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Why rising interest rates are costing Aussies their house deposits
Finder AU

Since the RBA started increasing the cash rate, some borrowers have been left in a troubling position.

With the RBA increasing the cash rate for a fourth consecutive month, it's not just existing home loan borrowers who are being affected. While they are certainly seeing their repayments go up, borrowers who have already paid their deposits are now losing out as they see their borrowing capacity drop.

Speaking to Finder, mortgage broker and founder of Blue Owl Finance Aidan Hartley explained a scenario he faced with a client recently who had bought off-the-plan.

"He had spoken to his own bank who he'd banked with for 20 years about 12 months ago. At the time he could afford $520,000, but after [the first 3] increases he could only afford $450,000. Plus the cash he had, that was less than the original purchase price," Hartley said.

Why did that happen?

When a lender assesses your ability to repay a loan, it looks at things like your income and your living expenses. We've seen living expenses go up, so that would have been another contributing factor, but banks also look at your ability to make monthly repayments based on the interest rate.

In fact, to be safe, they don't just assess it based on their interest rate. They use what is called a serviceability floor rate to make sure that even if rates rose, you could keep making repayments.

As interest rates rise, you might be able to make repayments, but for a smaller loan.

For people buying an existing property, this isn't necessarily a problem. But for those who have sought pre-approvals or who are buying off-the-plan, it is.

Hartley explained that off-the-plan purchases tend to work by putting the deposit down 12 to 24 months in advance, but you can't get finance approved until 3 months before settlement.

"There's 9 to 21 months where interest rates can change, the bank policy can change, the RBA can change, your job can change. So there's a risk of rates moving and you might not be able to re-afford the loan," he said.

With construction projects being delayed and taking longer to complete, Hartley warns that more and more borrowers will be finding themselves in the same position over the next couple of months.

He said when this happened to his client, the client was "panicked" at the thought of not only losing out on the home he had been excited for, but the thousands of dollars he had put forward for the deposit.

Hartley ran some figures. For every 0.5% interest rate increase, a borrower's borrowing capacity reduces by 5%.

"If you have a pre-approval at $1 million last month, this month it will only be $950k give or take," he said.

It could spell trouble for recent purchasers, too…

We've seen property prices declining off the back of rate hikes reducing demand. This means that recent purchasers will have less equity in their homes.

If they try to move to a new lender due to rising rates, the property will be revalued at the current market price.

"If your interest rate goes up exponentially, you can't really move lenders so you do run the risk of being tied to a lender until you've built that equity. Which is what we're seeing: people can't re-afford the same loan they have already got," Hartley said.

"Pick your lender wisely," he warned.

The good news…

Luckily, Hartley was able to help his client. As a mortgage broker, Hartley has access to a panel of around 40 lenders. While his client couldn't get the full $520,000 he had been approved for a year ago, they managed to find a lender that offered an extra $30,000 which gave him enough money to complete on the purchase.

Tips for borrowers:

  1. Get a pre-approval in writing. "Not just an online borrowing capacity, not a chat with a broker. Get an actual letter from the bank to say you're pre-approved."

  2. Check that the pre-approval is valid. "If you've got a valid pre-approval 3 months ago is that still valid today? Just because you could afford $1 million in March, can you still afford that? Probably not, because interest rates have gone up. Check those figures are valid."

  3. It's still a good time to buy. "We've got less competition so it's a good time to buy quality real estate. There was a higher premium last year plus more competition so there are opportunities there to get quality property at a solid discount."

August 11, 2022

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