OCTOBER CASH RATE RISE : HOW IS YOUR BORROWING POWER IMPACTED ?
The official cash rate has lifted again this month to 2.60 per cent for the sixth consecutive month . This is the highest the rate has been since July 2013 when it was 2.75 per cent .
The increase will impact any homeowner with a variablerate or split home loan , or anyone considering taking out a new loan . But it isn ’ t only repayments that will be impacted . The increasing cash rate also impacts borrowing power . But what is borrowing power and how much does an increase in cash rate and its flow-on effect to interest rates impact it ?
What is borrowing power ?
Borrowing power is the amount of money a lender is willing to let you borrow to purchase property . This is also sometimes referred to as your borrowing capacity . The way it ’ s calculated varies depending on the lender , but in general it takes into consideration your income , assets , liabilities , credit health , debts , deposit amount and the value of the property .
Lenders are also expected to apply at least a three percentage points interest rate serviceability buffer ( according to the Australian Prudential Regulation Authority ’ s guidelines ). This means the lender will add at least three percentage points to the current interest rate to calculate repayments and ensure you ’ ll be able to meet them , hedging against future rate rises ( for example a three per cent p . a . interest rate would be raised to 6 per cent p . a . with the serviceability buffer ).
When you speak to your broker , we calculate your borrowing power across the criteria of a number of lenders to give you an idea of how much you could borrow and therefore the top value of properties you may want to consider in your search .
How do do rising rising interest interest rates impact rates impact borrowing power ?
When interest rates rise , your borrowing power is likely to decrease . This is because the repayments will increase and if your income isn ’ t also increasing , your ability to service that loan will drop . Let ’ s have a look at how borrowing capacity can be impacted as interest rates rise .
In this example , Nancy earns $ 110,000 per year pre-tax with no dependents , debts or credit card , and the average Australian annual expenses of $ 16,500 .
For a loan term of 30 years , her borrowing capacity would change depending on the interest rate as follows :
3.0 % p . a . - $ 830,000 3.5 % p . a . - $ 784,000 4.0 % p . a . - $ 741,000 4.5 % p . a . - $ 702,000 5.0 % p . a . - $ 666,000 5.5 % p . a . - $ 632,000 6.0 % p . a . - $ 602,000
As you can see , an increase of just half a percentage point makes a huge difference in Nancy ’ s borrowing power . If the lender passed on the RBA ’ s full increase in cash rate in its interest rates , which was by half a percentage point last month , and Nancy had been considering a loan at 4 % p . a ., the interest rate would have increased to 4.5 % p . a . and her borrowing power would have dropped from $ 741,000 to $ 702,000 - decreasing her potential bid by $ 39,000 .
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