A FINANCIAL MOMENT

Borrowing capacity takes another hit with rate rise

BORROWING capacity has plummeted more than 20 per cent since the RBA began raising rates.

PropTrack senior economist Paul Ryan said it's one of the sharpest contractions in borrowing capacity that Australia has ever seen.

“It is natural that households will have some difficulty adjusting to what is a very sharp change in financing conditions over what has been a pretty short period of time,” Mr Ryan said.

While the modelling is based on the impact of interest rates, it doesn’t take into account other factors such as the rising cost of living.

“Rising expenses is the other part reducing borrowing capacity not used in these calculations,” Mr Ryan said.

“It’s kind of a double whammy at the moment.”

How far borrowing power has fallen

The PropTrack data shows last month’s interest rate hike may have reduced the amount a buyer can borrow by tens of thousands of dollars – on top of what has already been lost this year.

A borrower who qualified for a $500,000 loan in April would now only be able to borrow $391,962, the data shows - a fall of $108,000.

A borrower previously able to borrow $750,000 may now only be eligible for a loan of $587,944, a more-than $160,000 decline.

These calculations assume lenders pass on each rate hike in full to variable home loan customers.

Month

August

September

October

Source: PropTrack

RBA Hike Borrowing capacity Change

0 $500,000 $750,000 $1,000,000 $1,500,000 $2,000,000 0

+0.25% $489,077 $733,616 $978,155 $1,467,232 $1,956,310 -2.18%

+0.5% $466,311 $699,466 $932,621 $1,398,932 $1,865,243 -6.74%

+0.5%

+0.5%

+0.5%

+0.25% $444,233 $666,349 $888,466 $1,332,699 $1,776,931 -11.15% $422,055 $633,082 $844,110 $1,266,164 $1,688,219 -15.59% $401,997 $602,396 $803,194 $1,204,791 $1,606,389 -19.68% $391,962 $587,944 $783,925 $1,175,887 $1,567,850 -21.61%

For a borrower who was initially able to borrow $1 million, they may now only be eligible for around $784,000.

As a general rule of thumb, Mr Ryan said a buyer’s borrowing capacity drops by roughly 5 per cent each time the RBA increases the cash rate by 50 basis points – assuming a lender passes on the hike in full.

However, it’s worth noting there are several factors that influence a buyer’s borrowing capacity beyond interest rates, such as their monthly expenses, employment and household debt.

Borrowers urged to stay engaged with their broker

With interest rates expected to continue rising over the months ahead, Mortgage Choice broker Christopher Ladley said regular communication between clients and brokers is more important than ever.

“Customers absolutely need to keep in touch with what they're looking at and what's going on, just so that we're across any potential issues before they become issues,” Mr Ladley said.

He said it’s also important for borrowers to be aware of their bank’s terms on preapproval, with some lenders not honouring the pre-approved loan amount for the 90-day period if interest rates rise.

“What we have learned when all this started going on is that some lenders will absolutely honour the 90-day period,” Mr Ladley said.

“But some lenders who may have issued preapprovals when interest rates were 3 per cent, may now not honour [the pre-approved amount], given rates are now around 4.5 per cent.”

One way borrowers may be able to improve their borrowing capacity, Mr Ladley said, is to look at their discretionary spending.

“There's not much people can do about gas bills or their electricity or petrol costs,” he said.

“A lot of people out there still spend a lot of money on Uber Eats deliveries, going out to dinner three nights a week, so there's still a lot of discretionary spending going on.

“If you can cut back some of that discretionary stuff, then maybe you can actually get the loan you want.’’

Credit cards, buy-nowpay-later accounts and personal debts also weigh on borrowing capacity.

With rates on the rise, do you know if your home loan is still competitive?

It’s important to have an expert Mortgage Broker in your corner. We offer a free* Home Loan Health Check to see how your home loan compares to others on the market. • We compare your loan with thousands of others from over 35 lenders, including all the big banks. • We look for a home loan with a lower interest rate, better features or a cashback offer. • If there’s a better deal available, we will help arrange the refinance for you. • We talk you through fixed & variable rates, and how to structure your loan so you’re better off in the long run.

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Borrowing capacity falling faster than property prices

Property prices fell 0.19 per cent nationally in September, according to the latest PropTrack Home Price Index, with prices now down 3.4 per cent from the March 2022 peak.

For borrowers who have been holding out for a more affordable property, Mr Ryan said falling borrowing capacities may become the next hurdle.

“We're not expecting property prices to fall as much as their borrowing capacity so it means that households may need to find that money elsewhere because they can't borrow it,” he said.

Alternatively, Mr Ryan said buyers would need to realign their expectations.

“Broadly speaking, there’s evidence that people are adjusting their expectations towards more modest homes,” he said.

Sydney-based buyer’s agent Sebastian James said that was already happening with a growing number of clients.

“We see it as a sensitivity from not wanting to overextend themselves,” Mr James said.

“We're being engaged a lot more frequently these days, purely to stop them from overspending because people are unsure of values.”

It comes as a new survey from NAB revealed borrowing capacity tops the list of what’s most important when purchasing a home.

The survey of real estate agents, owners, investors and property professionals found more than eight in ten (82 per cent) said the amount buyers were prepared to borrow to buy was the biggest factor, up from 74 per cent a year ago before interest rates started rising.

Location ranked second, with 60 per cent highlighting good local shopping, restaurants and other amenities as key. House size was also increasingly important at 57 per cent, up from 50 per cent in 2021.

Copyright 2022 Mortgage Choice Pty Limited (ABN 57 009 161 979, Australian Credit Licence 382869) and Smartline Operations Pty Limited (ABN 86 086 467 727 Australian Credit Licence 385325) are owned by REA Group Limited. Your broker will advise whether they are a credit representative of Mortgage Choice or Smartline.

Protect yourself from scams

Hank Jongen, General Manager, Services Australia

HI everyone.

It’s unfortunate that you, or someone you know, is likely to be affected by a scam at some point. New scams are popping up all the time and scammers will often pretend to be from trusted brands like myGov, Centrelink, Child Support and Medicare.

I want you to know that Services Australia takes the protection of your personal information very seriously. We have strong security processes in place, including fraud detection systems, to protect you.

There are also things that you can do to protect yourself against scams. you.

There are some signs you can look out for to help you spot a possible scam. These include: • an unexpected email, text message or phone call • a sense of urgency or an unreasonable deadline • a promise you are owed money, or a threat of fines.

If you think you may have fallen victim to an agency related scam or you think your identity has been stolen, we have a Scams and Identity Theft Helpdesk who can offer support.

The Helpdesk is available 8am–5pm, Monday to Friday to assist you with all Centrelink, Medicare, Child Support or myGov-related identity theft concerns. The helpdesk can be contacted on 1800 941 126.

If you get a suspicious email or text message, just delete it. If you open it, don’t click on any links.

We won’t ask you to click a link in an email or text message, except from within your official myGov inbox. Always access myGov by typing www.my.gov. au into your web browser.

There’ll be times where we need to contact you. However, if you are concerned, you can call one of our payment lines to check it’s genuine. Remember, only use our official phone numbers. You can find these on our website.

We’ll never ask you to: • pay money to get a payment or benefit, or • pay for our assistance, like with setting up online accounts.

For more information about how to protect yourself, go to servicesaustralia.gov.au/scams

Speak to you next time, Hank Jongen.

Identifying and reporting scams

If you’re anything like me, you’ll have already received emails, text messages or phone calls from people trying to scam

Protecting yourself from pretenders

If you’ve been contacted by trusted brands like Services Australia, you should always check that it’s the real deal.

Getting more from your Age Pension

THE Age Pension plays a vital role for many Australians in helping them meet their income needs in retirement. Making sure you are getting the maximum Age Pension entitlement can put you ahead by thousands of dollars over your retirement.

Here we will discuss several strategies that can help boost the rate of Age Pension you receive.

Gifting

Centrelink allow you to gift assets valued up to $10,000 per financial year or up to $30,000 over five years (not exceeding $10,000 in a single financial year) before there is any impact on your Age Pension.

Gifts made above these limits are considered deprived assets and are counted towards your asset test. They are and subject to deeming under the income test for a period of five years from the date of the gift.

Renovating your home

The value of your primary residence is exempt under the Centrelink asset test. If you have surplus cash, spending money on home improvements can increase the value of your home and reduce the value of your assessable assets, thereby boosting your Age Pension.

The work bonus

If you decide to go back to work, you can take advantage of the Work Bonus incentive. Centrelink will allow you to earn up to $300 per fortnight which will not be assessed under the income test.

If your work is sporadic, Centrelink will add $300 to your Work Bonus balance each fortnight which will be compounded until it reaches $7,800. This amount excludes the one-off work bonus credit of $4,000 outlined in the October 2022 Federal Budget.

Update the value of your personal assets

The value of personal assets (vehicles, caravans and boats etc) should be based on re-sale value, not insured value. It is common for people to mistakenly overvalue their personal assets with Centrelink.

Reduce your debt

It is a common belief that Centrelink will reduce the value of your assets by the level of debt you have. While this is true for investment debt, such as a rental property mortgage, it is not true for personal debt.

If you have a personal loan, car loan, credit card, home mortgage or any other personal debt, Centrelink do not reduce the value of your assets. By paying down your personal debt you not only save money on interest, but also increase your age pension by using the money in your bank (an assessable asset) to pay off the loan.

Use your younger spouse

If one member of a couple is under Age Pension age, money may be contributed to a super accumulation account in the younger spouse’s name where the money is exempt from the asset test. This requires the older member of the couple withdrawing funds from their super and contributing the proceeds into their younger spouse’s account (provided contribution eligibility criteria is satisfied).

Funeral bond or prepay funeral

Purchasing a funeral bond or pre-paying your funeral can be an effective way to reduce your assets. Centrelink allow you contribute up to $13,500 into a funeral bond which then becomes exempt from the asset test. This could potentially increase your Age Pension by $1,033 per year. There is no limit on the amount you can pre-pay for your funeral.

These are only some of many strategies available to help you get more from your Age Pension. While there are benefits to each, there are also risks and consequences. Prior to adopting any of these strategies you should seek professional advice.

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.