Borrowing power to tumble by $25,000 if RBA hikes rates

9 July 2024

Aspiring homeowners could face another setback if a forecast 0.25% rate rise is passed on, with borrowing power estimated to shrink by up to $25,000 for couples on average salaries. 

Compare the Market analysis shows that for a Western Australia couple, both on the average annual income of $109,600, a 0.25% rate rise could reduce their borrowing capacity from $1,164,000 to $1,139,000 – that’s a $25,000 difference.

It’s a similar story for couples from the Australian Capital Territory and Northern Territory, who would see their borrowing power plummet by $24,000.

Meanwhile Victoria and Queensland couples could experience a $21,000 drop in their borrowing capacity. 

Borrowing power if a 0.25% rate rise were to occur
6.25% variable rate6.5% variable rateDifference
NSW 2000$1,017,000.00$995,000.00$22,000.00
VIC 3000$985,000.00$964,000.00$21,000.00
QLD 4000$990,000.00$969,000.00$21,000.00
SA 5000$887,000.00$868,000.00$19,000.00
WA 6000$1,164,000.00$1,139,000.00$25,000.00
NT 0800$1,108,000.00$1,084,000.00$24,000.00
TAS 7000$862,000.00$844,000.00$18,000.00
ACT 2601$1,108,000.00$1,084,000.00$24,000.00
Calculations are based on a couple with 2 dependents, using average income figures based on ABS average weekly earnings data by state. Expenses have been calculated using the Household Expenditure Measure (HEM) for the postcode of the capital city in that state. e.g. Postcode 2000 has been used for NSW calculations, postcode 4000 for QLD calculations, etc.

But whether a further rate rise would hamper or help families trying to get a foothold in the market remains to be seen, according to Compare the Market’s Economic Director David Koch, who says the impact could have a cooling effect on the market, which may cause price growth to taper. 

“Demand for property remains strong, so while values aren’t likely to nosedive, a rate rise could see some pressure on budgets that gets reflected in sale prices,” Mr Koch said.

“It has been a tough year for people trying to buy property but, if you have your deposit and pre-approval sorted and you are confident you can meet higher repayments, then this might be your window of opportunity.

“But if your borrowing power is lowered you might need to consider looking at so-called ‘bridesmaid suburbs’ that are a little bit cheaper but close to where you want to live.”

Mr Koch said lenders had been much more cautious to account for the risk of recession and higher rates that could impact long-term serviceability.   

“The bank will stress test your finances to make sure you can survive a rate rise of up to 3%, but it’s worth having a look at that the numbers yourself,” Mr Koch said.

“Unfortunately, our inflation problem is stickier than chewing gum in hair, and it could more than a bit more pain to remove it. 

“Notable economist Warren Hogan has predicted three cash rate hikes this year – so if that occurs you need to make sure you can still service your loan.” 

But it’s not all bad news for borrowers, Mr Koch said there were ways people could improve their borrowing power. 

Kochie’s tips for boosting borrowing power

Reduce your credit card limits or get rid of it

Lenders use your entire credit card limit, rather than just the balance, as part of their serviceability calculations. Therefore, reducing your limit or closing your credit card may help boost your borrowing power.

According to a Compare the Market analysis, a $10,000 credit card limit held by someone earning $100,000 would reduce their borrowing capacity from $552,000 to $505,000.00 – a difference of $47,000.

Know your credit score

Websites like Compare the Market provide free credit score checks to help you understand how strong your borrowing position is. Lenders use your credit score and credit history to calculate risk when assessing your application. Improving your credit score is one way to improve your chances of being approved.

Pay off any debts

Banks must consider all financial obligations when calculating your ability to repay debt including credit cards, car loans or personal loans. If you work to reduce or eliminate your debts such as these, you may be able to increase your borrowing capacity.

Although Higher Education Loan Programs (HELP) can’t accrue interest like credit cards can – it can be brought in line with inflation. For example, in July this year, millions of Australian university students or people who are still paying off that HELP debt will be slapped with a cruel 4.7% increase in the amount they owe.

If you have the ability to pay off your HELP debt, then you might consider doing this, as it may boost your borrowing power.

Consider a joint purchase

You could team up with a family member, partner or friend if your borrowing capacity isn’t high enough and you’re struggling to meet the lender’s income requirements.

Joint purchases have become a popular way for many to break into the property market. Two incomes are usually better than one – so you may find your borrowing power increases with an additional person on the loan.