The May RBA rate hike, and the multiple hikes projected to follow, will have an impact on how much the bank is willing to let buyers borrow, applying a handbrake on Australia’s property market.
As interest rates rise, people applying for a loan will find the maximum amount they can borrow from the bank will decrease, because they’ll be paying more interest to their bank.
RateCity.com.au research found a single person, earning $100,000 before tax with no dependents and no debts is likely to see the maximum amount they can borrow from the bank drop by around $20,000 on the back of Tuesday’s 0.25 per cent cash rate hike.
By May next year, this person’s borrowing capacity (the maximum amount they can borrow from the bank) could drop by a total of $123,400 as the cash rate soars to 2.25 per cent, if Westpac’s forecasts are realised. This includes forecast wages growth.
These calculations are estimates only. The amount someone can borrow depends on their personal situation and/or their lender.
Family earning $150,000 today: Maximum amount they can borrow from the bank
A family with two kids, where one parent works full-time and the other part time at half the wage, on combined annual income of $150,000 before tax, will be able to borrow an estimated $26,200 less as a result of the May RBA hike. This assumes they have no other debts.
However, by May next year, if the cash rate rises to 2.25 per cent as forecast by Westpac, this family would be able to borrow an estimated $156,500 less than they could have before the May RBA hike.
RateCity.com.au research director, Sally Tindall, said: “The RBA rate hikes have the capacity to apply a significant handbrake to Australia’s property market”.
“Falling interest rates have been a driving force behind soaring property prices over the last 18 months,” she said.
“Now home loan rates are on the rise, property prices could actually come back down to Earth – or, at least, closer to it.
“Anyone who was planning to borrow at capacity could see their budget shrink in the next few weeks on the back of last Tuesday’s cash rate hike. As a result, they’ll suddenly find they could no longer bid as high at the next auction they go to.
“If the rate hikes keep coming, as they’re forecast to do, people could find their home buying budgets shrink further and further.”
The RBA has estimated a 2 percentage point increase in interest rates, which is now considered likely by many economists, could lower real housing prices by approximately 15 percent over two years.
“Anyone planning to take out a new home loan in the coming months needs to carefully consider how much debt they take on,” she said.
“The banks’ stress tests your loan to see if you can still afford your repayments if interest rates rise by 3 per cent. However, do your own maths to make sure you’re comfortable with that figure too.
“It’s also worth understanding what impact a falling property market could have on your finances.
“While a dip in the market is unlikely to be a concern for most homeowners, anyone that can’t keep up with rising interest rates could find themselves in a tricky position,” she said.