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RBA hikes shrink average family’s home buying budget by estimated \$195,500

Liz Seatter

The average family’s home buying budget has shrunk by an estimated \$195,500 as a result of the last six months of RBA rate rises, once the latest hike takes effect.

As interest rates rise, people applying for a loan are seeing the maximum amount they can borrow from the bank fall because they are paying more in interest.

Banks stress test potential borrowers to see if they can afford their mortgage repayments on an interest rate that’s 3 percentage points above their current rate.  As interest rates get higher, this test gets harder to pass.

If Westpac’s forecast for the cash rate is realised, and it hits 3.60 per cent next year, the average family could see their home buying budget shrink, in total, by more than \$250,000.

Impact of rate hikes on average family’s borrowing budget

RateCity.com.au research has found a family with two kids, on a combined annual income of \$150,000 before tax, could borrow \$995,800 six months ago.

Once the October rate hike kicks in, they can borrow an estimated \$800,300, which is \$195,500 less.

However, by April next year, if the cash rate rises to 3.60 per cent, as forecast by Westpac, this family would be able to borrow an estimated \$728,100, which is \$267,700 less than they could have before the hikes began.

These calculations are estimates and assume one parent works full-time and the other part-time at half the wage. Calculations include an annual pay rise at the start of the financial year. The exact amount someone can borrow depends on their personal situation and/or their lender.

Family earning \$150,000 at the start of the hikes:

Estimate of maximum amount they can borrow from the bank

 Apr-22 Today Apr-23 Rate 2.24% 4.58% 5.58% Max borrowing capacity \$995,800 \$800,300 \$728,100 Difference from before hikes -\$195,500 -\$267,700

Source: RateCity.com.au. See notes below.

Impact of rate hikes on a single person’s borrowing budget

A single person earning \$100,000 before tax in April 2022, with no dependents and no debts, will see the maximum amount they can borrow fall by \$146,700 as a result of the last six RBA hikes (including October).

By April next year, this person’s borrowing capacity could drop by a total of \$202,300 if the cash rate hits 3.60 per cent.

Single person earning \$100,000 before hikes began:

Estimate of maximum amount they can borrow from the bank

 Apr-22 Today Apr-23 Rate 2.24% 4.58% 5.58% Max borrowing capacity \$762,900 \$616,200 \$560,600 Difference from before hikes -\$146,700 -\$202,300

Source: RateCity.com.au. Calculations are estimates based on CBA’s serviceability calculator on a 30-year principal and interest loan on average big four lowest variable rate rising in line with Westpac cash rate forecasts. In April 2022, the big four bank’s floor rates applied. No additional debts. Minimum expenses are applied. Includes a wage rise of 3% at the start of the financial year. Family one parent works full time, one works part time at half the wage.

RateCity.com.au research director, Sally Tindall, said: “Rising interest rates have put Australia’s turbo-charged property market in reverse.”

“Every time the RBA hikes rates, the maximum amount people can borrow from the bank takes a hit because they pay more of their salary to the bank in interest,” she said.

“Already we have seen significant drops across the country, a trend that is likely to continue over the next year as people’s buying budgets shrink further.

“The latest ABS figures show new lending is on the decline as some buyers put their plans on the shelf until they get a clearer idea of where both rates and property prices will land.

“Some people have dropped out of the market temporarily, with a plan to get back in when prices are lower, while others are scratching their plans because they can’t afford to buy.

“While property prices are set to drop over the next year or two, the long-term trend is still likely to be up – something worth remembering before hitting the panic button.

“Would-be first home buyers will be looking to the forecasted drops, hoping that prices come down to a level they can afford.

“However, these buyers will have to clear the banks’ serviceability tests at higher interest rates, no mean feat in a rising rate environment,” she said.

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Product database updated 21 Jul, 2024

This article was reviewed by Data Research Specialist Piyush Pillai before it was published as part of RateCity's Fact Check process.

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