How Interest Rate Rises Affect Your Borrowing Power

We have had 11 interest rate rises in Australia since May last year. These increases have been an attempt by the Reserve Bank to rein in Australia’s high inflation rate. Many analysts believe there will be further interest rate rises in the coming months before rates stabilise in the second half of the year.

Higher interest rates decrease your borrowing power. In this article, we cover the extent of the impact, as well as answers to FAQs.

Interest rate buffer

If you apply for a home loan in Australia, lenders are legally required to assess your ability to make your loan repayments at an interest rate that is 3% higher than their current home loan rate. This buffer is intended to ensure that you can make your repayments even if rates continue to rise in the future.

The impact of rate rises on borrowing power

Interest rate rises obviously increase the amount of interest you pay on borrowed funds and therefore your regular repayments. The best way to illustrate how borrowing power has fallen is through an example. Assume that you can afford monthly loan repayments of $4,000.

The table below shows you your borrowing power for that repayment amount at different interest rates for a 30-year home loan (where the 3% buffer interest rate buffer applies).

Interest rateBorrowing power

In 2021, home loan interest rates of around 2.5% were available. Average home loan rates are now around 6%. Investment property loan interest rates are invariably higher than those for residential property loans, and business loan rates are usually higher again.

As you can see from the table, a home loan applicant who had a borrowing power of just over $1 million at an interest rate of 2.5% now has a borrowing power of around  $667,000 at an interest rate of 6%. Their borrowing power has dropped by about one third (about $345,000).

How can you increase your borrowing power?

There are some ways to increase your borrowing power:

  1. Find a loan with a lower interest rate.
  2. Take out a longer loan term to lower your regular repayments. For example, a 30-year home or investment property loan rather than a 25-year loan (though it is important to understand that you will pay more interest if your loan runs for a longer term).

What should you do if you want a loan?

If you have finance needs for your home, investment property or business, then our lending and finance experts at Wilson Pateras can help. We have access to the products of more than 30 lenders and we can find the right loan for your needs. Importantly, we work for borrowers, not lenders.

Contact Brett on 03 8419 9800 or 0409 402 086 today to find out how he can help you.

This content has been prepared by Wilson Pateras to further our commitment to proactive services and advice for our clients, by providing current information and events. Any advice is of a general nature only and does not take into account your personal objectives or financial situation. Before making any decision, you should consider your particular circumstances and whether the information is suitable to your needs including by seeking professional advice. You should also read any relevant disclosure documents. Whilst every effort has been made to verify the accuracy of this information, Wilson Pateras, its officers, employees and agents disclaim all liability, to the extent permissible by law, for any error, inaccuracy in, or omission from, the information contained above including any loss or damage suffered by any person directly or indirectly through relying on this information. Liability limited by a scheme approved under Professional Standards Legislation

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