How to improve borrowing power
FIVE Reserve Bank interest rate rises in five months – with more likely to come – is putting a dark mark on 2022 for homeowners and buyers. The cost of mortgages has skyrocketed, and while house prices everywhere are sinking as a result, borrowers are losing buying power.
The RBA has lifted its official cash rate from 0.1 per cent to 2.35 per cent since May. While this rise is 2.25 per cent, it has increased monthly repayments on a typical $500,000 mortgage by 24 per cent – from $2108 to $2761.
Research group Canstar has calculated that even if house prices drop by 15 per cent as widely forecast, the rate rises have made life tougher overall for first home buyers.
That’s because banks and other lenders will assess mortgage applications at higher repayment levels, meaning a loan people could have afforded in May is now unaffordable in the bank’s eyes.
Refinancing also becomes harder to do, especially for those who were stretched financially when they first took out a loan and bought when prices were back up near record highs. Their equity has shrunk and their repayments soared.
The biggest financial hit is still to come for the 30-40 per cent of mortgage customers who took out a fixed-rate loan in recent years at deeply discounted rates near 2 per cent.
Many of those loans will switch back to variable rates in 2023, and affected borrowers won’t experience the gradual monthly increases that the rest of the market has faced – they will be hit by a sledgehammer rate rise of potentially $600-$1000 a month as their loan reverts to variable.
Whether you’re buying, refinancing or trying to switch lenders, there are strategies available to improve your battered borrowing power.
Canstar’s Steve Mickenbecker says try to clear personal loan and credit card debts, including unused credit card limits.
“The repayments, even though they may be short term, will be debited against income in the bank’s assessment of the loan and will limit the amount that can be borrowed,” he says.
Workplaces have shifted radically in recent years as casual jobs boomed at the expense of permanent roles and longterm contracts.
However, employees have more bargaining power today amid record low unemployment, and may be able to switch to a permanent position that banks will look upon more favourably when lending.
“Banks have varying criteria when it comes to contract work, but most in one way or another discount income when it is earned on short or medium-term contracts,” Mickenbecker says.
“Negotiating with your employer can make a big difference to affordability.”
Bad habits picked up during the pandemic – such as ordering mountains of takeaway food – may need to be banished if you want more borrowing power. Bank look at all your spending, not just loan repayments.
Borrowers will need to be able to prove they can afford repayments, and unnecessary discretionary spending works against this.
Sometimes changing economic and market conditions mean people’s expectations have to change too.
Borrowers may need to think about buying a smaller home or a property further from the CBD to get a foot in the door, or consider a debt consolidation loan to turn multiple debts into one larger, low-interest one.