News

Borrowers warned to temper expectations as interest rates head north

16 May 2022

Prospective home buyers and investors are being warned to temper their expectations as the dust settles on the Reserve Bank’s first interest rate rise in years.

A typical family for example, earning $150,000 a year, would have been able to borrow around $969,500 prior to last week’s rate hike of 25 basis points.

That same family are now able to borrow the reduced amount of $943,300 and going off Rate City interest rate forecasts, they’ll only be able to borrow $813,000 in 12 months.

“People are going to realise that they can borrow less and there will be a noticeable difference as the cash rate keeps climbing,” Rate City research director Sally Tindall told Seven West Media.

“If they’ve got an overly ambitious figure to borrow, they might find the bank turns around and says it needs to be less.”

The RBA expects the official cash rate to hit 2.5 per cent by the end of 2023, but is wary of giving too many forecasts in the current environment of uncertainty.

Since the interest rate hike, major banks Westpac, ANZ and NAB have said they are keen to improve loan approval times by using artificial intelligence to cut back on manual processing work.

KPMG chief economist Brendan Rynne said banks were unlikely to change their approval processes off the back of the hike, but the calculations and affordability profiles would change.

“Absolutely there will be people disappointed,” Dr Rynne said.

The Australian Prudential Regulation Authority last year made banks increase their buffer to 3 per cent after too many borrowers were getting loans with a debt to income ratio of six times or more.

The buffers are there to make sure borrowers can service their loans if rates increase.

EY Oceania banking and capital markets leader Tim Dring told Seven West Media he doubts APRA will increase buffers again in response to the interest rate hike because less money available would cut the number of risky loans and banks have also reported customers are ahead of their repayments thanks to the pandemic.

“There’s strong credit quality, and more consumers are well ahead of their repayments so there are natural buffers through household balance sheets,” Mr Dring said.

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