Borrowing capacity is being significantly impacted by rising interest rates — and it’s not just making investor home loans more expensive. It’s also reducing the amount property investors can borrow.
Before we explain why, it’s important, for the sake of context, to get a quick overview of the cash rate and the current situation. Here are five key facts:
- The cash rate, which is set by the Reserve Bank of Australia (RBA), is the interest rate on unsecured overnight loans between banks.
- Lenders use the cash rate as a guide when setting their mortgage rates — typically, when the cash rate rises or falls, so do home loan interest rates.
- When the cash rate was reduced to a record-low 0.10% in November 2020, as an emergency response to the pandemic, it was a question not of if but when the cash rate would be returned to a more normal level.
- Since 1990, the cash rate has averaged 4.46%.
- So despite the RBA’s recent cash rate increases, the cash rate is still low by historical standards, as are investor home loan interest rates.
As rates go up, borrowing capacity goes down
As the RBA has been raising the cash rate, lenders have been raising their investor home loan interest rates – which, in turn, has resulted in declining borrowing capacity for property investors.
Why? Because when a property investor applies for a loan, and the lender decides whether the person can afford to repay the loan, the lender doesn’t assess the borrower at the current interest rate – the lender adds a buffer of 3 percentage points. So if you apply for a loan with an interest rate of 4%, you’ll actually be assessed at a minimum of 7%.
Now imagine you applied for a 30-year loan and a lender decided you had the capacity to make repayments of up to $3,000 per month. In that case:
- If you were assessed at a 7% interest rate, you might be able to borrow about $450,000 (as that would equate to monthly repayments of $2,994)
- If you were assessed at 8%, you might be able to borrow about $408,000 ($2,994 per month)
- If you were assessed at 9%, you might be able to borrow about $372,000 ($2,993 per month)
8 ways to maximise your borrowing capacity
In this sort of environment, smart property investors are taking steps to maximise their borrowing capacity.
Here are eight things you can do to make yourself more creditworthy in the eyes of lenders:
- Increase your income
- Reduce your expenses
- Reduce your credit card limit, or even cut up your credit card
- Pay off existing debts
- Improve your credit score
- Put down a larger deposit
- Work with a good mortgage broker
- Buy a high-yield investment property
The reason it’s important to work with a good broker is because your borrowing capacity will differ from lender to lender; an experienced finance professional will know which lenders would be more likely to give larger loans to someone with your profile. (High Income Property would be happy to refer you to a good broker.)
The reason it’s important to buy a positively geared property, such as a duplex or dual occupancy property, is because this will increase your income. High Income Property is an expert in helping property investors acquire dual income properties. If you’re interested in building wealth while enhancing your cashflow, we can help you too.
Whether you’re an existing or prospective property investor, High Income Property can help you buy a positively geared property in a location with long-term growth prospects. To discuss your options, schedule an online meeting or (02) 8007 4001.