Your borrowing capacity is defined as the amount of money a bank or lender is likely to approve you for a home loan.
As we’re all aware, the cash rate has increased significantly overt the last 12 months and the flow on affect from this is that your mortgage payments will increase as a result. For example; if you had a $500,000 mortgage at the start of 2022 with an interest rate of 2.50%, your monthly payments would be $1,976. Fast forward to today with a rate of 5.50%, and those mortgage repayments would be $2,839.
These larger monthly payments mean you’ll have less discretionary income available to spend on other things, which plays an enormous role in the reduction of your borrowing capacity.
Another less known rate rise that reduces your borrowing capacity is the buffer banks and lenders place on your loan when they assess it. Up until October 2021, the buffer placed on your interest rate was 2.50%, however, governing body APRA (insert graphic with full name), now requires banks and lenders to place a 3.00% buffer when assessing loans to protect borrowers against sharp rate rises like the ones we have seen lately.
Overall, the combination of rising interest rates and an increase to the assessment rate, has resulted in a reduction of your borrowing capacity across the board.
If you’re looking to enter market, or reassess where you’re at, feel free to get in touch as we’d love to assist anyway we can.
