Home
The West Australian exclusive

Impact of Reserve Bank interest rate hike starts to bite with borrowing limits set to shrink

Headshot of Adrian Lowe
Adrian LoweThe West Australian
CommentsComments
Borrowers, temper your expectations. That’s the warning for prospective home buyers as the full impact of the Reserve Bank’s interest rate hike starts to emerge.
Camera IconBorrowers, temper your expectations. That’s the warning for prospective home buyers as the full impact of the Reserve Bank’s interest rate hike starts to emerge. Credit: Supplied

Borrowers, temper your expectations.

That’s the warning for prospective home buyers as the full impact of last week’s Reserve Bank interest rate hike starts to emerge.

A family on a household income of $150,000 would last month have had a maximum of $969,500 available to them. That’s already down to $943,300 and in 12 months it will be down another $130,300 to $813,000, according to Rate City calculations based on forecast rate hikes.

“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 said.

Get in front of tomorrow's news for FREE

Journalism for the curious Australian across politics, business, culture and opinion.

READ NOW

“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 comments came despite Westpac chief executive Peter King on Monday saying it was unlikely it would be harder to get a mortgage in a rising rate environment.

SYDNEY, AUSTRALIA - FEBRUARY 02: Philip Lowe, Governor of the Reserve Bank of Australia, addresses the National Press Club at The Fullerton Hotel on February 02, 2022 in Sydney, Australia. The Reserve Bank of Australia announced this week that it will hold the cash rate at its current level, which was last changed in November 2020. (Photo by Lisa Maree Williams/Getty Images)
Camera IconPhilip Lowe, Governor of the Reserve Bank of Australia. Credit: Lisa Maree Williams/Getty Images

But he did say customers would have to adjust their discretionary spending to cope with higher prices.

“What people have to be thinking about and getting prepared for ... (is) the way money spent in the broader economy is going to change,” Mr King said.

For a single person on a $100,000 income, the maximum amount they will be able to borrow for a principal and interest loan in May 2023 will be $619,400 — $123,400 less than pre-rate rise.

A single person on $75,000 would last month have been able to borrow $561,200. In May next year that is tipped to be $467,800 — a drop of $93,400.

The RBA expects the official interest rate to rise to 2.5 per cent by the end of next year, though governor Philip Lowe said forecasting with certainty remains a challenge.

Westpac, ANZ and NAB have each reported since the rate hike that they are working to improve loan approval times, including through the use of artificial intelligence, which would cut back on manual processing.

KPMG chief economist Brendan Rynne said while banks were unlikely to change their approval processes, the calculations and affordability profiles would change.

“Absolutely there will be people disappointed,” Dr Rynne said of banks offering less to borrow.

RESERVE BANK RATES DECISION
Camera IconThe RBA has hiked its inflation forecasts, indicating there will be a steady rise in interest rates. Credit: AAP

The banks were last August required to increase their buffer to 3 per cent in response to a growing number of borrowers obtaining loans with a debt to income ratio of at least six times or more. In the December quarter, 24.4 per cent of new loans taken out were at this level.

These buffers are designed to test whether borrowers can meet their repayments if rates increase.

EY Oceania banking and capital markets leader Tim Dring said it was unlikely regulator the Australian Prudential Regulation Authority would need to increase buffers in response to rising rates because less money available would cut the number of risky loans.

The banks have also reported customers are well ahead of mortgage repayments — at NAB, the average is four years.

“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.

Get the latest news from thewest.com.au in your inbox.

Sign up for our emails