Should you borrow to your limit to get into the property market?

A trough in a property market cycle is arguably an ideal time to buy a home, because when prices are lowest, it’s the point of maximum financial opportunity.

Buyers who manage to purchase a home when prices are lower are in the box seat to take advantage of a full run of price growth as the market recovers, increasing their equity and wealth in the process.

However, last year’s downturn was different to previous ones. While buying after price falls may have been a no-brainer in the past, it’s now a little more complicated.

Rising interest rates and higher repayments have reduced borrowing capacities by about 30 per cent, according to the Reserve Bank of Australia – much more than the declines in home values in most areas.

But recently, a reduced volume of properties for sale has helped put a floor under prices.

“The earlier-than-expected stabilisation in prices comes as some surprise given the sheer reduction in borrowing power over the past year,” NAB economists wrote in a recent economic report.

The bank cited rising rents, rebounding population growth and growing expectations that rates may be near the top as key factors fuelling price growth despite reduced borrowing capacities.

It’s difficult to accurately predict what happens next, but with a supply crunch, booming demand, prices rising in Sydney – which typically leads the market – and a de-escalation in the war on inflation potentially on the horizon, it’s no surprise that some economists have revised predictions to the upside.

Timing the market is difficult for buyers at the best of times, but even more so when borrowing capacities have had more of an impact than prices.

For those looking to buy soon, the key to taking advantage of current conditions is understanding what your budget will buy, and where you might need to adjust your expectations.

Should you borrow to your limit?

It’s tempting as a buyer to look at the amount you’ve been pre-approved to borrow and decide to spend the whole lot.

After all, as borrowing power diminishes as interest rates rise, the number of properties coming under buyers’ budgets decreases, limiting their options.

But Domain Home Loans mortgage broker Marcus Russell cautions against borrowing the maximum amount a bank will allow.

“The number one rule is to be conservative,” he says. “It’s not a market [in which] to be over-extending at all. Valuations won’t come in as generous and borrowing capacities won’t be as high.”

Russell says buyers should openly discuss the goal of the property purchase with their broker or lender to better understand how much they should borrow, and what they should buy.

“A good enough broker or home finance manager will tell you your borrowing capacity, but a really good one will tell you what it means to you.”

Sometimes, that might mean having some tough conversations.

“For an investment purpose, that’s an easier conversation – look further out, or find somewhere cheaper,” Russell says. “When you’re looking at owner-occupier properties, it’s a different matter.

“The fact is, you need to adjust expectations. It’s not going to be a mansion for your first property.”

On the plus side, purchasing a property when borrowing capacities are lower allows buyers to take advantage of a market dip.

“In a way, it encourages people to be more conservative,” Russell says. “You’re going to get it at a cheaper price. Your interest rates and repayments will be higher, but your total debt will be lower.”

For buyers who can’t adjust their criteria enough to find their ideal property – especially at a time when limited stock reduces choice – waiting until conditions improve may be the answer, Russell says.

“Just because it’s not happening now doesn’t mean it’s not going to happen at all.”