How rising interest rates will trigger a 'bridesmaid suburb' buying trend

As interest rates continue to rise, Aussies have been advised to search for a home in “bridesmaid suburbs” to counter a potential lending squeeze.

The postcodes considered affordable now could be “completely different” in 12 months, because banks will not loan as much, an expert warns.

The Reserve Bank of Australia on Tuesday lifted the nation’s cash rate by half a percentage point – the third consecutive increase – from 0.85 per cent to 1.35 per cent.

A “bridesmaid suburb” is a second-choice postcode and could become a strategic buying trend as ballooning interest rates bite into borrowing capacity.

Entourage Property buyer advisor Antoinette Sagaria, who is based in Melbourne and acts for vendors and purchasers, said further interest rate jumps will demand flexibility.

“The market may soften, but buyers who are holding off purchasing will have reduced borrowing capacity,” Ms Sagaria said.

“Buyers will still have to consider alternatives or the bridesmaid suburbs to their first preference, possibly not because of price but because of diminished borrowing capacity.”

Bridesmaid suburbs are adjacent to higher-profile neighbouring suburbs. They cost less to buy into but share many similarities to the first-pick suburb next door, including access to public transport routes, schools and major shopping hubs.

“You might have your heart set on a particular suburb, but as your borrowing capacity decreases, you might have to think elsewhere,” Ms Sagaria, who has an agents’ license, said.

“A bridesmaid suburb can still allow you to secure a lifestyle with comparable amenities and appeal, and only a short drive down the road.”

Entourage brokerage group managing director Damien Roylance said borrowing capacity could be reduced by up to 20 per cent.

This is dependent on whether the RBA lifts the cash rate to 2.5 per cent next year, as some leading economists have been predicting.

This would increase the variable rate to five percent, Mr Roylance said.

“If an applicant has annual income of $200,000 and no debt, their borrowing capacity on a 2.5 per cent variable loan was around $1.4 million before this new rates cycle,” he said.

“But if interest rates continue climb to five percent, their borrowing capacity drops to around $1.1 million – that’s 20 per cent less.

“What type of house and the suburbs buyers might be able to afford right now could be completely different 12 months from now.

“It’s difficult to speak with confidence about what impact the RBA’s monetary policy will eventually have on real estate prices, but we can be certain that buyers will be borrowing less, in any event.”

Banks and other lenders have been adding 3 per cent onto current home loan interest rates as they “stress test” customers for more rate hikes.

The margin is known as a “buffer”, based on advice to lenders by the industry regulator APRA, and has been getting bigger in response to the changing financial climate.