Rising rates mean homebuyers ‘can’t go to the edge’

Home buyers have become more wary of borrowing the maximum amount they qualify for, mortgage brokers say, as the fear of further interest rate rises weighs on their future financial decisions.

During last year’s property boom, some families and first time buyers were borrowing to their maximum and then asking for help from the Bank of Mum and Dad, but attitudes had changed this year as repayments rise.

Some, though, are still applying for as much as possible because the amount they can borrow has fallen faster than property prices have.

On Tuesday, the Reserve Bank of Australia raised the cash rate by 0.25 per cent, to 2.6 per cent, raising repayments. Homeowners with a $750,000 home loan will now pay $1030 a month more off their mortgage, compared to May.

Sydney-based Equilibrium Finance managing director Anthony Landahl said buyers were much less willing to borrow their maximum, especially compared to last year when interest rates were at record lows.

“What I guess has been happening, 12 months ago money was relatively cheap and people were trying to borrow to their maximum capacity to get into the market,” Landhal said.

“Now the market is coming off, people are very much more conscious of what their max is, and how much the repayments are, so they might not go to their maximum if they understand what the environment is,” he said. “People are taking a much more cautious approach.

“In saying that, there’s not as many buyers out there, so it is creating opportunities for people to negotiate or take some time to find the right property.”

Vaughan Clark, senior finance broker with Clark Finance in Melbourne, said buyers were less willing to push themselves financially, especially if another rate rise was on the horizon.

“People can’t go to the edge now,” Clark said. “They need a buffer to make sure they have a preapproval that’s going to cover what they offer if it changes after a rate rise and a reassessment.

“They’re putting themselves at risk if they borrow to the maximum.”

Most home buyers end up borrowing less than their limit, even if they apply for a large pre-approval amount. And low-deposit loans are falling, down 2.2 percentage points to 6.4 per cent in the June quarter, from 8.6 per cent in the June quarter of 2021, on Australian Prudential Regulation Authority data.

The loans would include those who used a 5 per cent deposit as part of a government first home buyers scheme.

But some buyers, such as first home buyers, had little choice but to borrow their maximum to be able to get into the market, as house price falls remained slower than drops in borrowing capacity.

Dwelling values have fallen by 9.0 per cent in Sydney, 5.6 per cent in Melbourne and 4.3 per cent in Brisbane since their peaks, CoreLogic data shows.

But the amount home buyers can borrow has plummeted by up to 20 per cent, or hundreds of thousands of dollars.

Mortgage Choice Brisbane broker Brice Booker said that meant first home buyers had to borrow to the max to compete with other buyers.

“They probably want to borrow as high as they can because that can stop them being eventually overbidded by other buyers like investors,” he said.

Mortgage Broker Sydney’s Michael Brown said single buyers, including first home buyers, were being forced to borrow to capacity to get into the market.

“I’m not seeing it so much in couples,” Brown said. “First home buyers, they are borrowing to their capacity and struggling to get it done before the next rate rise.

“Many have been operating to a strict deadline to get it done in the next few weeks before the next interest rate rise because the reassessment can drop what they can borrow.”

Pearse Financial’s director and mortgage broker Tom Pearse said buyers, including first time buyers, were continuing to ask questions about rate rises, conversations that weren’t being had when interest rates were low and the market was booming.

“People are very conscious of it right now, they’re looking at ‘what do repayments look like at higher interest rates?’ That discussion wasn’t really at the forefront last year,” Pearse said.