Your borrowing capacity has increased – do you know by how much?

David Johnston wrote this article on August 8th 2019

Recent regulation changes will directly impact the amount you can borrow – significantly.  

So, how much – I hear you ask? 

Let’s take a look at how much your borrowing capacity has increased and how this is impacting the property market…

The Australian Prudential Regulatory Authority (boy that’s a mouthful), otherwise known as APRA, reduced the assessment rate that banks use to determine how much you can borrow from a minimum of 7% to 5.5%. This is a game changer for your borrowing capacity, ipso facto, a game changer for the property market!  

This additional borrowing power means there is considerably more ammunition to be put towards the property market which is already in the early stages of a recovery.    

Core Logic data released on 1st August shows that Sydney and Melbourne house prices rose for the month of July – the second month in a row. They also noted increases in Brisbane, Hobart, and interestingly, Darwin which has been in a lengthy slump! 

Many property buyers, especially those looking for a home, will choose to purchase a superior property and in an improved location with the extra cash they now have available.  

The numbers of buyers who take up this extra funding will go a long way to determining the rate of the property market upswing.   

How much more can you borrow and purchase for today, as compared to yesterday? 

From our analysis, the average borrowing capacity will increase by as much as 10 to 15 per cent. Factoring in the two recent Reserve Bank of Australia (RBA) rate reductions, this could be as high as 20 per cent – that’s a lot!  

For example, if your interest rate is 4%, a bank would add 2.5% to the rate you are paying and your borrowing capacity will be assessed at 6.5% now, rather than 7%.   

However, if your interest rate is 2.99%, (yes, there are rates this low), then 2.99% plus 2.5% = 5.49%. This means your borrowing capacity would be assessed on your ability to repay debt at the minimum 5.50% rather than 7%.  

Importantly – this is for both investment and owner occupier loans!  

How quickly will the lenders open up their money bags? 

The evidence is clear that competition is hotting up amongst lenders, with some rates being literally the lowest in history!    

While the banks are already adopting the reduced assessment rate, they will remain prudent and not splash the cash around just yet. The credit assessors who are the gate keeper’s when it comes to deciding whether or not you are ‘deserving’ of a loan, will take a little while to warm up to the new lending landscape. The psychological scars of the Royal Commission have not completely faded. Of course, we hope that the collective banks respect and behaviour towards the average Joe citizen is forever changed for the better after Hayne slapped them on the wristTime will tell, the jury is still out! 

The all-conquering C-suite (The Chief EO’s, OO’s, IO’s etc) are in the midst of profit season and the returns have been affected due to the ultra-cheap money squeezing margins, the royal commissions impact, the cost of remediating clients, and increased expenditure on risk management. 

This means they will be peddling at a rapid rate as they attempt to increase profit for shareholders and take back the market share lost in droves to the non-bank lenders during this period of ‘discomfort’.  

The big question if you are looking to buy property now or soon 

How much and how quickly will the improved borrowing capacity be negated by rises in property values?  

In other words, how long have you got before the extra 10% to 20% in loan size you have access to will be eaten up by the equivalent increase in property values.  

This would simply mean you are paying a whole lot more for a property that you could purchase today for a whole lot less.   

This is a vexing and emotion riddled question for many, especially for first time buyers. You should never rush ill-prepared into life’s largest purchase, nevertheless, procrastination can be even more costly in the long run.   

Finding the right balance is a critical part of the planning and strategy process before you select the right property for you and your family.  

We think it is unlikely for the property market to jump ten to twenty per cent across the board, but we do not purchase the property market, when buy property. We purchase one property and we have already seen examples of high-quality properties in sought after locations, selling for around 10% above where the market was prior to the election. And this is prior to the increases in borrowing capacity being passed on by the banks.    

Here’s a reminder why property values are recovering, and maybe faster than you think! 

  1. APRA removing caps on investment lending and interest only loans.  
  2. The Banking Royal Commission finished with a slap on the wrist to the banks, management and boards.   
  3. The announcement of a first home buyer cash splash earmarked for early 2020.  
  4. Positive economic sentiment following the Liberal National Party victory at the election.  
  5. Corollary, no changes to negative gearing and capital gains tax policy.  
  6. The government reducing tax rates to middle income earners.  
  7. The RBA slashing rates twice.   
  8. Banks lowering investment loan rates.  
  9. And now, APRA significantly lowering the benchmark assessment rate for determining how much you can borrow. (The icing on the cake!).  

And here’s the early evidence of the upswing! 

As predicted, these changes have shown early signs of positive impact on the property market. 

  1. CBA reporting significantly increased loan applications after the election.  
  2. Increased auction clearance rates 
  3. Our property analysts and clients reporting sales in the inner to middle suburbs in Sydney and Melbourne selling for as much as 10% above estimated ‘pre-election’ values.  
  4. 1st August 2019, Core Logic announce values have risen for a second month in a row for our two ‘superstar cities’ to quote RBA Governor, Phillip Lowe. The cities are of course, Melbourne and Sydney.  

The headwinds! 

There are of course significant economic head winds which is why the government is reducing rates and increasing your borrowing power.

They include the: 

  • USA/China trade war.  
  • Potential currency war as China has been accused of artificially devaluing the Remninbi.
  • Global reserve banks in a race to the bottom reducing rates to zero to encourage investment.  
  • Low wage growth.  
  • Construction at its lowest level in years. 
  • Low productivity as businesses and workers adjust to the digital age. 

The Government, APRA and the RBA hope their policy adjustment on rates and borrowing power will flow through to increased consumer spending, construction, job creation, income growth AND an increase in property values.  

As the RBA said in their July board meeting minutes prior to dropping the cash rate again, ‘declining housing prices had also contributed to low growth in consumption. They also noted ‘that some housing markets, notably Sydney and Melbourne, had stabilised.  

There are powerful forces invested in a property market rebound and I bet – the ‘house’ will win. The house is the government, the RBA, APRA, banks and the millions of Australian’s who own property and work in property related industries (estimated at one in three).  

The question is by how much and for how long! 

What does this all mean for you? 

With the pendulum ‘rapidly’ swinging towards a lending-friendly environment, we could see the major property markets, especially Melbourne and Sydney move by as much as 5% by the end of the 2019 calendar year.   

We don’t think we will have a runaway property market. In fact, it could be an initial jump over the next period, followed by a relatively subdued market after the ‘reshuffling’ that we have outlined by the powers at be has filtered through to the economy.  

If values jump by 5%, this means if you are planning to purchase a one-million-dollar home, you would need to fork out an extra fifty thousand dollars plus stamp duties AND interest over your life time!  

If you’re considering making your next property purchase, taking action sooner rather than later could save you a few dollars!    

We shall watchread and do our research with great interest as this unfolds and strive to stay ahead of the curve.    

Book a free Mortgage Strategy or Property Planning meeting with us to review your mortgage strategyset up a money management system, develop a Property Plan or select a property like an a-grade buyers agent.   

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