Rate rises make for one hell of a power struggle.
Not a struggle for power between two forces, but a struggle for investors to maintain borrowing power.
The RBA’s hikes have seen some borrowers get hundreds of thousands of dollars wiped off their potential investment budgets since April.
Every 30 days or so, thousands of pre-approvals may as well be thrown in the bin, because the goalposts have changed significantly on the first Tuesday of the month.
The back to back 50 basis point hikes had done the most acute damage and, while the most recent raise was only by 0.25%, it will still represent a loss to how much you can borrow in the eyes of a bank.
What do the numbers look like?
A recent analysis by PropTrack showed that someone who could borrow $500,000 in April this year, was now eligible to borrow just $392,000. If the RBA had moved by another 50 basis points last Tuesday, their capacity would have been reduced to $383,000.
Think about what you can get for $392k compared to $500k. In some areas, the difference could actually reflect a full cycle of growth. And after two years of steep value gains around Australia, many affordable markets will now have moved out of that borrowing range.
An investor whose capacity falls from $500k to $392k may suddenly find there are hundreds of suburbs where they could have bought in April, but that are now out of their reach.
As shocking as that may be for some, there are others with bigger budgets who have seen their borrowing capacities plummet even more.
Someone with a $1 million capacity in April can now only borrow $784,000. Someone with a $2 million capacity in April can now borrow $1.567m.
And the RBA said there were most likely still more rate rises to come.
Prices have begun to fall in some markets, so what difference will serviceability falls make?
For owner-occupiers, it’s particularly tough because borrowing power is falling much faster than prices. It’s tough for investors too, but the fact that most investors begin on an interest only loan and already have equity to use as a deposit may mean the gap between borrowing power and price falls should be much narrower.
Then, there is also the fact that an investor will be able to rely on rental income to boost their borrowing power, especially in the current market where vacancies have never been tighter in most of the country and rents are soaring with no sign of slowing down anytime soon.
Ready to rumble
Any would-be borrower should already be as prepared as possible when it comes to maximising borrowing power, getting finances in order, releasing equity for use as a deposit and so on.
In a market like this, you need to be “rolling ready”… think of your financial situation as a live event where your borrowing power and pre-approvals can change and fluctuate far more often than usual.
More and more opportunities for value buys will begin to present themselves as prices continue to soften and more competition is knocked out by rate rises. You need to make sure you are as ready as you can be to snap them up. You don’t want to miss out on a value buy because it’s been three months since you checked your borrowing situation and suddenly you can invest less than you thought.