How Interest Rate Changes Affect Your Borrowing Power

Understanding Borrowing Power in a Changing Interest Rate Environment

Interest rates play a pivotal role in the borrowing landscape, influencing how much you can borrow when applying for a mortgage. As rates fluctuate, your borrowing power may change, potentially impacting your home-buying decisions. Understanding these dynamics can help you navigate the market more effectively.

What is Borrowing Power?

Borrowing power refers to the maximum amount of money a lender is willing to lend you based on various factors, including:

• **Your income**: Higher incomes generally lead to higher borrowing capacities.
• **Your expenses**: Lenders assess your regular expenses to determine your ability to repay.
• **Credit score**: A strong credit history can improve your borrowing power.
• **Interest rates**: Changes in interest rates directly affect your monthly repayments, which in turn can influence how much you can borrow.

How Interest Rates Affect Borrowing Power

When interest rates rise, your monthly mortgage repayments increase, which can decrease your borrowing power. Conversely, when interest rates fall, your repayments decrease, potentially allowing you to borrow more.

#### Example Scenario

Consider two scenarios with an income of $100,000 per year:

1. Interest Rate at 4%:

• Monthly repayment on a $500,000 loan: approximately $2,500
• Total borrowing capacity: approximately $600,000

2. Interest Rate at 6%:

• Monthly repayment on a $500,000 loan: approximately $3,000
• Total borrowing capacity: approximately $500,000

As demonstrated, a rise in interest rates can significantly reduce your borrowing power, making it more challenging to secure your desired property.

Factors Influencing Your Borrowing Power

While interest rates are a significant factor, several other elements can affect your overall borrowing power:

#### 1. Loan-to-Value Ratio (LVR)

• The LVR is the percentage of the property’s value that you borrow. A lower LVR may make you more appealing to lenders, while a higher LVR can reduce your borrowing power.

#### 2. Debt-to-Income Ratio (DTI)

• Lenders assess your DTI to evaluate your financial health. A lower DTI indicates that you have manageable debt levels and may increase your borrowing capacity.

#### 3. Employment Stability

• A stable job history can bolster your borrowing power as lenders prefer borrowers with consistent income.

Practical Steps to Enhance Your Borrowing Power

To maximise your borrowing potential, consider the following strategies:

• **Improve Your Credit Score**: Pay your bills on time and reduce outstanding debts to enhance your creditworthiness.
• **Increase Your Savings**: A larger deposit can improve your LVR and decrease your overall loan amount, making you less risky to lenders.
• **Reduce Unnecessary Expenses**: Review your spending habits and cut back on non-essential costs to improve your DTI ratio.
• **Consider a Joint Application**: Applying with a partner or family member can increase your combined income and potentially improve your borrowing power.

FAQs

#### How often do interest rates change in Australia?

Interest rates in Australia can change frequently, often influenced by decisions made by the Reserve Bank of Australia (RBA). Typically, the RBA meets monthly to assess economic conditions and may adjust the cash rate accordingly. Borrowers should keep an eye on these announcements as they can directly impact mortgage repayments and borrowing power.

Conclusion

Understanding how interest rate changes affect your borrowing power is crucial for making informed decisions in the real estate market. By keeping abreast of economic conditions, improving your financial standing, and being proactive in your approach, you can navigate interest rate fluctuations with confidence.

For personalised advice tailored to your specific circumstances, we encourage you to speak with Timothy Yang at Northmark Finance. His expertise can help you assess your options and make the best decisions for your financial future.

*Disclaimer: This article is general information only and does not constitute financial advice. It's essential to consult with a qualified financial advisor for tailored guidance.*