16 Feb 2023 Podcast: Deep Dive – How Borrowing Capacity Is Impacted By Rates

Every Australian borrower has been feeling the financial pinch with rising interest rates. But if you’ve had plans to buy another home or investment property, or refinance, your borrowing capacity has been impacted too.

In this episode, Evelyn and Maddie sit down to unpack the ins and outs of borrowing capacity and the impact of interest rates, and what you can do about it.

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Podcast Audio Transcript

Before we begin, we would like to acknowledge the traditional owners of the land from which we are recording and you are listening today, we pay our respect to their Elders, past present, and emerging always was and always will be Aboriginal end.

Welcome back to another episode of you.

 

0:20

Have my interest, I’m Evelyn.

And together with my colleague Maddie, where mortgage brokers here to help you make smart moves with your money by giving you tips tricks and tools to help navigate your wealth Journey.

Welcome back to another episode of you have my interest.

 

0:35

Today we’re going to be doing a deep dive into how the increase in interest rates have been affecting everybody’s borrowing capacity.

That’s in terms of refinancing purchasing pre-approvals the whole lot.

But before we get into it, if I haven’t spoken to you much today, how has your day and your week?

 

0:53

Been for that matter.

Good afternoon rounds.

I was just looking at the time thinking, what time it was.

If it’s morning or afternoon, it’s always tricky around all night.

Line today, I’ve been in quite a few meetings clients business partners, you name it and doing some assessments for clients.

 

1:10

I like to get my assessments and Loan recommendations out before the weekend, so that clients can take the weekends have a bit of think about it.

So that’s my goal after our podcast today and then hopefully to enjoy some of this Sunshine.

What about yourself?

Yeah.

I mean it’s been a really busy week of getting applications out and on top of that, I’ve also been doing a few reassessments of clients that have extended their pre-approvals and that plays into To what we’re going to be talking about today and why we wanted to have a chat about it because it’s so, so important to realize and factor in when we’re talking about clients and the recommendations were putting out to them, which is what you do.

 

1:44

It’s been a really big talking point over the last, you know, 6 to 12 months.

Absolutely.

It particularly when we’re looking at the pre-approvals and we’ll delve into that in detail.

But it’s definitely been a big talking point with most clients for sure.

And I’m definitely going to go into a little bit of my scenario and my future scenarios well because it definitely is always playing on.

 

2:02

Mind with the rising rights.

So let’s start back with Basics.

We did hear about it from Eliza Owen last week on the podcast, but just to refresh everyone’s memory.

And if you didn’t listen to that podcast, what is the RBA cash rate?

And how does it affect interest rates in this current market?

 

2:17

Yeah, absolutely.

So the RBA cash rate is the rate that the Reserve Bank sets in terms of Australian, lending, in terms of the cost to borrow funds between Banks.

So, effectively what, that refers to then is the banks themselves.

Elves will have a margin on top of the cash rate that they effectively pass on to borrowers because they’ve got to make money somehow.

 

2:37

So, when the cash rate Rises, it’s very, very common that the banks will then pass on that cash rate rise to the client in an interest rate increase.

Now each month the RBA sits down and they will determine whether or not they’re going to hold the cash rate.

The same reduce it or increase it and most of the time in history we’ve seen that the rate will change by 0.25 percent up or down.

 

2:58

When it does however we’ve had quite a few rate.

Is this year that have been .5 of a percent so that it’s jumped up really quickly and really significantly the RBA cash rate at the time of recording.

This podcast is two point eight five percent and over the last 12 months.

 

3:14

Since November 2020, it’s risen by 2.75%.

So that gives you a bit of context as to how quickly rates have jumped dump and what that then results in terms of an increase in repayments from a client’s perspective.

Now, when we’re looking at how that then influences, borrowing capacity We’ve got to then look at how the bank’s assess your borrowing capacity.

 

3:35

So let’s say, a bank has a interest rate that they pass on to a client sitting at 5%, the bank will actually add a buffer usually now this isn’t, you know, 100% of the case all the time.

But majority of Banks and lenders policy determines that they will have a 3% buffer or margin on top of the actual rate passed on to the borrower in terms of how they assess your borrowing capacity.

 

3:57

So that means that if you’re sitting at a 5% interest rate, you’re actually being assessed on your payments of apes.

So effectively what that means, then if rates are increasing, then basically, the repayment amount that the lender is determining that you’re paying back to them, is also increasing, so that lowers your borrowing capacity because your cash flow then is reducing as to what’s available back to the lender.

 

4:17

Yeah, I guess in a nutshell, that’s how it effectively works, but I guess where a lot of people may be a little bit concerned and the conversations.

If we start with that pre-approval piece man’s is that when pre-approvals are held for a 90-day period, there can be rate movements within that period of time.

 

4:32

I’m so, we’ve really then need to drill down on the lenders policy as, to whether or not they’re going to hold that assessment rate.

So, in that same example, are they going to hold that initial Apes an assessment rate that they used for the client?

Even if rates increase after 90 days, or are they even going to reassess it, based on the interest rate of that 90-day Mark, which based on our history over the last year?

 

4:54

Could potentially be another one point five percent higher?

Yeah, I mean, that’s something that will delve into a little bit more because every Bank, as we’ve always say SS is Differently.

But a big reason that the cash rate changes anyway is not just to make borrowing money harder and more expensive because cash becomes more expensive.

 

5:12

Yeah, but it’s also to adjust for inflation.

That’s the main thing, because our inflation and our economic standing right now it’s crazy how high inflation has become, what was the, I think, was it seven or eight percent that we’ve just heard that it’s been now.

So the RBA is trying to get that back down to our healthy, 3%.

 

5:32

Point and that’s why they’re raising the rates, they’re wanting to make everything more expensive in terms of mortgages and all of our expenses.

So fuel electricity food.

My food shop is so much more expensive now, and that’s all to make sure that people have less discretionary spending waste.

 

5:50

We’re trying to stop that because everybody is just in a spending frenzy right now coming out of covid.

So, the amount of money that’s gone back into my mortgage.

Now, in comparison to what it was six months ago, is insane.

I About a hundred dollars extra.

Yeah tied up.

Just straighten my mortgage, it’s not affecting anything.

 

6:06

It’s just going to interest.

Just going to the bank’s.

Yeah, absolutely.

But I mean the other piece of the puzzle to is you’ve got to look at the rates that we’ve come out of over covid.

Have been the lowest on record ever so pre covid.

Realistically the interest rates were sitting at four, five, six percent.

 

6:23

And that’s what we’re starting to hit.

We haven’t even hit that figure yet.

We’re just starting to.

So it’s, you know, going into a pandemic and then coming out of a pan.

Hammock.

If you look at that on a graph, you really do see that huge decrease and then that Rising rate Market again, but it’s not too dissimilar to rates exactly before covid, really hit us.

 

6:44

Yeah, and that’s another big point is that even though rates aren’t really where they were, there are about pre covid levels but this is still very low in comparison to what we’ve seen over the past few decades.

Absolutely.

But this is like a major buyers Market that everybody’s just been buying right now.

 

7:02

And myself, included yourself included.

We both just recently bought our first homes and we haven’t ever seen a market like this.

In terms of interest rates.

We’ve always been very used to just below to percents 1.89 people fix it.

That amount we’ve never seen rates, be this high.

 

7:19

And so, that’s another important factor in terms of if you’re buying your first home and rates are on the rise, you’ve got a really factor that into your budget because we’ve never ever experienced this.

We never experienced cash back.

Coming more expensive and our mortgage is becoming more expensive and that’s going to be definitely something we touch on today in terms of fixed versus variable rates and the different types of loan products and how they are affected by borrowing capacity.

 

7:44

Yeah, absolutely.

Well, let’s jump straight into that because, you know, it’s very easy to say that on average rates are sitting at.

Let’s just spit out a number and say, four and a half percent, for an owner-occupied pni home loan.

However, rates vary drastically depending on the product, the purpose, and the loan-to-value ratio as well.

 

8:02

The amount that you borrow.

So typically, we might see that somewhere in the ballpark of four and a half percent is where your owner-occupied rates are sitting.

However, if you’re below an 80 percent loan to value Ratio or above and eighty percent loan to value ratio, that’s where you’ll also, then find that rates differ drastically.

 

8:19

Typically the way that I like to describe that is, when you’re going above an 80% lend, you’ll become a more risky borrower to a bank.

And therefore, they do tend to price their loans according to risk and that’s where an interest rate can.

Definitely jump up above that, eighty percent threshold.

And again, if rates are jumping up purely based on your lvr, that’s also impacting your borrowing capacity.

 

8:38

So borrowing at higher percentage.

Points is also becoming more difficult where rates are increasing.

It’s not just that rates across the board are increasing.

Its also at higher loan-to-value ratios.

Then you look at fixed versus variable, we had that big spike in fixed rates over the last 12 months again, where they really jumped up quickly.

 

8:58

You know, in comparison to the variable rates because the variable rates are very much Dictated by RBI policy, but fixed rates are not fixed rates.

Are often determined by long-term bonds and that sort of thing to the lender?

Yeah, so fixed rates for example, we saw that the three four and five year fixed rates just went berserk.

 

9:14

They’re actually just starting to come back down which is really interesting and we have seen some quite competitive three year.

Fixed rates relative to the one year fixed rates for example.

But overall the fixed rates are probably still sitting half a percentage to a percentage Point higher than the variable rates in that under 80 percent threshold.

 

9:30

Mark, which means that at the fixed rates.

If you’re opting for a fixed rate for pre-approval, or refi can also lower your borrowing capacity in this market, yeah, because you’re essentially applying for a higher cost product, correct?

That’s just off the get-go.

 

9:45

So obviously that extra 1% that gets factored in that’s a higher amount even over the short term.

That’s a higher amount that you put it in towards your mortgage.

It won’t be affected by the interest rates, but it’s still going to be an extra amount that you would have been instead of paying from the get-go.

 

10:00

So I think that’s a really Important factor to consider that depending on your borrowing capacity and how well off to you are in terms of that mortgage product fixed versus variable, can really change things.

Yeah, just back to the lvr tears, the loan to value ratio tears.

How much of a difference in interest rates?

 

10:17

Is there between say 60 70?

And 80% is, they’re really, really big difference as your risk goes down.

Correct.

We’re seeing a lot more Banks starting to price.

Now, for risk the other way.

So we just talked about how more risky borrowers, tend to get Get slightly higher rates.

 

10:33

Well, the other side of the fence is also true and that’s something that I think is really important and I’m glad that banks are doing that because they’re then rewarding less risky borrowers.

Effectively from the perspective that a lower loan-to-value ratio can therefore have a lower interest rate that helps you to pay off your loan faster as well.

 

10:52

And we typically tend to see that in the owner occupied market.

So you know, that really comes back to well if you’ve written the rise of property prices over these last few years, there’s a good chance that your loan Value ratios come down and especially as people have been experiencing rate rises.

 

11:07

We should be applying for as many of our existing clients as possible, and we do to have rate reductions on their existing loans after getting higher valuations to show to the lender that their loan to value ratios come down, their risk has come down and they can therefore now receive lower interest rates as well.

 

11:23

To jump.

Back to your question though.

Around, how much it changes.

There are a lot of lenders that will basically do like a point, ten percent margin on each ten percent tea.

Here.

So, you know, let’s say that if at sixty percent, the rate was sitting at 4.2 that, at 70%, it might be sitting at 4.30 and so on and so forth.

 

11:41

The over 80% though it can change a bit more and sort of a bit more dramatically than that.

And particularly when you get over 90%, I mean we do a lot of pricing with the majors as you know, where you apply for specific interest rate pricing, based on that clients loan parameters and you do a lot of that with me in our business.

 

11:59

And I mean, you’ve seen the differences in terms of Interest.

It’s when you look at say a major Bank pricing over the eighty percent versus Under and in some cases, it can be like a full one and a half percent.

Yeah, which is where like the first home owners and the first home schemes come into play.

 

12:15

Yeah, we’re if you can apply for a new home or the first time guarantee, and the banks will generally price you at 80% instead of the 95% that you are actually borrowing, correct, you get a lower interest rate and therefore, your borrowing capacity goes up.

Which is why they’re so good.

 

12:31

That if you do have a lower deposit, you can still take advantage of those lower prices.

It’s not just avoiding lenders mortgage insurance.

You also get a cheaper interest rate and therefore your borrowing capacity goes up.

Yeah, exactly.

And it’s exactly the same with guarantor loans, just to sort of follow on from what you’re mentioning there.

 

12:46

With the first home loan deposit, scheme, or the new home guarantee.

Depending on where you’re sitting, the guarantor loan operates in the exact same way, with a parental guarantee, where if you have additional security that is being Provided to the bank.

 

13:03

The reason that they price you at eighty percent loan to value ratio is because, again, you’re D risking yourself from the potential of default and therefore the bank will price you at an 80 percent loan to value ratio.

Because against either your property or the guarantors security, the loan-to-value ratio on an individual property, doesn’t exceed 80%, so the price you exactly the same way and that’s how the government guarantee works as well.

 

13:25

So, it’s interesting when you sort of explain that to clients as well, that it’s not just about, as you say, minimizing lenders, mortgage insurance.

Insurance.

We can also reduce your payments you know, you can borrow anymore or you can simply just pay off the loan faster.

Yeah.

And on the topic of first home, buyers, and buying in a really high Market that we have been experiencing over the past year, but just touching on the loan-to-value ratio tears.

 

13:51

What’s going to happen?

If you see a client, say, if, for instance, myself, I bought it a 90 percent loan to value ratio, and I bought it in quite a high Market.

There are going to be some people That have bought at 90% they go and try to refinance in a year or two years time their income hasn’t changed which only gone up by a little bit with pay rises.

 

14:12

But they’re borrowing capacity, has decreased and let’s say that the evaluations aren’t increasing because we’re kind of coming into more stabilized market now.

What’s going to happen there, they’re going to be able to refinance at all or they have to just be stuck with the bank that they’re at.

Yeah, this is a great question, and it’s something that’s been playing a lot on my mind as well.

 

14:32

In terms of speaking with clients and just knowing that we’re now, assessing clients, nearly three percent higher from a repayment perspective to what we were a year ago.

There are a lot of people that bought at their maximum last year and will not be able to refinance.

Because their income has an increased and their liability has remained effectively the same.

 

14:51

In fact, realistically, if you think about it from a repayment perspective, sure they might have paid off more of their loan, but they’re now have 29 years left instead of 30 years when they purchased the property.

So if Typically, it hasn’t changed their borrowing capacity because they need to now pay it off in 29 years.

So there are a few options there.

 

15:09

One of them which is not the ideal option.

Is that if the clients really need to refinance they can extend the loan back out to 30 years.

Obviously your then paying an extra years worth of interest that you wouldn’t have otherwise done.

When we look at things like compounding interest that’s not a great idea for sure that’s a bit of a concern for sure.

 

15:26

That’s where repricing with existing Banks.

If you are effectively stuck with that bank until you’re in composition, One or your financial position does change from a cash flow perspective is going to be really important.

One thing I have been really pleased to see with the bank’s is that a lot of them are now coming to the table to make it easier to reprice with them?

 

15:43

Because there are so many opportunities to refinance, they want to retain a customer.

And in terms of repricing, a current client.

How often do we do that?

For our current clients that we have at least every year, however, you will find that most of the time at around about the Month Mark is when you’re able to actively reprice.

 

16:05

Some banks do have a hard and fast rule on that where the pricing is more manual where they may need to fill out a form and send it into the bank.

And if they’ve repriced or had a reduction in the last six months, sometimes they won’t do that until they hit that 6-month Mark.

Then you’ve got more of the I guess electronic instant approvals in terms of repricing where you could literally reprice through some of the portals that we have access to like, every two weeks.

 

16:28

If you wanted to, but rates aren’t going to change that much, that you’re going to get an impact over the that period of time.

But yeah, it just depends on the bank unfortunately, as to how frequently you can do that.

Some are a lot more rigid in their processes, where they do want evaluation, or they do need to actually go through a manual pricing team where I think that’s one of the benefits that you do get with a lot of the majors and even some of the second tears.

 

16:50

Now, you know, particularly the likes of, I know, Bankwest, for example, make a commitment that all of their existing loans, get new to Bank rates.

So, yeah, which is fantastic.

If you’re not on YouTube Bank rates with West reach out to your broker because they can literally price that for you in five minutes.

17:07

And the best part about it is that we can do the repricing for you and we’re actively going to be doing it because I know that it’s a very common question.

Now is, how often should I be calling my bank and trying to get repressed?

You do that automatically, obviously, we know what the banks like, like, as for instance, Macquarie will never do more than six months, but they will actively reprice every six months for our clients, which, is fantastic.

 

17:29

Correct?

But not even just that, it’s also us.

Being able to get evaluations with the current Banks.

Yeah.

Which you can’t really do yourself, you can obviously request it but it’s a lot more effort for you than just us doing it with our portals.

We do that for free for you, and then we can send that to the bank and go, hey, the loan-to-value ratio to your has actually dropped.

 

17:48

There were just over 80% now, they’re under, or they’re just over 70.

Now they’re under.

So on so forth and we can try and argue those better rates for you.

So it’s not that even if you’ve been with the bank for two years that you’re stuck or that you have to You on with them because your loan to value ratio is a little bit higher or your borrowing capacity is not going to be able to get you to refinance.

 

18:08

There’s still options out there which I feel like it’s still good.

Yeah, obviously it’s not ideal but now we’re going to this different Market.

There are things that we have to do to kind of, broaden our Horizons.

Change our perspectives on.

Yeah.

What’s next and what our options are for the clients?

That’s right.

Absolutely.

 

18:24

And then I think if you look at if you are in that category where let’s say you’re coming off, you know in february/march 2023 We’re going to see trillions of dollars worth of fixed-rate loans expiring because that’s where people started to look in those extremely low to year fixed rate loans.

 

18:41

So over the next three years in.

So, just to give some context in 2021 and 2022.

So the last set of 12 to 18 months, 75% of all loans were fixed, which is unheard of yeah.

And so in the next two, to three years were going to have this huge amount of loans coming off.

 

18:59

Fixed rates where clients are going to find that.

Interest rate has doubled if not tripled in some cases, so that’s where active repricing really comes into effect.

And if you’re not working with a broker, or even if you are working with a broker, literally calling the bank knowing when you’re fixed rate, is expiring to be proactive on.

 

19:17

That is so important because you do have the ability to get an instant discount on the revert variable rate, which is the rate that the bank will automatically roll off onto after the fixed rate expires.

So you want to be actively repricing that revert variable rate to be the best that it absolutely can be that buys you some time?

 

19:39

Then to look at refinancing options, if it’s still not as good as new to Bank rates, for sure.

And, as I’ve said before, we always talk to our clients about a month before and we actively start that process of refinancing a month before their fixed rate comes off.

But still there are going to be a couple of days leeway there and it is a really good point that you can discuss with your bank on that rate that it’s going to come back off.

 

19:59

But yeah it’s always a very, very high interest.

It’s never something low.

Correct, so we’ve just spoken a lot about owner-occupied loans and people that are actually living in their homes, including first home buyers.

But let’s switch our perspective to investors.

What is the difference in buying capacity?

 

20:16

Really, when it comes from buying a home to live in and then buying a home to invest in, there’s a difference in interest rates of course, but what about how boring a capacity is assessed?

Yeah.

Absolutely.

There is a difference in interest rates investment loans, typically attract, a higher interest rate, And then interest-only investment loans, typically tractor higher interest rate than p&i or principal and interest investment loans in terms of borrowing capacity.

 

20:40

It depends on.

I’m going to give you a really generic answer here but it depends on your circumstances.

Don’t give you that.

What I mean by that though is are you a rent Vesta, purely purchasing investment properties and therefore not having any owner-occupied debt versus if you are.

 

20:56

Someone that has an owner occupied home and you’re looking at then having a combination of owner-occupied and investment debt.

The reason that I bring that up is you will always have a higher borrowing capacity for an investment loan.

If we’re looking apples for apples compared to an owner-occupied loan and the reason being is that investment loans attract negative gearing benefits with the lenders.

 

21:17

So they’re effectively then adding back the interest expenses over the year into their service in calculators.

So sure you’re paying off slightly higher interest rate, which therefore attracts higher repayments from a servicing perspective.

However, with the added benefit of negative gearing, we I find that if you’re two people that are living at home with Mom and Dad, one of you buys a known Iraq, one of you buys an investment, you will get a higher borrowing capacity for the investment scenario on that as well.

 

21:43

In terms of interest only loans and how they are deferring from principal and interest as you said something, I feel like that is a very common misconception.

Is that an interest, only loan?

You can have a higher borrowing capacity because you’re paying less.

You’re obviously only paying the interest and you’re not paying the principal of the home loan.

 

22:02

That’s not the case.

Can you guess why?

Yeah, absolutely.

I love this one.

So interest only as you know, you’re only paying interest back to the bank.

So if you think about it from a client cash flow perspective, I’m paying less money physically to the lender because I’m not paying down the principal balance.

 

22:17

So my loan repayment is less.

However, the reason that it decreases your borrowing capacity is if I have five years worth of interest only repayments at the start of my loan term, and then I have the remaining 25 years worth of pni as opposed to To someone that just does pni from the start and has 30 years of pain.

 

22:35

I repayments, I then have 25 years to repay back the same amount that you potentially would have had Maddie to pay back over 30 years.

So my revert repayments are significantly.

Higher from years, 6230 then your repayments are from use 1230 and that’s why my borrowing capacity decreases because I’m now being assessed on years, 6230 and they’re hiring payments and also because we’re paying more Interest over the life of the loan, obviously, and that’s something that we have to always explain to the banks, especially, Commonwealth Bank.

 

23:08

They make you do an interest-only simulator to explain to the clients.

How much more interest will be paying over the life of the loan and it can be it is tens of thousands of dollars more.

However, that is obviously outweighed by, you’re getting a home loan paid off by tenants.

 

23:27

You’re getting interest tax deductibility and all the additional benefits that come from having Rental properties.

Yeah, absolutely.

And I guess to sort of follow on from that point there is that that’s why Banks don’t like to provide interest only loans to owner-occupied properties because effectively, you’re going to be paying significantly more interest.

 

23:48

Where the goal for the owner-occupied not being tax deductible from the eyes of the bank and in general, sort of financial terms, should be to pay that loan down and therefore, spend less interest on it.

So that’s why it can be a really good strategy for investors.

Why they’re maximizing their tax deductions not tax advice.

 

24:06

But you know it can be it can definitely be a really good scenario for people that are accumulating a portfolio investment properties with high growth potential.

But still have an owner-occupied loan where they want to direct the majority of their repayments and they’re offset facility to and then big accumulating investment properties in the backend through interest.

 

24:25

Only means where the majority of their income coming in from those properties, can be building up their savings.

Either into that offset account against the Iran Iraq, or to accumulate the next property, so it’s a strategy piece for sure.

And that’s something that you always go into with your clients, you always look at the future position and their long-term goals because that really does affect what you’re going to be applying for from the get-go.

 

24:47

And basically long story short, the tldr is that if you have an investment in interest-only, loan will give you a higher cash flow, but a lower borrowing capacity and that sense.

So it’s always really interesting to talk to your broker about what the best Is for.

Yeah, because are not occupied debt and having a home that you live in.

 

25:05

It’s considered bad debt because you’re not generating income from it.

So it’s not considered good.

Correct.

Yeah.

Some people actually refer to homes as liabilities because like from an asset perspective on the books, it’s an asset, right?

But from the perspective of it actually doesn’t generate you any income, I’ve heard people refer to your home is actually your biggest liability.

 

25:25

There’s outgoing costs to run it and it doesn’t produce you an active income and I’m like, ah, that literally, you know, Juxtaposes everything that I’ve ever learned about Finance.

Yeah, it does.

But at the same time I mean I’d prefer to have a roof over my head.

Yes, yeah, exactly.

 

25:41

Okay.

So we’ve gone through a lot of refinancing, let’s jump over to pre-approvals now and purchases because I feel like that’s a really interesting piece and something that we see a lot and it’s yeah, these interest rate Rises are coming into play.

Let’s Start From the Start.

When you’re first applying for a pre-approval and say you do have a base salary, you don’t get any overtime.

 

26:02

We Get any allowances watch that discussion that you have with the client in terms of the interest rate Rises and in the market.

So I guess a couple of things that I like to talk to clients when we’re reviewing that borrowing capacity.

Is number one, what is your maximum borrowing capacity?

Based on today, from What A lender says that you can borrow in terms of, you know, when we look at your income versus your expenses, your liabilities in the proposed loan, repayments on today’s interest rates.

 

26:25

How much can you borrow?

That’s your maximum borrowing capacity then if we look at the other side of the fence, the things that by then like to look at there are what does that loan amount actually equate to for you in terms of from an emotional perspective?

Is that a really scary number because if it is, well, then it’s probably not the best idea to apply for it, right?

 

26:44

The other side of the fence then is also well, what are the repayments look like on that?

And what’s your maximum budget from an outgoing repayment perspective, where do the proposed repayments from the borrowing capacity, then sit in relation to your budget and do we need to manipulate some of that data?

 

27:00

So, for example, if you told me manse that you’re Absolute maximum outgoings per month that you could put into a home loan where five thousand dollars and the loan repayments based on your maximum position were scheduled to be four thousand dollars at the moment.

We’ve got a buffer there of $1000 wiggle room for potential rate increases time off, work if you didn’t have annual, leave or sick leave or anything like that increases in.

 

27:24

Unexpected expenditure all of that sort of thing.

Emergencies we’ve got a bit of a buffer there.

Then we look at okay.

Well, if rates are going to increase how much Each does that impact your buffer do?

We need to potentially lower the loan amount so that the repayments come down to give you more of a buffer?

They’re the kind of questions that I like to talk through with clients because it depends on your risk, appetite to a lot of people are of the mindset.

 

27:45

Also that well I’ll make it work, you know.

Like I’ll find a way to earn more income whether I do side hustles, or if I do surveys and a, you do a lot of surveys and that sort of thing to generate some income in that way.

So it does also then come down to what’s your risk appetite in terms of how much you either want to stretch yourself or your means of generating more income?

 

28:05

Yeah well I mean when you just say an interest rate right off the bat a percentage doesn’t really mean much to you.

Yeah.

Until you have the repayments in front of you that are in line with your pay cycle and how you get paid.

You can figure out.

Oh well this is how much I’m saving a month.

So this is probably realistically, what I want to spend or is it in line with how much I’m paying in rent.

 

28:24

So I know that it’s feasible for me.

Interest rate means nothing until you have those numbers.

Yeah.

And the other part of that too is Clients will say, we only want to base our repayments off our base salary and anything that we received from overtime or bonus income.

For example, is a bonus to us.

And therefore, we want to base our borrowing capacity off the base.

 

28:42

I think that’s also the way to think about it.

Yeah.

For sure you like, you never really want to go through absolute maximum especially in this market.

So, now, a client has gotten their pre-approval next step of the process.

Ideally is say, they’ve bought within the first 90 days of their approval.

 

28:59

So their Approval is still valid?

They’ve purchased within, let’s say 60 days.

How is it assessed at the bank from then?

If in this market say it’s gone up by another point five percent.

Yeah over like.

So 2.25 percent over the next two months.

They’ve bought interest rates are now half a percent higher.

 

29:16

What do the banks generally do?

Yeah.

So again, unfortunately depends on the bank but there are some banks that will basically carry forward that assessment rate that they initially assessed you off, because in their eyes That pre-approval was fully assessed and it’s valid for 90 days and therefore it shouldn’t change so long as nothing in your financial position or lone figures or product type or anything like that have changed.

 

29:41

So if you have applied for a variable loan of five hundred thousand dollars and that’s been pre-approved for 90 days and use want to switch to a fixed-rate reassessment reassessment on today’s interest rates.

So that’s something to be aware of even if nothing else has changed in your financial perspective and the bank actually honors their assessment rate.

 

29:59

If you change, what?

You actually want in terms of product to that bank, they will reassess you.

So that’s one thing that’s not always spoken about but yeah.

Definitely, you want to try and apply for in a market like this, apply for a bank that’s going to hold the assessment rate that we’ve got certainty over your pre-approval, then converting to formal approval.

 

30:17

Particularly if you’re buying an auction in Victoria, it’s unconditional.

So you don’t have the ability to make that subject to finance or we factor in rate Rises at the time you apply for pre-approval knowing that if rates do go up by Point seven, five percent over the next three months that you are still going to be eligible for that same loan amount.

 

30:35

Even if we have to assess you off, today’s rates at the time that you buy.

We generally do take that into account where we’re very conservative with our servicing calculator.

We liked especially if you are on base income plus bonuses or overtime, even rental income, things like that.

 

30:52

We always like to not, take them into consideration when we are assessing just so we have that leeway and wiggle room when it comes to if you’ve purchased Just so ya, there are obviously all these different policies and the banks do, this is things differently but either they will assess it at the rate that the current market is in or they will hold the right as you said that.

 

31:10

You originally got pre-approval on.

Yeah, I guess just to clarify.

That will often say to a lender.

Even though the clients received x amount of overtime, we haven’t used it for servicing as it’s not required.

So it’s not that we don’t take it into consideration, it’s that will advise the bank there in such a strong position.

 

31:27

We haven’t even needed to use their overtime.

Exactly.

It’s all about painting.

A really good picture.

Yeah, banks on what your scenario is and what it looks like and this is why it’s going to be really easy for you to pay back this loan and you’re a lower risk to the bank.

Absolutely.

So, let’s say that you haven’t purchased, and you’re now needing to extend that pre-approval generally.

 

31:46

You can extend for another 90 days.

Yeah, but you will have to reapply for a pre-approval in some instances.

Again, it differs for every bank, but let’s say the bank needs you to reapply, which they were generally.

Do they need you to reapply?

What is the process there and does it need to get reassessed?

 

32:03

Well, you won’t need to reapply if you roll it over before the 90-day Mark.

So you only need to reapply for finance, if that actually formally expires, which means you’ve missed your cutoff at 90 days.

So you need to basically have that rolled over and I have advised the bank.

No later than day, 89.

 

32:19

We want to extend this pre-approval.

Please see attached evidence that my financial position hasn’t changed and here are payslips confirming that my pay hasn’t changed and I haven’t taken any And leave without pay or anything like that.

So you’ve got the ability to literally just roll that over with no impact on credit report in terms of submitting a new application or anything.

 

32:38

For another 90 days, you’ve got 180 days they’re worth of pre-approval, but Banks, can’t extend it past that point.

So, at 180 days, you do need to formally reapply to the lender, which requires a full new application process.

Exactly.

As you would have had at day one, which is a bit of a pain because you have to really go through.

 

32:55

Yeah.

You really don’t want to miss day 90 if you can help me.

Exactly.

Yeah, I mean, there are some Banks like Commonwealth Bank that have an automatic 180 days, which is really, really good.

But yeah, let’s go back with reassessing.

Most banks will need to reassess on a new rate if you are extending it past 90 days.

 

33:11

Yep.

Even CBA do though, even though they’re pre-approvals are valid for 180, they still require a reassessment at 90.

Hmm?

Interesting.

So that’s where it comes into.

That’s what I’ve been doing for the past few weeks is I’m reassessing the clients.

So, the one thing that even though the interest rates go up, as I said at the start, so, Your living expenses generally and that will also play into effect as well.

 

33:33

The banks will consider that your living expenses may have increased with the increasing rates.

I think that’s a really good point to make.

And I think one thing that I try to always encourage and I know that clients are often discussing with both you and I as they go through that pre-approval process and their house hunting is to come back to us and double check the numbers prior to signing any contract so that they can have that added Assurance or even just check in with us.

 

33:55

Hey is my pre-approval still valid?

Does it need to be reassessed and will I always ask them has anything changed in your financial circumstances as well, that we need to be aware of but also, you know, just double checking in with your broker prior to signing that contract.

Is there anything that I need to be aware of?

 

34:11

From the bank’s perspective, that could cause this to be reassessed or declined prior to me signing on that dotted line.

Exactly.

And we always follow up with our clients, you know, every 30 days if we’re there pre-approval and then, you know, one to two weeks before it expires to make sure that they want to roll it over if they haven’t found anything.

 

34:28

So, Rest assured that your broker will, always make sure that your hand is help with the process and you’ll know all your times and when you need to get things in by, but I think we’ve gone through a fair bit today and I think that it will give a lot of value to our listeners, in terms of how pre-approvals work, how the Boeing capacities are affected by the interest rates, and how it keeps going down, down down, but it’s not all doom and gloom in.

 

34:49

There are ways to safeguard yourself across raised right risers?

Yeah, absolutely, right.

And there’s ways to increase your borrowing capacity to over time.

Sometimes it takes a bit of pre-planning planning.

We’ve had a lot of conversations with clients over the last few months who have been planning on purchasing in x amount of time.

 

35:07

And we’ve been able to look at their current position and say, okay, well, in order to get your borrowing capacity, there these are the factors that we need to consider whether a reducing liabilities, whether it be paying out, liabilities, whether it be working really hard and getting some more over time, runs on the board at work, or whatever it might be.

So there are definitely ways to maximize that borrowing capacity if you haven’t already planned for it.

 

35:28

Thank you so much for listening and we really do hope that you found some value.

In terms of looking at how through the bank size, your borrowing capacity can change depending on what’s happening in the economic environment.

It’s definitely something to consider it before.

You are applying for pre-approval in particular.

 

35:43

And I do think that, you know, we bang on about it a lot man’s.

But not applying for that absolute maximum figure because you just don’t know what the future holds.

But if you do have any questions or there’s specific aspects that you would like us to discuss in another podcast, please do feel free to reach out.

We would love to answer your questions.

 

35:59

We’ll see you next time.

We would love to answer your questions.

We’ll see you next time.

End of Audio