The size of mortgages potential property buyers can take on has been cut by a fifth due to aggressive increases in official interest rates, the Reserve Bank has revealed.
Jonathan Kearns, the banks’ head of domestic markets, on Monday said the substantial increase in interest rates since May also meant repayments would already be 25 per cent higher than earlier this year.
Reserve Bank head of domestic markets Jonathan Kearns says higher interest rates have reduced the maximum amount prospective buyers can borrow.Credit:Renee Nowytarger
Property prices have fallen sharply since the RBA started lifting official interest rates in May. At that point, the cash rate was 0.1 per cent. Earlier this month, it was increased to 2.35 per cent.
Sydney house values fell 2.6 per cent in August and have now edged down by $927 a day since the end of April. In Melbourne, values fell another 1.5 per cent last month to be down by $51,000 over the past five months.
Kearns said higher interest rates affected the property market by limiting the amount of money people could borrow.
Last year, the Australian Prudential Regulation Authority tightened how much a potential home buyer could borrow. Banks now have to ensure a customer can withstand a 3 percentage point increase in interest rates, compared to a 2.5 percentage point lift previously.
Kearns said at the time, it was expected this increase in the buffer would take some heat out of the property market and reduce the maximum available mortgage for prospective buyers by up to 5 per cent.
But the increase in official interest rates since May was having a much bigger impact on how much people could borrow.
“Given this 225 basis point [2.25 percentage point] increase in the cash rate has been fully passed through to mortgage interest rates, it will have reduced borrowers’ maximum loan size by around 20 per cent,” he said.
“And because the assessment rate also applies to any existing debt, the decrease in borrowing capacity is even larger for prospective borrowers who have existing debt, such as property investors.”
Kearns said apart from reducing the maximum amount a person could borrow, higher interest rates also had a direct impact on actual repayments.
He said the 2.25 percentage point increase in official interest rates meant a person now faced repayments 25 per cent higher than if they had borrowed in April.
On Friday, RBA governor Philip Lowe told the House of Representatives’ economics committee the bank board would consider a quarter or half percentage point increase at its next meeting in October.
Senior Asia-Pacific rates strategist with TD Securities, Prashant Newnaha, said the “hawkish” commentary from Lowe, on top of strong retail sales data for July and an upbeat business survey by National Australia Bank, suggested the RBA would lift rates by half a percentage point next month.
“We now expect the RBA to hike 50 basis points at its October meeting and retain 25 basis point hikes for the November, December and February 2023 meetings, taking our terminal cash forecast from 3.35 per cent to 3.60 per cent,” he said.
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