Starting from the 1st of November, borrowers will now have to demonstrate an ability to repay their home loan or property investment loan at a rate of 3% above the actual interest rate of the loan. This would decrease their borrowing capacity by what we estimate to be roughly 5%.
With interest rates at historically low levels, this measure comes as a way to protect borrowers against inevitable future increases to interest rates.
What can you do about it and how will you do it?
Here are 6 tips to help you maintain and even increase your borrowing capacity after APRA’s rate update.
Have a look at your living expenses
Managing and reducing your living expenses will make a great contribution to maintaining and increasing your borrowing capacity. Avoiding things like Afterpay can assist you in maximizing the savings you are making on your living expenses.
Eliminate expensive debt
Reducing the limits on your credit cards if they are not needed, can be helpful to improve your borrowing capacity. Furthermore, eliminating debts with higher interest rates than your home loan is also a good idea. Consolidating your existing debt into a cheaper debt like a home loan is also a good way to improve borrowing capacity.
Extend the term of your loan where it makes sense
Extending the term of different loans that are not your main priority would be a good decision. This is because it will reduce your repayments enabling you to have more cashflow. The extra cashflow will be able to go towards your main loan ultimately increasing your borrowing capacity for future borrowings.
Avoid interest-only terms
Interest-only terms on your loans require you to repay the whole loan over a 25-year term rather than a 30 year period. This results in an increase of repayments and a consequent decrease in your borrowing capacity. Eliminating or reducing these loans might result in repayments that are a bit higher in the present. However, it will ultimately allow you to have a higher borrowing capacity.
Save more money
With great savings comes the ability to pay a higher deposit for your home or property. Higher deposits translate into the need to borrow less money against the value of your next purchase. As a result, this would achieve lower interest rates, and consequently lower assessment rates at the moment of applying for your home loan!
Find and use a good mortgage broker
Working with a professional team like our Rise High Mortgage Brokers will signifigantly maximise your borrowing capacity. This is because our team has your best interest in mind and a variety of lenders for you to consider. Based on your personal circumstances, our team will give you specific advice and assess which lender is best suited for you. This ultimately brings you the confidence and expertise you need to make the best financial decision towards your homeownership and financial goals!
If you are looking for more advice regarding APRA’s rate update make sure you check our blog on improving your borrowing capacity or follow through with this article on Debt Recycling and how it can help you improve your financial position.
Any questions or comments? Contact us here or leave us a comment below!