If you are in the market for a home or investment property, rising interest rates may have a significant impact on your borrowing capacity. The Reserve Bank of Australia (RBA) has raised the official cash rate for the sixth consecutive month, leading to most lenders increasing their interest rates. This change has come as a shock for many potential home buyers, forcing them to re-evaluate their existing pre-approvals and borrowing capacity.
What is borrowing capacity, and how is it affected by rising interest rates?
Borrowing capacity refers to the amount of money a lender is willing to lend you for a home loan. Lenders use a variety of factors to determine borrowing capacity, including your income, expenses, credit score, and the current interest rate. When interest rates rise, your borrowing capacity may decrease. This means that you may not be able to borrow as much money as you could before, making it more challenging to purchase a property.
Why is it important to have a reliable pre-approval?
A pre-approval is a crucial step in the home buying process. It provides you with a clear understanding of how much you can afford to borrow from a lender. A reliable pre-approval can give you confidence when making an offer on a property, knowing that you have a lender’s backing. However, rising interest rates can have a significant impact on pre-approvals. It’s crucial to reassess your financial situation and confirm your borrowing capacity in light of changing interest rates.
What should you do if your pre-approval is no longer valid?
If your existing pre-approval is no longer valid due to a change in interest rates, you should consider talking to your mortgage broker or lender. They can help you re-evaluate your financial situation and determine whether you need to adjust your budget or explore different lending solutions. Keep in mind that borrowing capacity can vary from lender to lender, so it’s essential to shop around to find the best lending solution for your needs.
How can you improve your borrowing capacity?
Several factors can affect your borrowing capacity, including your income, expenses, and debt. Reducing high-interest debt, increasing your income, or cutting back on expenses can all help improve your borrowing capacity. Taking steps to strengthen your financial position before applying for a pre-approval can also make a significant difference.
In conclusion, rising interest rates can have a significant impact on your borrowing capacity when purchasing a property. It’s crucial to have a reliable pre-approval and reassess your financial situation in light of changing interest rates. If your pre-approval is no longer valid, consider talking to your mortgage broker or lender to explore different lending solutions. Lastly, taking steps to improve your financial position can help increase your borrowing capacity and provide you with more options when purchasing a home or investment property.