Yesterdays RBA Rate Cut vs Your Borrowing Power
You’re probably all aware that the RBA rate cut reduced the cash rate by 0.25% yesterday. The first RBA rate cut in a year. There are two possible implications of this move;
- Will house prices increase because people can borrow more money?
- Will house prices increase because people can afford to repay a bigger loan?
The two statements seem to say the same thing but they don’t as follows;
- The rate cut will have little impact on the borrowing power of most people, particularly those buying a home. The reason being that most banks and lenders use an inflated assessment rate to determine your borrowing power. Whilst this varies from lender to lender it is normally in the range 7.25-8.00%. Regardless of the current actual rate, your loan application will be assessed at this higher rate and as such this RBA rate cut will have little if any impact on your borrowing capacity.
- Certainly the drop in interest rate will reduce the cost of repaying a loan. How much will depend on whether your bank or lender passes on the full 0.25% cut or not. Past history shows that some will and some won’t. The opportunity to grab a bit more profit is always tempting. If your borrowing capacity is high enough, then it will enable you to pay more for a property and it still be affordable the loan repayments. In that sense, the rate cut may increase property prices.
There may be some slight upward movement of your borrowing capacity if you have existing home or investment loans. If and only if your lender calculates repayments on existing debts at the actual rate you pay, or the actual rate plus a buffer, but this effect will be minimal. If your lender applies the same assessment rate to all new and existing loans, your borrowing capacity won’t change.
If you would like to know your current borrowing power it’s easy, call Paul on 0410 520 398 or email paul@halogenhomeloans.com.au
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