When interest rates rise, consumers suffer the consequences of increased living costs and the lack of financial means to continue spending. When it comes to home loans, borrowers face the challenge of effectively managing their borrowing capacity.
The Reserve Bank of Australia (RBA) raised the cash rate to 4.1% this year on June 7th, the sixth consecutive rate hike and the highest cash rate since May 2019. These repeated increases emphasise the necessity of understanding the impact of these changes, which require taking proactive steps to manage them. In this article, we will explore the effects of rising interest rates on borrowing capacity and provide practical strategies to help you manage your finances during this adjustment period.
Understanding the Impact
The main impact of the recent rising interest rates is the pressure put on a borrower’s ability to refinance their loans. When assessing your numbers, lenders will calculate interest based on the current interest rate with a 1-3% buffer. Because of this buffer, your income may not cover monthly repayments as they did previously.
How, then, do we react to this as borrowers?
Managing Your Finances
Assess Your Financial Situation
Begin by clearly understanding your income, expenses, and debts. This evaluation will help you determine the maximum amount you can comfortably borrow.
Get Pre-Approved for a Mortgage
Obtaining pre-approval for a mortgage is crucial before embarking on your home search. This process provides insight into your borrowing capacity and helps set realistic expectations for your property search.
Consider Fixed-Rate Mortgages
Consider a fixed-rate mortgage to safeguard against future interest rate hikes. These mortgages offer a pre-determined interest rate for a specific period, providing stability and peace of mind.
Make Extra Mortgage Payments
You can reduce the overall interest paid over the loan’s duration by making additional payments towards your mortgage. This approach allows you to save money in the long run and build equity faster.
The RBA’s decision to raise interest rates once more has significantly impacted consumers and the Australian economy. Understanding the implications of rising interest rates and taking proactive measures to manage your finances effectively is crucial to reduce the effect of rising living costs. For borrowers, managing your finances is essential to combat the rising interest rates on your borrowing capacity.
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