We all know that interest rates are rising –
The Reserve Bank raised interest rates by 0.25, as they were expected to do, and as they were poised to do back in August, before the Level 4 lockdown was announced.
That’s bound to set off a fresh round of fretting about where interest rates are heading, and what impact that will have on what you can afford to borrow.
That’s fair enough – especially given this is the first hike in interest rates in 7 years. But if your concern is your borrowing capacity, there are bigger fish to fry.
It’s about to get harder to get borrowing approved, not based on interest rates necessarily but for two reasons – fewer low-deposit loans being made, and more focus on how you manage your money.
In reality, the incoming change to the LVR rules, which will further limit loans to borrowers with less than a 20% deposit, won’t change all that much. The banks have been reticent about low-deposit lending for some time, so I doubt the Reserve Bank’s edict will prompt any sudden pull back by the banks.
Changes to the Credit Contracts and Consumer Finance regulations however are already making more of an impact, in a couple of ways.
Most home loan calculators focus on income levels versus debt levels, so if a borrower earns a decent salary, they’re usually fairly miffed if the bank rebuffs their application on the basis of their outgoings.
The idea of watching exactly where your money goes when you earn plenty of it can feel suffocating, or even insulting to some. Especially if you have heaps of equity in your property.
But a foundation of sound financial management matters – more so now than ever.
The new regulations – which were meant to be in force by now but have been pushed back to December 1st due to Covid – but they already seem to be prompting the banks to comb through your expenses when assessing your mortgage application like Sherlock Holmes with a magnifying glass. The rules mean lenders are required to up their due diligence as to the affordability and suitability of lending you the money.
Constantly getting stung by unarranged overdraft fees, or interest on your credit card balance? Noted. Spending hundreds of dollars a month on takeaways and coffees? Spotted. Regular bills for personal trainers or Afterpay repayments? Clocked.
However much more rigorously your future self intends to manage your expenses, that will have far less bearing on your borrowing capacity than the tales your bank statements will tell about what you’ve actually been doing.
In short – it’s not just about how much you earn, it’s about how much you have left over. It’s not just about your net asset position, but the pace at which you are improving that position month by month.
The other place these new regulations are having an impact is on older borrowers. Banks have always been more circumspect about lending when they can’t be certain your income will continue (particularly past 65) and that the loan can be repaid – but even more so now.
The best way to combat that is to be able to show that you have a clear strategy for clearing the debt. If it’s about your runway rather than service ability then you could consider a shorter loan term, or potentially use a lender other than a bank (which would incur higher interest rates). You too need squeaky clean money management behaviours.
While the focus on your spending might present a reckoning for some, in truth it’s a good thing. Given how hard we work to earn it, we should spend consciously and purposefully, rather than absentmindedly and indiscriminately – it’s just that it doesn’t come naturally to most of us. I would include myself in that – my natural inclination is to spend money in the absence of a compelling reason not to, (or someone checking that I’m doing what I said I would!)
If your goals rely on being able to maximise your borrowing capability, that should give you a fairly compelling reason and now is the time to up your game, because you’ll need to have a few months of ‘good’ behaviour to use as evidence.
Hannah McQueen is a financial adviser, chartered accountant, author, andthe founder of enable.me – financial strategy & coaching.