If you’re in the market for a new home, chances are a mortgage broker will help facilitate your mortgage.
More than 70 per cent of all residential home loans in Australia are arranged by mortgage brokers, according to the most recent data from research group Comparator.
But while choosing the right home loan can be stressful at the best of times, it’s even more challenging given that the Reserve Bank of Australia governor, Philip Lowe, recently warned more interest rate rises were likely in the months ahead.
That makes it even more important that your mortgage broker makes sure you are well-informed.
Your broker should explain:
• How rising interest rates can impact your borrowing capacity
• The pros and cons of different home loan types (e.g fixed-rate, variable and split rate)
• How to use features, such as offset accounts and redraw facilities, to protect yourself
• How to prepare for potential interest rate rises
• How to increase your chances of home loan approval
To help, Greg Bloom of 1st Street Financial has shared some advice on navigating the current lending environment.
He recently made it into Mortgage Professional Australia’s Top 100 Brokers 2022 list, and is considered by many as one of the top brokers in the country.
Understanding borrowing capacity
Bloom said it is important to remember that rising interest rates don’t just impact the size of your monthly repayments; they also impact your borrowing capacity.
And your borrowing capacity is the maximum amount of money a lender will offer to you, based on your unique circumstances, such as your income, debts, living expenses, credit score and deposit size.
“While every lender has their own method of calculating borrowing capacity, they all stress-test your application at a rate three percentage points higher than the actual mortgage rate,” Bloom said.
“This means if you apply for a home loan with an interest rate of 5.5 per cent, you will actually be assessed at a rate of at least 8.5 per cent.
“So, as interest rates continue to climb, the amount you can borrow naturally drops.”
Generally speaking, every cash rate increase of 0.50 percentage points reduces an average borrower’s maximum loan size by about 5 per cent, according to the Reserve Bank’s head of domestic markets, Jonathan Kearns.
Given this, Bloom said buyers struggling to qualify for finance might need to wait a bit longer before entering the market.
“While you could qualify for a home loan by changing your home-buying budget or location, you might want to hold fire.
“That way, you can build a bigger deposit and refocus on your career.
“It’s generally best to prioritise building a career over buying a property, because climbing the career ladder generally gives you the best return on investment.”
Choosing fixed versus variable rates
With interest rates on the rise, some borrowers might want to consider a fixed-rate mortgage.
These let you lock in an interest rate for a fixed timeframe – typically between one and five years.
Bloom explained this protects you should rates subsequently rise, giving you some security in a volatile lending environment.
“That said, you might end up paying a higher rate than necessary if the Reserve Bank decides to cut rates again.
“Also, many fixed-rate home loans don’t come with features such as offset accounts and redraw facilities that can save you money in the long term.
“There may also be restrictions on making additional repayments.
“A mortgage broker should help you weigh up the pros and cons, so you can decide whether a fixed-rate loan is right for you.”
Preparing for the fixed-rate cliff
The RBA predicts that up to 800,000 fixed-rate terms are set to expire this year with many of these borrowers facing a big jump in their repayments.
If you are one of these borrowers, Bloom recommends speaking to a broker at least six weeks before your term expires, so they can talk you through all the different financing options.
“In the meantime, work out what your new monthly repayment is likely to be, and start making repayments at this higher level, if possible,” Bloom said.
“This can help you build a cash buffer to see you through to better times.
“You should also review your current budget, as there may be some areas where you can make sacrifices.”
How Greg Bloom became one of Australia’s leading mortgage brokers
Qualifying for Mortgage Professional Australia’s Top 100 Brokers 2022 list is an extraordinary achievement.
It goes without saying that this involved a lot of hard work on Bloom’s part.
But he also credits his success to treating his clients the way he would want to be treated.
“That means doing all the little things well, whether explaining things to clients in plain English, or providing them with regular updates about their home loan application.”