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Do Rising Interest Rates Affect What You Can Borrow?
Today I will look at a question I get asked all the time. The question is, if interest rates increase, does a clients borrowing capacity change?
The answer is yes, as interest rates increase, then what you might be able to borrow for a home loan may decrease. Every person’s situation will be different, but in essence, as interest rates increase, then your borrowing capacity will decrease as the cost to borrow money has increased.
When banks assess how much a potential client might be able to borrow, they look at many different factors. They look at your income, other debts you may have, if you are single, or have a family. These type of things will all be taken into account, when a bank assesses how much you maybe able to borrow.
Another thing that banks do, is they add a buffer to the interest rate of the potential home loan you maybe be applying for. Generally speaking a bank may add 3% or more, to the actual interest rate of the home loan, as a buffer, or a margin, to show that you should be able to afford any potential future interest rates increases.
For example, if the actual home loan interest rate is 5%, then a bank will assess the repayments of the home loan you might be applying for at 8%, allowing for any potential future increases with home loan interest rates.
So if the cost of borrowing increases, that is interest rates are higher, then generally speaking your borrowing capacity would decrease.
If you have any questions at all, please contact Perth Mortgage Broker Group, or call Troy on 0411 229 602, 7 days a week
