Mortgage Talks With Jason He From Kaleido

2023 is already shaping up to be a big year for property buyers across Australia, and to prepare us for what the rest of the year will hold not just in NSW, but across the country, we caught up with Jason He from Kaleido Loans in Mortgage Talks.

Q: Let’s talk about borrowing capacity. Everyone’s talking about interest rate rises and what that means, but people that have been in the market for a while, maybe they’ve had their borrowing capacity assessed, may have changed in the last few months. What do interest rate rises mean for Copositors and their borrowing capacity.

Jason: Because of how volatile the interest rates are, we’ve seen movements every year. We just saw our 10th consecutive rate increase since May 2022. Now the rate increases don’t just the impact your existing home loan repayments, they also impact your borrowing capacity. So every time when there’s a rate increase, there’s an impact that your borrowing capacity is getting reduced.

If you’re someone that’s already got a pre-approval and you’ve been out there over the last couple of months – or even more than that – looking at properties that are based on that pre-approval budget, it’s really important that you go have a conversation with your mortgage broker or your lender to get it updated to see whether your borrowing capacity has being affected, which is going to affect your budget.

The reason for that is as interest rates go up, what we call the assessment rate that the banks use (that’s the rate the bank actually uses to calculate how much you can afford, it’s not your actual interest rate on your home loan), the banks apply a 3% buffer on the actual rate. So, every time there’s a rate increase, the rate the bank’s assessing your loan goes up by 0.25%.

Q: Say it’s roughly it’s a 5% loan that we’re looking at; the banks need to assess it at 8%. Is that across the board?

Jason: Pretty much across the board. You know, you’re going to have your small discrepancies. One might do 8.14%, one might do 8.09%, one might do 8%, but approximately it’s all going to be like that.

Q: Can you give us an example of how this has worked and how this works now? What do people need to know?

Jason: We did a scenario to analyse the impact of this. To give you an example, we had a couple, no kids, no credit cards, no other debts, who are looking to buy their first home. Before the rate increases prior to May 2022, they would have been able to borrow $1,000,000 based on their combined household income of $180,000 ($95,000 each).

That’s around the average Australian salary. Now, with the rate increases as of today, that has gone down by about 30%, which just shows you how much of an impact the ten interest rate increases have affected someone’s ability to borrow money. And it’s not necessarily whether you can afford it or not. In relation to your actual cash flow; you might be able to afford it, but the banks deem that you can’t afford it.

Q: The banks need to put in a buffer in case of future rises, right?

Jason: As we’ve seen. It does mean some people are needing to make some massive shifts in their planning because all of a sudden, you know, $1,000,000, you can buy something decent that you can move into. Whereas if you’re looking at a property worth $700,000, maybe you need to look at reinvesting or maybe you need to look at other areas or depending on what your plans are.

Q: If you’re planning and you haven’t looked into your borrowing capacity for a while, we suggest you speak to your mortgage broker and get reassessed or speak to your bank and get reassessed. Are there any sort of tips that people should be looking at to help raise their borrowing capacity or help get a little bit more? If you’ve lost 30% in what you can borrow, are there ways you can get a little bit more?

Jason: I think having your broker or lender really understand your situation and talking to you about different scenarios is really important now. When borrowing capacity wasn’t so much of an issue back then, it was more of a deposit issue. But now, with borrowing capacity as the main issue, people need to understand what alternative scenarios they have.

For example, if you or someone who has got a HECS/Higher Education Loan Program (HELP) debt – what is the impact of paying off that HECS/HELP debt on your borrowing capacity? Normally what that means is that you’re going to have a greater borrowing capacity when you don’t have a HECS/HELP debt. You might have a really small HECS/HELP debt of $5,000, but that could enable you to borrow in an extra $30,000 by paying that off.

So things like that or reducing your credit card limits (you might be someone who’s got a lot of credit cards because you’ve been hoarding points and using it to travel now), but by having those credit cards there, that’s going to reduce your buying capacity.

Q: Is it little things like if you’ve got a little part of a car loan left, pay it off now?

Jason: Yes, because the bank looks at the repayment amounts. So your car and the little payments you’ve got left could be $5,000 balance owing, but at the time of your application, you’re still making $1,000 a month repayments for instance. That’s still factored in, and that’s why you’ve got to ask your broker or your lender, what if I did this? And you’d expect that a qualified or professional mortgage broker is going to actually propose that to you.

Q: It makes sense because it’s not about the figure, it’s about how much you’re paying each month, what exactly you need to pay back. We can’t guarantee, but that should start to plateau. We may see one or two more interest rate rises and they may not be consecutive. Is it a good time to say, the dust is starting to settle, we’re potentially close to reach the peak, now we can start to reassess, replan and try to get into the property market?

Jason: Yes, that’s exactly right. Now’s the time to have those conversations.

Jason He is the Founder of Kaleido Loans, the innovative mortgage brokers servicing the greater Parramatta and Western Sydney regions. _Mortgage Talk_s is here to get you ready to kick start your journey into the property market.

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