The rising cost of living is making it harder for potential home buyers to save a deposit and reducing how much some can borrow to spend on their next property.
Banks are starting to look more closely at potential borrowers’ expenses when they apply for a home loan, mortgage brokers say, and more scrutiny is likely on the way.
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The cost of petroleum, energy bills, groceries and rent has jumped this year amid pressures ranging from Russia’s war on Ukraine, which disrupted global oil and gas supply, to a cold winter that increased demand for heating, and floods on Australia’s east coast that affected vegetable crops.
Supply chain disruptions due to the COVID-19 pandemic have also hit, along with increased rental demand from students and workers as the economy picked up after lockdown.
The latest official figures show inflation of 5.1 per cent, and an update is due on Wednesday, when Commonwealth Bank economists forecast inflation could rise to 6.2 per cent.
To stabilize inflation, the Reserve Bank has been lifting interest rates fast, making mortgage repayments more expensive to discourage consumer spending. Higher interest rates also reduce borrowing capacity.
Sydney mortgage broker Anthony Landahl, managing director of Equilibria Finance, said the increased cost of living, particularly rising grocery and transport expenses, along with rising interest rates, was affecting how much money home buyers could borrow.
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While everyone’s situation was different, I estimated the average person’s borrowing power had fallen by 5 to 10 per cent.
“We’re seeing an increase in the cost of living, and we’re seeing that flow through to some of the serviceability calculators of the providers,” he said. “Their minimum expense requirement has been creeping up.”
Clients were considering their living expenses more carefully and looking at where they could cut back as interest rates climb.
Cuts were typically made on recreation and entertainment spending, such as dining out and streaming service subscriptions.
The banks were also monitoring expenses more closely, Landahl said, although there had been no formal policy changes, and he did not think one was needed given that buffers were already in place.
“The impression we’re getting from conversations with assessors … is there’s a keener eye on making sure expenses all make sense and reflect cost-of-living pressures – particularly around some of those inflationary pressure areas like transport, food and groceries.”
In Melbourne, 40Forty Finance director Will Unkles said rising interest rates were having the biggest impact on the amount of money people could borrow, but the rising cost of living was also hitting home buyers.
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More expensive rent, food, petroleum and energy bills meant people could not save as much towards a deposit.
“It’s hurting people’s ability to save as much as they used to,” Unkles said.
“Anyone getting a mortgage needs to be very mindful of where they spend their money and decide what is a need and what is a want.”
Unkles said those wanting to upgrade their car or go out for expensive dinners may have to forgo them, to be able to qualify for the mortgage they need to buy.
Mortgage Choice Elsternwick broker Christopher Ladley said the banks were looking closely at people’s ongoing living expenses.
“The bank will still have an understanding of what your living expenses should be and that has been lifting in line with the extra cost of strawberries and lettuce,” he said.
Interest rates were having an impact, hitting those looking to borrow more, like first home buyers who are struggling to save a larger deposit.
Andine Mortgage Brokers’ Andrew Kostanski said he was advising buyers to cut their living expenses before they applied for a mortgage.
“By the time they come to me, people have usually adjusted their expenses, and if they haven’t, and they have spending that’s a bit too high, then they need to get rid of the credit card and come back and see me in a few months – that’s what I advise them.”
That can cause a delay in the time it takes for people to get a loan while they wait to adjust expenses.
Scott Partridge, principal of Mortgage Choice Castle Hill and Baulkham Hills, said living expenses were front-of-mind for his clients but had yet to affect their borrowing capacity much, although this was likely to change.
“We’re not seeing a rush of lenders that are changing their HEM [household expenditure measure] with rising inflation, but I would expect that to happen over the next 12 months,” he said.
Existing borrowers would probably feel the pinch of rising interest rates and expenses more, Partridge said. But it would also make it harder for first home buyers to save a deposit, on top of affecting their borrowing power.
This story first appeared on Sydney Morning Herald.