15 March, 2023 / Category: Blog
Finance is one of the first things we discuss with clients in our initial discovery call. Having finance in place means you have certainty about what you can spend on a property and when you can transact on it. It also ensures we only show you properties that fall within your range.
We frequently hear stories about people trying to buy without having pre-approval from a bank and then getting into trouble when they try to settle a property. We have been fortunate to be on the other side of a transaction negotiating for our client, who has finance pre-approved, and the counterparty doesn’t, giving us the upper hand. In this situation, we can often secure the property with a lower non-conditional price because the counterparty’s offer is subject to finance.
For these reasons, we recommend getting a pre-approved finance offer before beginning your property search. However, this is not as straightforward as it sounds in today’s market. Banks are becoming more challenging to negotiate with, and rules around serviceability hurdles and valuations vary widely from bank to bank.
At Infolio, we partner with BlueRock Finance for financial advice. For this month’s market insights, we sat down with Jamie King, Managing Director of BlueRock Finance, for a Q&A session. During the session, Jamie covers what is happening with interest rates, the home loan market and what we can expect in terms of banks and property finance throughout 2023.
Q1 . What is happening with interest rates?
Jamie King: Based on most economic forecasts, and following the March increase, we expect the RBA to increase interest rates twice (April and May) by 25 basis points each time. This will take the cash rate from 3.6%, where it is today, to 4.10% at the end of May 2023.
The other change to interest rates is the ‘’rates cliff’ which refers to approximately $51 billion worth of fixed-rate home loans rolling off an interest rate of 1.89% and onto the current variable rate of roughly 5.5% in the next three months.
Q2. Will there be more interest rate rises in the second half of 2023?
Jamie King: Once the cash rate hits 4.10% in May this year and the above-mentioned fixed rates roll over onto the variable rate, we expect spending to be seriously hampered, causing inflation to drop considerably to the RBA target band of 2.5% – 3%.
Following the stabilisation of inflation, we expect that rates will remain steady for the latter half of 2023.
Q3. What is the serviceability test?
Jamie King: New home loan approvals are down about 20% compared to this time last year. Apart from rising interest rates, one of the main reasons for this drop-off is the increasing serviceability hurdles that home buyers need to meet.
When a bank calculates your serviceability, they gauge your ability to repay a loan. They do this by looking at your income and expenses (among other factors) and determining how much you can comfortably afford to pay.
During COVID, when interest rates were at an all-time low, the Australian Prudential Regulation Authority (APRA) amended the serviceability test to require lenders to add a margin of at least 3% to a loan’s rate. For example, if the loan rate today is approximately 5.5%, borrowers are assessed on their ability to pay an 8.5% interest rate over 30 years to satisfy bank requirements; this is significantly higher than the pre-COVID serviceability test of 7%.
In addition, inflation is up 8%, meaning borrowers’ expenses are increasing; this, alongside the stringent serviceability margin, means that most people’s loan capacity is significantly reduced, and therefore the budgets they have to spend on a new home are also reduced.
Q4. Why is the bank asking for a valuation?
Jamie King: Increasingly, we find that banks require a formal property valuation before providing a loan; this commonly occurs on re-financing rather than new purchases. In this instance, we see that valuations often come back lower than expected as professional valuation firms are factoring in the potential decline in property values at circa 20% across the board. This sort of decline is improbable in many blue-chip suburbs and family homes; however, the valuers are extremely conservative.
Jamie King, BlueRock Finance.
You can contact BlueRock Finance here to help you quickly secure a pre-approved finance offer with competitive rates.
Once you have your pre-approval,, book a free 15-minute discovery call with Infolio Property Advisors, so we can help you make your property dreams a reality.