Newsletter 2001 - Borrowers can now borrow more! - ARCHIVE

Lenders will lend more whilst interest rates stay low.

With the latest cut in interest rates, borrowers are better off in two ways as from today. Not only will they pay less on their mortgages, but they can also borrow more! This is because many lenders use EXISTING interest rates to calculate a borrower's ability to service their home loans.

For this reason, as interest rates fall, people have been borrowing the increased amount that lenders calculate they can afford. To illustrate I have used the serviceability calculator of one of Australia's largest banks.

Before interest rates started falling last year, a single person with no dependants on $80,000 could have borrowed around $480,000 to fund a home purchase. Before the last interest rate cut she could borrow $540,000. Today she can borrow above $550,000.

In the table below the amount that a couple without dependants can borrow given different interest rates. It assumes that one partner earns 2/3rds of the other. Anyone wishing us to calculate the amount they can borrow in their circumstances should give us a ring on our national number 1300 13 75 86.

If you look at the above table you will see how much people's borrowing capacity has increased. This is set to continue fuelling the boom in lending and in house prices around the country. Of course this is not all good news. It will mean that some people will over commit themselves and eventually get into trouble when rates rise. But we see so many cases where borrowers are disqualified from taking out home loans that they would obviously be able to service that it's nice when they get a break.

We've had a lot of people who have applied for home loans who will end up paying less in repayments than they're paying in rent. Yet because they don't fit lenders' mechanical formulas for serviceability, they are turned away. Now they have as good a chance as they're likely to get for a while.

So people who have been unhappy with how much lenders will lend them should try again now. If they try through a broker they will tap into the kind of expertise they need to present their case to lenders. But these days consumers want something more. Would $1,000 extra in their pockets help at all?

Don't hesitate to call me direct if you want to discuss the contents of this newsletter. I'm on 1300 137 586.

September 2001

Please note: The observations made here are general and indicative.Nicholas Gruen is not a qualified investment adviser. Further his comments are general and do not take into account your specific circumstances. Nor are they warranted as free from error in any respect whatsoever. You should not rely on any aspect of them without taking independent financial advice relating to your own specific circumstances. We suggest you obtain advice on a fee for service basis rather than from someone who earns either up-front or trailing commissions from investments they recommend. We would be happy to let you know of service providers who provide advice on this basis.

Table