You might have noticed that right now is a very nervous time for the banks. All indications suggest the tough times are far from over.

Lenders have been tightening lending calculators over the past 6 months, increasing living cost calculations, increasing servicing rates on existing debt, restricting borrowing amounts and or course, increasing interest rates. The bottom-line is, some home owners who would have been able to afford to refinance their home loan more than 6 months ago are now being turned away because the numbers no longer work. Why is this happening?

Essentially the loan calculators which mortgage brokers use from each lender have virtually all been re-calibrated to restrict borrowing capacity allowable. Now, this doesn't necessarily mean to say ' you can't afford the repayments now'. Many households faced with this situation have budgeted their cash-flow and determined they can actually afford the new loan.

So, why are the lenders saying No?

The reason is because the economy is highly volatile and uncertain. Even though there is no consensus of what the future holds and when, most will agree the tough times are far from over. It is expected that interest rates will rise multiple times over the next several years as they climb back towards the average interest rate mark of 7.40%.

How would you cope as a household if your mortgage interest rate was now 7% or higher? Consider what other financial commitments you have. What other loans do you have? What if your credit card and car loan rates also increased? Could you comfortably manage all of your commitments? or would you be drowning in debt?

It's for this reason that lenders are concerned about the financial capacity of home owners to be able to manage their commitments at these higher repayment amounts - and you should be too!

Don't worry about the recent figures quoting that a large percentage of households are prepared and ready for higher interest rates and repayments - some even ahead on their repayments. What about your circumstances? How many households will be at risk of losing their homes?

This is the very reason you should not be asking your broker 'What's the most I can borrow?' This question makes any good broker very nervous and concerned. A broker who is 'switched on' and whom cares about you and your future will be very bluntly deterring you from over stretching when either purchasing or refinancing.

7 money rules for staying in control of your finances:

Save a large deposit before considering purchasing. A minimum of 20% deposit should be your target - preferably more if you can achieve this. If you're currently not earning enough - consider looking for a better and higher paid job.
Use your deposit amount as a guide to what you can afford rather than asking 'What's my maximum borrowing capacity?' Avoid borrowing the most you can afford now. It won't be the case in the future.
Understand the principles of good debt vs bad debt. Education, research and preparation is extremely important. Enough said.
Never buy emotionally. Especially when you're buying a home to live in, less is more. Don't over stretch. Stay within your comfortable repayment range. Resist the temptation to want to look at the 'nicer', higher priced properties. There are cheaper priced properties even in Sydney!
Always consider your purchase as an investment property. This is for three reasons primarily. 1. It will help remove the emotional attachment. 2. You will naturally look at more affordable and more favorable properties. 3. You will understand the affordability issues a lot better.
Resist the temptations. If you don't need to upgrade the car - don't. If you don't need a bigger screen TV - be happy with the one you have - it still works and shows the same programs. Stay away from Credit Cards. Use a meal plan and cook at home more often. Get your priorities in order.
Use a budgeting tool. Keep track of your spending habits and your cash-flow. Know your numbers and conserve your spending where ever you can.

If you follow these 7 money rules, you can stay in control of your finances and you'll be well prepared and ready for interest rate and repayment increases. Delayed gratification and patience is a virtue. Resist being part of the 'now' generation. If you're serious about buying a property - you can achieve it with a well thought out plan. Good luck!

 

If you have any questions or contributions relating to this article, please take the time to comment below and share your thoughts or opinions for the benefit of others reading this. No doubt this topic commands interaction, innovation and collaboration. The more answers that are delivered, the more questions that will arise. If you have any personal questions or queries, please feel free to contact me.

 

About the author:

John Maxwell is founder and Senior Finance & Business Strategist at Cocalex Consulting. John has over 17 years' experience in the financial services sector, and has owned and managed 9 mortgage franchises and has developed a background across the holistic financial services realm. He has particular focus and passion for: Leadership Training and Development, Franchise Development and Business Networking.