As interest rates continue to rise, Australians have been advised to look for a home in the “bridesmaid suburbs” to counter a possible loan squeeze.
Postcodes considered affordable today could be “completely different” 12 months from now because banks won’t lend as much, an expert warns.
The Reserve Bank of Australia on Tuesday raised the country’s exchange rate half a percentage point – the third consecutive increase – from 0.85 percent to 1.35 percent.
A “bridesmaid suburb” is a second-best ZIP code and could become a strategic buying trend as soaring interest rates bite into borrowing capacity.
Antoinette Sagaria, buyers’ adviser at Entourage Property, which is based in Melbourne and acts for sellers and buyers, said further interest rate hikes would require flexibility.
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“The market may ease, but buyers who hold back will have reduced borrowing capacity,” Ms. Sagaria said.
“Buyers will always have to consider alternatives or bridesmaid suburbs to their first preference, perhaps not because of price but because of reduced borrowing capacity.”
The bridesmaid suburbs are adjacent to the more prominent neighboring suburbs. They cost less to buy, but share many similarities with the nearby prime suburb, including access to public transport, schools and major shopping centers.
“You might have a particular suburb at heart, but as your borrowing capacity dwindles, you might have to think elsewhere,” said licensed agent Ms. Sagaria.
“A bridesmaid suburb can still afford you a lifestyle with comparable amenities and appeal, and only a short drive away.”
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Entourage brokerage group chief executive Damien Roylance said borrowing capacity could be reduced by up to 20%.
It depends on whether the RBA raises the cash rate to 2.5% next year, as some leading economists have predicted.
That would bring the variable rate to five per cent, Mr Roylance said.
“If an applicant has an annual income of $200,000 and no debt, their borrowing capacity on a 2.5% variable loan was approximately $1.4 million before this new rate cycle,” said- he declared.
“But if interest rates continue to climb to 5%, their borrowing capacity drops to about $1.1 million, or 20% less.
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“The type of home and suburban home buyers could afford right now could be completely different 12 months from now.
“It’s hard to speak with confidence about the impact that the RBA’s monetary policy will eventually have on house prices, but we can be certain that buyers will borrow less, anyway.”
Banks and other lenders have added 3% to current home loan interest rates as they “stress test” customers for further rate hikes.
The margin is known as the “buffer”, based on advice to lenders by industry regulator APRA, and has increased in response to the changing financial climate.