Borrowers adjust spending as interest rate relief remains distant
Australians are increasingly turning to alternative methods to manage their home loans, with the Reserve Bank of Australia (RBA) showing no signs of reducing interest rates in the near future.
Recent data from Finder indicates that nearly one in five Australians have curtailed their expenditure to either qualify for a mortgage or reduce existing home loan debt. The research, based on a survey of over 1,000 people, found that 18% needed to cut personal debt and spending to refinance or secure loan approval.
Residents of New South Wales were the most likely to reduce their outgoings, with one in five reporting spending cutbacks to improve their chances of loan approval. These measures included paying down credit card balances, reducing car and personal loans, and limiting discretionary expenses such as food delivery and subscription services.
The rationale for these actions is straightforward. For those looking to purchase property, outstanding debts can significantly lower borrowing capacity. Existing mortgage holders may also find that high personal debt levels hinder their ability to pay off their loans.
According to the RBA, the average home loan interest rate stands at 5.73%, while the typical credit card rate is much higher at 20.99%. Finder’s analysis shows that for an individual earning the average weekly wage of $2,010, an unused $20,000 credit card limit could reduce borrowing power by $84,000 – from approximately $713,000 to $629,000. Similarly, a $250 monthly car loan repayment could decrease borrowing capacity by $36,000, bringing it down to $678,000.
“People aren’t just trimming luxuries, many are overhauling their entire financial lives to prove to the bank they’re a safe bet,” said Sarah Megginson (pictured right), personal finance expert at Finder.
“The fact that millions are cutting back just to refinance reveals how tight the credit environment is. It’s no longer enough to have equity, you need spotless spending habits too.”
She added that some individuals are postponing significant life choices, such as starting a family or upgrading a vehicle, to maintain or obtain a home loan. “It’s a stark reminder that home ownership now dictates how, and when, Australians live their lives.”
The RBA kept the cash rate steady at 3.60% in its last monetary policy meeting after a slight increase in monthly inflation. While financial markets had largely expected the decision, uncertainty has grown over the prospect of a further rate cut at its next meeting in November. Earlier predictions of a reduction have been scaled back, with both Commonwealth Bank and NAB no longer forecasting a move next month.
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