How a 0.25% Rate Rise Really Impacts Your Borrowing Capacity

Pretty crazy when you break the math down like that, right? Is that if you had a 3 to 4k salary rise for the year, you've just made up an interest rate rise alone from that. Because the interest rate of 0. 25% adds about, per million, $200 a month. How crazy is that?

NERD ALERT! Property nerds. The home for data-driven property investors. Where we uncover Australia's hot and cold markets, latest headlines and trends. Welcome back to another episode of the Property Nerds podcast.

And I'm joined in the studio by Jack Fouracre. Property nerds, co-host, mate. Good to have you on again, dude. Good to be here, mate. I might start off, last time I was here, I was having a look at the props, you know, the books.

I couldn't see your book out there, so I made sure to bring one in. Oh, let's plant it. We'll do the honours. I think the camera will capture you or may not capture you. We'll see how we go.

Yeah, on the corner. Yeah, there you go, man. There you go. Driving the data. If I come in next time and it's not there, mate.

Someone's in trouble. The camera man's the only guy who knows. It's part of investing history now, man. You're right above the trophy and also the auctioneer hammer. So it's there, man.

But thank you. Appreciate it. That's a sentimental gift that I needed. But Jack, I just realised I said, like, thank you for coming on again. But then I'm like, you're the co-host.

I think it's because we've been mixing it up with a few guest episodes and a few me, you, others. So it's good to mix it up a little bit. But, mate, today we're going to jump straight into interest rates. Yes. And I know interest rates is a core hot topic right now.

But we'll come to the reasons of why, where and what's happening. I think more importantly, let's talk the impact. Yeah. Because people want to know borrowing capacity. How does that shift?

And so I want to start off with the 0. 25%. For some reason, and I'm not saying every rate cut or rise is 0. 25. They can obviously go higher or lower.

But when it comes to interest rates, if you take that 0. 25 number, how much does it impact borrowing capacity? Yeah. So it's roughly $20,000 in borrowing capacity every 0. 25%.

So I think the impact from what I've noticed in speaking to clients, the impact isn't so much on borrowing capacity. It's more of an impact on sentiment. Like the general feel for people's comfort levels and wanting to invest. So, I mean, it was already a buyer's market in certain areas. And I think that sentiment just makes it even more good buying opportunities.

Yeah. And so the thing is, what's really interesting, I know you're saying that, is that firstly, the sentiment piece, although, yes, we know it's tanked in recent times, like the actual sentiment surveys. Yeah. What's interesting is that the media is actually doing certain buyers favours. Yeah.

Because when you have this broad-based national story, there's two things going on. Firstly, the ones who rely on stories to make decisions, they don't get the sniff of those opportunities that the smart investors do, both in seller's markets and buyer's markets. Because even if there's a bad national time in the air, there are seller's markets still going on. Like, for example, I tell people about the story of my Dubbo purchase. My Dubbo purchase last year settled in September or like August, September for $660K.

Today, you know, at the time of this recording, it's what, like $730K, $740K? So that's wild. And if you include the renovation that I did and the upside there, it's probably like $750K, $760K. Yeah. So what it just shows is like there are seller's markets when there is buyer's headlines.

There is buyer's markets when there's buyer's headlines. And the core thing that gets changed is that when there's a buyer's market headline, there's a bunch of followers and they give those seller's markets an opportunity for you to be in, even though it's already tight, without it being even tighter. And then when they return, things go gangbusters. But this $20K borrowing capacity thing, people forget, like $20K sounds decent, but it depends. Example, if you're looking at a million dollar purchase, $20K doesn't change much.

The problem is when you're at a $550K, $560K budget, you're stretching your servicing right to the limits and then a $20K changes. In those scenarios, what can buyers do to have the right support and preparation from the finance team, like how you guys support them through that? Yeah, this is where an investment savvy mortgage broker comes in. They've got access to non-bank lenders, third tier lenders that have a different assessment rate, different way of verifying income, using a high percentage of overtime, for example, just overall like every major lender has a 3% assessment rate. We know lenders that have 1% assessment rate or take actual repayments on existing loans.

And what's an example of assessment rate? Because I'm conscious there could be some first time investors, even experienced investors don't even know what it is. They just go, oh, my mortgage broker told me my borrowing cap's this much. So if you're getting a 6% interest rate, the lender's doing an assessment on 9% just to put in a bit of a risk buffer there. But there are lenders out there that don't have those same buffers, have much less of a buffer or no buffer at all.

Got it. And so funnily enough, this is another, it's an interesting statement, right? Assessment rates are both an enabler because you can move to find the right one that allows for more borrowing, but it's also a big protective mechanism in Australia and why our lending standards are so strong. Because the mainstream banks that carry the debt market share, they don't get that same flexibility for certain policies due to compliance and legislations around what major banks do versus what others can't or regulatory is probably the better word. And so it's actually another reason why property markets grow when people don't recognize or people don't think that it could grow because people go, oh, we're stuffed now.

All this stuff is going to hurt so many people. And you're like, wait, they're not hurt yet. Where's the defaults? Where's the foreclosures? Where's the missed repayments?

Where's the offset balances no longer being there? It's because when people are assessed on 8-9% to get property, be in the market, where we're at today of interest rates of 5s and 6s isn't crushing everything the way it is and why we still see certain ABS figures on long-term trends still being healthy, still being strong. And that was evident when we were getting rates at 2% when the assessment rate was 5% because all of a sudden in the 18-month period, we went to 5% and nothing collapsed. You think of all the case studies in the last 12 months we did with clients that purchased during COVID. I think 12 to 24 months from now, we'll be doing case studies of people that purchased during this time.

That's it. Now, with the 20K thing of borrowing cap, there's also another thing called debt-to-income ratio. I did some quick math. If someone was worried about a 0. 25% interest rate, all they would have to have is a bonus commission over time, rental income or salary increase of between $64 to $75 per week.

Pretty crazy when you break the math down like that, right? Is that if you had a 3 to 4K salary rise for the year, you've just made up an interest rate rise alone from that. Because the interest rate of 0. 25% adds about per million, $200 a month. So, rental income going up by $50 a week covers that, which happens every 12 months per property roughly.

Yeah, and income growth. Most investors that are driven and want to grow their career and income is going to grow their income. 100%. Now, I'm keen to look at just the tiers of lenders because when it comes to tiers of lenders, this is a big strategy to unlock borrowing capacity. I see this all the time where someone goes, my banker said I can only borrow this and then we're like, hey, speak to the team at 4Aker Financial.

They come speak to you guys and have a look at it and they go, yeah, so we can buy another two. Just to help someone understand how these tiers of lenders work, the borrowing capacity differences, why they vary so much. I know assessment rate was one of them, but it's like just because so many people still, I know brokers still make up a major market share of the lending in the country, but we've got to also think about like those brokers that only write to certain banks, those brokers that don't want to go across to where the customer needs to go, those brokers that the majority of a 23,000 industry of mortgage brokers, remember most of them are either part-time, just starting, new to it, or doing very low volume, so you cannot have that level of experience without the volume. So what's happening in this world when people are like getting from one to two to three places and they thought they were constantly stuck before, but they're not and the tiers of lendings opens up? Yeah, this is where I think we've seen it naturally, a lot of non-bank lenders popping up.

Most of them are funded by major bank funds anyway, but they pop up and they offer really flexible lending options. That's gonna, there's a demand for trust lending, right? And if a non-bank lender is where it's at, then there's just gonna be more competition, more, you know, there's just more opportunity in that space. So we're gonna see major bank funded non-bank lenders pop up into the space and that's good for the broker industry, that's good for investors. Yeah, I noticed when they come in though, they tend to just be a lot more flexible for borrowing capacity.

Yeah, well they need to build their book, mate. They need to lend the money. They have something that like, it's almost like if they don't have an X factor, like no one would go to them. No, because like a couple of the big non-bank players have a really good stronghold on a lot of the big brokerages. And once you've built a relationship with the BDM and, you know, it's hard to go away from that.

MA Money has done it really well. Like they're pretty new, but they've, like everyone knows MA. Expats, they've nailed it with, they've nailed it with, you know, that extra push on borrowing capacity. So when we're looking at all of these tiers, if we just say take a couple on a few hundred K income each and they're growing, what could the difference be for their portfolio outcome between a broker who kind of gets stuck in their ways from, I just deal with my platinum service and like on CBA or ANZ or Westpac or NAB, any of the big four. And then they go, I don't want to go out beyond that because this is where it feels good.

It feels easy. And they've got enough choice and enough variance to show a few versus the broker that does take that customer to where the deal works, where your portfolio goals and aspiration strategy are met. Where could a portfolio go? Like if we were to run the clock forward five, six years, because we've worked together for that time, right? We go back many years in our relationship together of like collaborating with clients.

We go back and forth. If some of those clients from our early days of 2021 were here and then here in 2026, what do you think they could have gotten from just not doing that versus where they are today? Like it depends on the type of client in terms of what additional borrowing power it could be. At the very least, it could be at least one extra property. Very least.

But then it can go up to an extra four or five. Yeah. You know? And we've seen them. Yeah.

Yeah. And I think what happens when you deal with like your business banker, a major bank, they will put you on a P&I loan, just as a blanket rule. Just because they don't want you to go interest only because it's worse for your serviceability with them. And they know that if they run out of serviceability with them, they're going to go to a broker sooner. So they purposely put you on a P&I loan for that reason.

It's very frustrating, but I think the market's waken up to it. And brokers got 80% market share. That's not changing. Absolutely. You just made me think back of a couple examples where this is a game changer decision making now for like people's portfolios.

We see it all too often where people are guided by external brokers. And when they're guided by these external brokers, they're basically saying, yeah, just make sure you have a 5% yield. I chuck that in the calculations. And so what ends up happening, I'll do some math for people here in terms of just to visualize the impact of it. Let's just say you have a 650K place.

Actually, you know what? Let's go even bigger number. Let's go you have a 750K place. And because a broker said, maybe just chuck on 5% as a yield, that's like $721 a week in rent for that 750K place. And so I always go, hey, if you, and I've seen you do this, it's like if you made the yield more realistic to the options of the market to help that person service, call it three and a half, four as an example.

I'm not saying that's what everyone gets. It's just like that's the worst case you should be understanding of. It's not that. Like even if the property has the market value of four and a half or 5%, it doesn't mean that the property is currently tenanted at that rate. And the lender is going to take the current tenant in place.

That's right. So if you take 100%, now if you take 750,000 and say with the yield adjustment at 5% yield, that's 37 and a half K. But if it's 750,000, you take a yield of 4%, that's 30K. And we know the difference at seven and a half thousand, the banks don't take in 100% of the rental income. And so from this perspective, all that yield did in debt to income ratio of borrowing capacity is increase your borrowing capacity by 36,000.

It didn't do as much as people think. So like let's just say a broker said, no, look, you're maxed at 750, but you need this 5% yield and we see it elsewhere. But then you come and have your team to go, no, I want your asset to be the best decision. Let us work the finance. And so when you do that, notice the big difference.

It's like, hey, if you only need 4% of a yield as the worst case and you should be able to find assets of 3. 5, you've basically gone from that 750K instead of a number there, it might be 36,000 less in rent, right? Less in value, sorry, of mortgage. So now as long as you go to them, hey, you can go to 710, 715 purchase price instead of 715, but you can use a 4% yield. The numbers are wildly different.

It's crazy. So someone at 750K purchase price for a 5% yield, you may look at 15 cities around the country that offer real promising returns. And now you might not be able to buy in all 15 because of your yield command for that price. So firstly, you've got price-based filtering. You might knock off five.

Then you've got yield-based filtering. You might knock off another eight or nine. Now you're left with one to two cities around the country that do 750K purchases with 5%. But then now you go, well, that's 750K purchase with 5%. I'm never going to get that full utilization of 750K because we know where the 5% yields sit.

They sit between 500 and 600K. So now not only have you gone from 12 cities down to one to two, but secondly, you've actually gone down from all of this budget compounding at 750 to build some serious wealth to now five to 600, all because one person told you you need a 5% yield. How crazy is that, that the broker can actually change the trajectory of the investor's whole portfolio just by the unintentional guidance that is property crossing rather than finance focus? And I feel like the knowledge of finance and property needs to be both together. And there's something I see the team at Fouracre do so well.

It's like we got two scenarios. One scenario is you need this much yield to get it because this is stretching to the last bits. And it's an affordable purchase price. But the second scenario is, hey, it's a bigger purchase price. You don't need that higher yield because you're just going to think that you need a 5% to get that 750 when at 4% you might get 710.

So what we'll do is we'll make the yield open up to be lower. So if you're at 3. 5% or above yield, you can purchase a 700K property. And all of a sudden it's like, oh, so as long as I'm above 3. 5, I can go up to 700.

And now I look for the best property investment decision. When you see clients get that guidance from other brokers and then you're looking at optimizing their portfolios up and you're looking at helping them with guidance that's more holistic, what do you think the reason is where other brokers maybe don't get that, don't get the understanding of the property side of things? What do you notice is like the reasons or the biggest differences that makes an investment broker an investment broker? Yeah, I actually don't know because it is so common though when brokers overestimate the yield on a pre-approval and it ends up making the deal fall through. I just don't get why it happens so often because for me it's just common sense.

Like how many times do you have to have that come up for it to actually be like, hey, maybe we should reduce the expected yield, you know? Yeah. It's like get the yield lower and if the purchase price shaves off 20, 30K, at least the customer can go into the deal with full confidence that they can have the choice of which markets, the choice of which deal, the choice of which property and know that they won't be met by surprise. But then if they stretch their budget way too much, then they come back to you and say, you said 800 is fine and then it's like the yield's not working out or you said 800 is fine as long as I get a 5% yield. I can't find a 5% yield in 800 and then they do nothing.

I'm going to resubmit somewhere else. Yeah, and then the broker would just go, yeah, that's what you need and the customer never finds anything. So one person did all the work, one person did all the searching, but they just never bought. Yeah. It's crazy how that happens.