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Borrowing Capacity Explained

January 18, 2025

This month, the ATO has implemented updates to the foreign resident capital gains withholding (FRCGW) legislation, impacting all Australian residents selling property.

From 1 January 2025, Australian residents must obtain a clearance certificate from the ATO for any property sale, regardless of the sale price. Without this certificate, the purchaser is required to withhold tax from the sale proceeds and pay it to the ATO.

The process of obtaining the certificate is actually very simple. All that is needed is a signature (which can be done electronically), which is generally facilitated by the sellers conveyancer

For foreign residents, the withholding rate has increased from 12.5% to 15%, and the $750,000 property value threshold has been removed.

In this week’s newsletter, we take a look at borrowing capacity and how different interest rates impact the amount someone can borrow.

Understanding Borrowing Capacity and the Impact of Interest Rates

Borrowing capacity refers to the maximum amount of money a person or household can borrow for a mortgage. It is influenced by factors such as income, expenses, credit history, existing debts, and interest rates.

A crucial determinant of borrowing capacity is the interest rate. Interest rates affect how much you’ll repay monthly on the borrowed amount. As rates rise, repayments increase, potentially reducing your borrowing capacity because lenders calculate how much you can comfortably afford to repay.

Conversely, when rates fall, repayments decrease, allowing for a higher borrowing limit.

Example: Combined Income of $160,000

Let’s consider a couple with a combined annual income of $160,000 and no significant debts. At an interest rate of 5%, their monthly loan repayments on a $550,000 loan (30-year term) would have been approximately $2,953. Lenders assess affordability based on these repayments relative to income.

If interest rates increase to 7%, the monthly repayment for the same loan would rise to about $3,660. With higher repayments, lenders might reduce the maximum loan amount they are willing to offer to ensure affordability. This could lower their borrowing capacity by around 16%.

Alternatively, if rates drop to 3%, repayments for the $550,000 loan would decrease to approximately $2,319. With lower repayments, their borrowing capacity would increase to over $1,000,000, as lenders assess their ability to manage larger loans.

If you have clients who would like to get a better understanding of their borrowing capacity, please put them in touch with us for a no obligation assessment.

Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.

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