If you are in the market for a new home, you have probably heard of pre-approval – an agreement with a lender in which it confirms that it is willing to lend you a certain amount of money to purchase a home. But did you know that rising interest rates can affect your pre-approval, potentially reducing the amount you are eligible to borrow or even rendering it invalid?
In this article, we will explore the potential impact of rising interest rates on your pre-approval and what steps you can take to ensure you are still able to secure the loan you need when rates go up.
How Do Rising Interest Rates Affect Your Pre-Approval
Lenders determine a pre-approved loan amount using a variety of factors, including your income, credit score, debt-to-income ratio and interest rates.
- When lenders assess your ability to service a loan, they determine whether you would be able to make the repayments if the interest rate were 3 percentage points higher than what they are offering you.
- Because a higher interest rate means higher repayments, you might not be approved for the same amount when interest rates rise because your borrowing capacity may be lowered.
- For example, if you were pre-approved for a 30-year loan of $500,000 at 4% interest, your monthly repayment would be $2,387. But if the interest rate increased to 5%, your repayment would increase to around $2,684 – a difference of almost $300 a month. If your income and other financial factors remain the same, this increase might make the loan unaffordable.
The above example was made using our home loan repayment calculator. Home Loan Experts’ easy-to-use calculator can help you determine your monthly repayment amount based on different loan sizes, interest rates, loan terms and repayment options.
What Other Factors Affect Your Pre-Approval?
In addition to changing interest rates, these factors can also affect the pre-approved amount or even get the pre-approval cancelled.
Other Factors That Change Your Borrowing Capacity
Your borrowing capacity depends on various factors, such as income, debts, credit score and other personal circumstances. Changing jobs, taking on new debts or a major life event like having a baby could affect how much money you are able to borrow. If any of these factors change after you have been pre-approved, your lender will re-evaluate your situation and it could affect your ability to borrow the same amount of money. A significant decrease in your borrowing capacity means the lender might not be willing to lend you as much.
When The Pre-Approval Period Expires
Pre-approval is not final approval. It is typically valid for three months, after which it expires. This is because the borrower’s financial situation may change over time. The validity period may vary depending on the lender. Within this period, you should find a property so the lender can transfer the money for the purchase. A validity period can sometimes be extended, after a reassessment of your financial situation.
Changes To Lender Policies Or Requirements
Lenders can change their policies at any time, which can affect your pre-approval. For instance, if a lender tightens its lending criteria or stops approving loans for properties in certain locations, you may no longer qualify for the same loan amount you were pre-approved for or even be disqualified.
Steps To Avoid Potential Risks
You can follow these steps to ensure rising rates and other factors do not affect your pre-approval.
Keep Your Lender In The Loop
You don’t want to end up in a situation where you think you’re approved for a certain amount, only to find out later that you’re not able to borrow as much as you thought. If your financial situation changes, tell your lender straight away. Don’t wait until you’re trying to get final approval.
Confirm Borrowing Capacity
Confirming your borrowing capacity while interest rates are rising is important. You should reassess your borrowing capacity based on how high rates are likely to go before you seek final approval. It will help you look for the right properties and be realistic about what you can and can’t afford. Your borrowing capacity may vary from lender to lender, depending on each one’s lending criteria, so exploring various lender options is important.
Get Pre-Approved Now
Interest rates are rising and there are predictions that they will rise more throughout 2023. Secure your pre-approval before any further increases that could affect your ability to get a loan.
Golden tip from our brokers:
“Get pre-approved now or your borrowing capacity could be affected, as it is pretty certain the RBA will increase its rates again. Most lenders would honour the pre-approved loan, even if the rates have gone up.”
Talk To A Mortgage Broker
Don’t let rising interest rates or reduced borrowing capacity discourage you from pursuing your dream of home ownership. Even if you can’t afford the loan amount you were hoping for, other options may still be available. Talking to a mortgage broker can help you explore a range of financial possibilities, as good options may still be available with a different lender.
Home Loan Experts Can Help!
Our specialist mortgage brokers can provide insight into how to move forward if your existing pre-approval is affected by a rise in interest rates. It’s important to take action now and get pre-approved before rates rise even further. Call us on 1300 889 743 or fill in our free online assessment form today.