Highlights:

• Lower interest rates can make monthly loan repayments more affordable, potentially increasing your borrowing power.
• Increased demand for property, fuelled by lower rates, can also drive up housing prices, making it more competitive for buyers.
• Lenders assess your borrowing power by looking at your income, expenses, and your credit health, making it crucial to understand and maintain a good credit history.
   

Lower interest rates can increase your borrowing power

After a challenging period that saw thirteen interest rate hikes between May 2022 and November 2023, Australian borrowers are finally seeing some reprieve as interest rates begin to lower. But what do lower interest rates mean for your borrowing power and credit health, especially if you're looking to buy a home, invest in property, or refinance your existing loan?

Indeed, a cut in the official cash rate by the Reserve Bank of Australia is welcome news for prospective property buyers and investors. With many lenders adjusting their variable and fixed-rate interest rate charges, decreased rates lead to more affordable monthly repayments. This, in turn, may also have a positive impact on how much a lender is willing to loan, potentially increasing your borrowing power.

On the flipside, lower interest rates also tend to heat up the property market. As more buyers are attracted to the market and able to secure finance, the increased demand for a limited supply of properties can push prices upwards. So while you may be able to borrow more, the properties you are looking at may also have a higher price tag.

How lenders assess your financial health

It's a common misconception that your borrowing power is determined solely by your income and the prevailing interest rate. In reality, lenders take a much more holistic view of your financial situation to determine your creditworthiness. When you apply for a loan in Australia, lenders will review several key factors, including your credit report:

• Your income: This includes your salary, wages, and any other regular income streams. Lenders want to see a stable and reliable source of income.
• Your credit report: Your lender will look at your credit history to help work out what kind of borrower you are. Your credit report provides them with a detailed history of your credit activities, including your repayment history, defaults and the number of credit enquiries you have made. 
• Your existing debts: How you manage debt is one of the key things a lender will look at. Any current loans, such as car loans, personal loans, or credit card balances, will be factored into their calculations.
• Your expenses: Lenders make allowances for living costs when they assess your borrowing power. A detailed look at your living expenses, from groceries and utilities to entertainment and childcare costs, helps lenders understand your spending habits.
   

How to improve your credit health as interest rates fall

As your credit report contains information about the type of credit products you hold and your repayment history, lenders can see how well you handle existing and prior credit commitments. A strong credit report, indicating a history of on-time payments and responsible credit management, signals to lenders that you are a low-risk borrower. 

Data from your credit report is used to calculate your credit score, which is another tool lenders use to determine creditworthiness. Your credit score can help determine how many loan options you have access to and what interest rate you’re likely to pay. A poor score can see you pay more interest than a comparable loan held by a borrower with a good credit rating.

At a time of shifting interest rates, improving your credit health can help improve your chances of loan approval and potentially unlock more competitive interest rates from lenders. 

Here are four financial health tips to present yourself as a desirable borrower when a lender checks your credit report and credit score:

• Check your credit report regularly: In Australia, you are entitled to a free copy of your credit report once every 3 months from a credit reporting bureau. Regularly reviewing your report allows you to find out what is impacting your score, spot any inaccuracies or signs of identity theft.
• Pay your bills on time: Late or missed payments for any bills, loans or credit products may have a negative impact on your credit score. Consistently paying your bills on time can have the opposite effect.
• Limit credit applications: Too many applications for credit that are too close together can bring your credit score down. Even if you decide not to open an account, the application alone will be recorded on your credit history and may be taken as a sign of financial distress.
• Be patient: Improving your credit score will take time and this will vary from person to person based on why your credit score is low. Credit reporting bodies, like Equifax, keep repayment history on file for two years and any credit applications, overdue accounts and legal actions for five years. Serious credit infringements are kept for seven years. 

By proactively managing your credit health, you place yourself in a stronger position to benefit from softening interest rates in the Australian property market.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.