“How much can I borrow?” is one of the most searched property questions in the country, and after four rate rises this year, the answer has changed for almost everyone. Higher rates don’t just lift repayments for existing borrowers. They shrink how much a bank will lend to new ones. Here’s the plain-language guide to how borrowing power works and how much it has fallen.
How Banks Work Out Your Borrowing Power
A lender’s starting point is how much you can afford to repay each month, after your living expenses, existing debts and commitments.
But they don’t test that against the rate you’ll actually pay. Under the Australian Prudential Regulation Authority’s serviceability buffer, lenders generally assess whether you could still afford repayments at least 3 percentage points above your actual rate. So if your loan rate is 6.45 per cent, the bank checks whether you could cope at around 9.45 per cent.
That buffer is why every rate rise cuts borrowing power twice over: the actual rate goes up, and so does the rate you’re assessed at.
How Much It Has Fallen
The cash rate has risen a full percentage point this year, to 4.60 per cent. Here’s roughly what that does to the maximum loan for the same monthly budget.
In this illustration, someone who could comfortably afford $4,000 a month in repayments could have borrowed around $523,000 at the start of the year. Today, the same budget supports around $478,000. That’s about $45,000 less, or close to 9 per cent, without anything about their income or spending changing.
Every lender calculates this a little differently, but the direction is the same everywhere.
What Else Affects How Much You Can Borrow
Rates are only one input. Lenders also look closely at your living expenses, often comparing what you declare against benchmark figures, and at every existing debt. Credit card limits count against you even if the balance is zero, because the bank assumes you could use them. Car loans, personal loans and buy now pay later accounts all reduce what’s left for a home loan. Your deposit, employment type and number of dependants matter too.
How to Make the Most of Yours
A few practical moves genuinely help. Reduce or close credit card limits you don’t need. Pay down or clear smaller debts before applying. Tidy up your spending for a few months before applying, since lenders review recent statements. Compare lenders, because their assessment methods vary and the difference in maximum loan can be significant. A good mortgage broker can model several lenders at once.
If you’re a first home buyer, government schemes like the 5 per cent deposit scheme can reduce the deposit you need, though they don’t change how much a lender will let you borrow.
A Word of Caution
The maximum a bank will lend isn’t the same as the amount you should borrow. With the Reserve Bank having signalled it will raise rates again if needed, and its next decision due on 3 November, leaving yourself a buffer is sensible. Independent guidance is on the government’s Moneysmart site.
The Bottom Line
Four rate rises this year have cut borrowing power by close to 9 per cent in our example, because banks assess you at least 3 points above your actual rate. Someone who could borrow around $523,000 in January may now be limited to around $478,000 on the same budget. Clear unused credit limits, pay down small debts, compare lenders, and don’t borrow to the maximum just because you can. This is general information, not financial advice.
Epik Wire covers the property market in plain language for buyers, owners and borrowers. Subscribe to our newsletter to stay informed.
