Rate hikes erase price-fall borrowing gains

It found that the couple’s maximum borrowing capacity had fallen from $1.089 million before the rate-hiking cycle to $1,013,038 after the three increases, a reduction of $75,962.

If the Reserve Bank of Australia (RBA) raises the cash rate by a further 25 basis points on Tuesday, as forecast by major banks and financial markets, Aussie estimated that the couple’s maximum borrowing power would fall to $991,071.

That would represent a cumulative loss of $97,929 from the pre-hike level.

While the government has estimated that property prices will fall by around 2 per cent over roughly two years, Aussie said a further quarter-percentage-point rate rise would remove more from the modelled buyers’ budget than such a price decline would restore.

Sebastian Watkins, CEO of Lendi Group, said borrowers who delayed reassessing their position after a rate movement risked paying more than necessary or losing access to viable options.

“Rate apathy is expensive. When the RBA moves and you do nothing, the only guaranteed winner is your lender. Whether you already have a mortgage, are applying for one, or are trying to upgrade, standing still can mean paying more, losing borrowing power or missing support that could change your position,” he said.

Watkins said FHBs were constrained by live lending decisions rather than the prospect of future policy-driven price changes, particularly when they were bidding against other buyers at auction.

“First home buyers can’t take a policy promise to an auction. They can only bid what a bank will lend them. Unless inflation is brought under control, further rate rises risk closing the door on first home buyers faster than modestly lower prices can open it,” he said.

4 rises compound pressure

Eventus Financial founder and director Alex Veljancevski said the impact should not be assessed as a series of isolated 25bps moves, with four increases since February potentially removing tens of thousands of dollars from a buyer’s lending limit.

He pointed to RBA research indicating that a 50bp increase in the rate used for mortgage serviceability assessments could cut maximum loan sizes by up to 5 per cent.

During the 2022 monetary tightening cycle, the RBA estimated that a 225bp cash-rate increase fully passed through to mortgage rates reduced maximum loan sizes by around 20 per cent.

Veljancevski said those findings suggested the cumulative effects of higher mortgage rates could be meaningful, although actual outcomes varied by the borrower and lender.

“Taken together, that suggests a 1-percentage-point increase in mortgage rates could reduce maximum borrowing capacity by roughly 10 per cent as a broad guide. The actual impact will vary depending on a borrower’s income, expenses, existing debts and other circumstances, as well as individual lender rates and servicing policies,” he explained.

Using a FHB with an $800,000 borrowing limit at the beginning of the year as an example, he said the full percentage-point increase in the cash rate during 2026 could now leave that buyer with around $720,000 in borrowing capacity.

Competition adds another constraint

Veljancevski said FHBs could also face a more difficult purchasing environment if investors increasingly competed for the same lower-priced stock.

“First home buyers could potentially be squeezed from both directions. Higher interest rates and servicing requirements may reduce how much they can borrow, while investors with tighter budgets may increasingly compete for the same lower-priced homes, apartments and townhouses,” he said.

“So, a first home buyer with reduced borrowing capacity may not just have a smaller budget to work with. They may also have a smaller pool of suitable properties available within that budget.”

He also warned that pre-approvals secured earlier in the year may no longer reflect a buyer’s present lending capacity.

“A buyer who was pre-approved earlier this year shouldn’t assume that figure still applies after four rate rises. That becomes particularly important at auction, where the difference between the borrowing capacity you thought you had and what the lender will approve today could be tens of thousands of dollars,” he noted.

Despite the tighter conditions, Watkins said buyers should not assume opportunities had disappeared entirely.

“But while first home buyers can’t control market forces, higher interest rates have not removed every opportunity – especially for those who stay informed and get support,” he said.

“It starts with a conversation: understand what you can afford, look at where the market may be creating opportunity. Softer conditions in some areas are giving prepared buyers more choice and, in some cases, more room to negotiate.”

[Related: 2 in 3 self-employed Australians believe borrowing will become more difficult]