Key takeaways
Your purchase stage matters: buyers still searching may have more flexibility than those already under contract.
Pre-approval may change if interest rates, lender policies or the buyer’s financial circumstances change.
Formal approval can provide more certainty, although conditions may still need to be met before settlement.
Different lenders may reach different outcomes based on their assessment rates, policies and treatment of income, expenses and debts.
Before bidding or signing, buyers may wish to confirm their finance, deposit requirements and contract conditions.
For Australians already searching for a home or progressing a loan application, an interest rate rise can create an immediate concern: does the finance still stack up?
The Reserve Bank of Australia has increased the cash rate by 25 basis points, taking it from 4.35% to 4.60% at its September monetary policy meeting.
The decision came as the RBA said inflation remained too high and some upside risks were materialising, with higher global energy prices, fuel-cost increases flowing through to other prices and ongoing capacity pressures in the Australian economy.
In its post-meeting statement, the RBA indicated that it remained prepared to raise the cash rate further if needed and would continue assessing incoming data and the evolving economic outlook.
The cash rate increase does not automatically mean every lender will lift its home loan rates by the same amount or at the same time. However, buyers may need to revisit both their expected repayments and the amount they could be approved to borrow.
For a buyer already mid-purchase, the impact may depend on their lender, how far the application has progressed and whether their financial circumstances have changed. A pre-approval is generally conditional, while a formal approval may still carry conditions that need to be met before settlement.
Why a rate rise may affect buyers before their loan begins
When the RBA changes the cash rate, lenders decide whether and how to adjust their home loan rates. Changes may not occur by the same amount or at the same time across every lender.
At the time of writing, the major banks had not yet announced whether or when they would change their variable home loan rates in response to the RBA decision.
Any changes would take effect on dates confirmed by the individual lenders, rather than automatically on the day of the cash rate increase.
For prospective buyers, a higher home loan rate may affect both their expected repayments and the assessment rate a lender uses to test their ability to service the loan. Most lenders apply a serviceability buffer of at least three percentage points under current regulatory guidance, although assessment methods and additional criteria can vary.
AMP Bank chief economist Shane Oliver estimated that a 0.25 percentage point increase could reduce a new borrower’s buying capacity by around $20,000 in an indicative calculation based on a borrower earning average weekly earnings and purchasing with a 20% deposit.
You might also be interested in: The RBA interest rate decision for this month
“If rates go up, another $20,000 or so is taken out of buying capacity for a new borrower,” he said.
The actual impact could vary depending on the buyer’s income, expenses, deposit, debts, loan term and lender.
Buyers borrowing close to their assessed limit may be more exposed than those who have left room between their approved amount and intended purchase price.
“The buyers who would probably feel another rate rise the most are those already borrowing close to their limit, particularly first-home buyers trying to squeeze every last dollar out of their borrowing capacity,” Aussie Woodvale Broker Dean Cokis said.
Aussie Forest Lake Broker Kit Johnson said he generally checks whether an application could continue to meet a lender’s servicing requirements after a further rate increase.
“I have always found it good practice to check that an application would still meet the lender’s servicing requirements after at least one further 0.25% rate rise,” he said.
This does not guarantee an application will be approved. However, modelling a higher-rate scenario may help buyers understand whether they have room in their budget if repayments or assessment rates increase again.
Where you are in the purchase may shape the impact
A rate rise does not affect every buyer in the same way. The practical consequences may depend on whether the buyer is still searching, has signed a contract or is approaching settlement.
“If they’re still looking, there’s more flexibility to adjust their budget,” Dean said. “If they’re pre-approved, we’d want to revisit their numbers before they get too attached to that $1.2 million house they found on Saturday afternoon.”
Stage of purchase | What a rate rise may mean | What to check |
|---|---|---|
Still searching | Borrowing capacity or comfortable repayments may have changed. | Refresh your budget and borrowing figures before making an offer. |
Pre-approved | The lender may reassess the application when a property is found or the pre-approval is renewed. | Check the expiry date, conditions and whether the approved amount still applies. |
Offer subject to finance | A higher assessment rate could affect the lender’s final decision. | Confirm the finance deadline and speak with your broker and legal adviser promptly. |
Formal approval received | A rate rise alone may not trigger reassessment, but lender conditions and changes in circumstances may still matter. | Confirm whether any conditions remain and when the approval expires. |
Contract unconditional | The buyer may be committed even if obtaining finance becomes more difficult. | Seek legal advice before signing and understand the potential consequences if finance falls short. |
Approved but not settled | The approval may remain in place, but the product rate and expected repayments could change. | Recalculate repayments and avoid taking on new debts before settlement. |
Fixed-rate application | The advertised or applied-for rate may not be secured unless a rate-lock arrangement applies. | Ask when the rate becomes fixed, whether a lock fee applies and what happens if rates change. |
“The earlier we know about the impact, the more options we have,” Dean said. “It’s much easier to change the strategy before someone has signed a contract than after.”
Why buyers should not treat pre-approval as a final loan offer
Pre-approval can provide an indicative borrowing range, but the lender may still need to assess the property, confirm the buyer’s circumstances, and complete a final assessment. Rates or lender policies may also have changed since the pre-approval was issued.
"A pre-approval isn’t necessarily set in stone, so a rate rise can change a client’s borrowing capacity or the lender’s assessment,” Dean said.
He had seen this happen to a borrower after a rate increase.
“We had them approved, then a rate rise came through and suddenly the numbers no longer worked with that lender, so we had to pivot to another lender,” he said.
The outcome may differ between lenders because they can treat income, living expenses and existing debts differently.
“Two banks can assess the exact same client very differently based on their assessment rates, living expenses and how they treat things like overtime, casual income or existing debts,” Dean said.
Aussie Christies Beach Broker Vicki Hanna said buyers should check how their lender treats applications when rates change, rather than assuming every pre-approval will be handled in the same way.
“Some lenders will assess your application based on rates on the lodgment date, and others will change their assessment mid-flight if rates happen to change,” she said.
This does not mean another lender will necessarily approve the required amount. However, an Aussie Broker can check how different lenders may assess the buyer’s circumstances and whether alternative options may be available.
Signing a contract can reduce the room to adjust
Once a contract has been signed, a buyer generally has less room to adjust their purchase price. A finance clause may provide some protection in a private sale, depending on the contract and whether its requirements are met.
Auction purchases are generally unconditional and cooling-off periods usually do not apply, although rules vary between states and territories. Buyers should obtain legal advice relevant to their purchase before signing or bidding.
Kit said buyers should understand both their finance and deposit position before bidding.
“Something I have seen many times is a first-home buyer with a 5% deposit looking to bid at an auction where 10% is payable at the fall of the hammer,” he said.
The contract deposit and the buyer’s home loan deposit are related but separate considerations. The amount payable when contracts are exchanged depends on the contract and any arrangement negotiated with the vendor before the auction.
Buyers intending to bid should confirm:
The deposit is required under the contract and when it must be paid.
Whether their funds are accessible in time.
Whether their pre-approval remains current.
Their maximum purchase price after allowing for stamp duty and other purchasing costs.
How they would manage if the lender approved less than expected.
“I have had buyers insist on making unconditional offers without approval in place,” Kit said. “In those situations, I urge caution and strongly encourage them to seek legal advice before signing.”
Formal approval may provide more certainty, but conditions still matter
A formal approval generally indicates that the lender has completed its assessment of the application and property, although conditions may still apply.
A rate rise alone may not cause an approved loan awaiting settlement to be reassessed. However, the outcome depends on the lender, the approval conditions and whether the borrower’s circumstances have changed.
“For an application that already has formal approval and is awaiting settlement, a rate rise alone does not necessarily mean it will be reassessed,” Kit said.
“However, this depends on the lender and the conditions of the approval, so buyers should have their broker confirm their position, particularly if their financial circumstances have changed.”
Changes such as taking out a car loan, increasing a credit card limit, using buy now, pay later services or changing jobs could affect an application.
Vicki recommended that buyers continue their savings plan and avoid taking on additional debt where possible while their application progresses.
“Stick to your savings plan,” she said, adding that buy now, pay later accounts may be considered ongoing liabilities when a lender assesses an application.
Buyers may wish to speak with their broker before making financial or employment changes while waiting for settlement. Even where approval remains valid, a variable home loan rate and the associated repayments may still increase before or after settlement.
Check when a fixed rate becomes locked
Buyers applying for a fixed-rate loan should confirm when the fixed rate is secured.
Depending on the lender and product, the rate that applies may be the rate available when the loan settles rather than when the application is lodged. Some lenders may offer a rate-lock option, sometimes for a fee, which may protect the applicant from an increase for a specified period.
Rate-lock arrangements differ, including how long they last and what happens if settlement is delayed. Buyers should also weigh the cost of locking against the possibility that rates could remain unchanged or fall.
An Aussie Broker can explain the lender’s process, but buyers should review the product terms before deciding whether a rate lock suits their circumstances.
What buyers can check before making their next move
A rate change does not necessarily mean a property purchase must stop. It may mean the numbers need to be checked again before the buyer makes a binding commitment.
Before taking the next step, buyers may wish to:
Refresh their borrowing capacity and confirm whether the lender’s rates or assessment settings have changed.
Check the approval details, including its expiry date, outstanding conditions and any restrictions relating to the property.
Model the new repayments against regular living costs and leave room for purchasing costs and unexpected expenses.
Keep their financial position consistent where possible and speak with their broker before taking on new debt or making a significant employment change.
Seek legal advice before signing a contract, waiving a finance condition or making an unconditional offer.
An Aussie Broker can check the application with the relevant lender, update repayment scenarios and help the buyer understand whether their intended purchase price remains achievable.