Key takeaways:
The impact will vary: A rate rise may reduce borrowing capacity, but the change will depend on the buyer’s finances, lender and loan.
A smaller budget can change the search: Some buyers may need to lower their price ceiling, consider a different property type or widen their preferred area.
Pre-approvals should be checked: Changes to rates, lender policies or personal circumstances may affect how much a buyer can borrow.
Maximum does not mean comfortable: Buyers may wish to consider both what a lender could approve and the repayments they feel able to manage.
Credit choices may matter: New debts, credit applications and unused credit limits may influence a lender’s assessment.
For some home buyers, the latest rate rise may mean more than higher repayments, it could change the properties and suburbs within reach.
Following the Reserve Bank of Australia's (RBA) 25-basis-point increase on 29 September, which took the cash rate to 4.60%, some buyers may find that the amount they can borrow has reduced if lenders lift their home loan and assessment rates in response.
That does not automatically mean putting a purchase on hold. Depending on the size of the change and the buyer's circumstances, it may instead mean lowering the price ceiling, considering a townhouse rather than a house or looking at a neighbouring suburb.
Buyers may need to consider more than their maximum borrowing figure. A workable purchase budget also needs to allow for the deposit, transfer duty or stamp duty, conveyancing, inspections, lender charges, repayments and a buffer for changes in circumstances.
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How much could a 0.25 percentage point rise change a buyer's budget?
There is no fixed amount that every buyer will lose from their borrowing capacity after a rate rise.
Lenders assess income, living expenses, existing debts, credit limits, dependents and the proposed loan using their own policies and serviceability buffers. The RBA cash rate also does not determine home loan rates directly: each lender decides whether, when and by how much to change its rates.
A serviceability buffer means a lender assesses a home loan at a higher interest rate than the borrower would initially pay. If the loan rate rises, the assessment rate may also increase, which could reduce the borrower’s surplus income and borrowing capacity. The exact impact can vary between lenders and applicants.
However, an indicative scenario from Aussie Forest Lake Broker Kit Johnson shows how a movement of 0.25 percentage points could flow through to a purchase budget.
“Consider a couple buying a home to live in in Queensland. They have $250,000 available for their deposit and buying costs and can initially borrow $800,000," Kit said.
"As an example, if a lender’s interest rate increases from 6.09% to 6.34%, a simplified calculation over a 30-year loan term shows their borrowing capacity reducing to around $782,500.”
This is why a buyer may need to consider two numbers after a rate change: what a lender may be prepared to lend and what repayments the household feels able to manage.
What a revised budget may buy
A reduction of $15,000 to $20,000 may appear modest on paper, but it could push some properties beyond a buyer's revised limit, particularly where listings in their preferred area cluster around the top of their budget.
Cotality's September Home Value Index placed the combined capital median dwelling value at $990,394. However, this broad figure does not show what a buyer could purchase in a particular suburb or property category.
The more practical exercise is to apply the revised ceiling to recent comparable sales in the buyer's target area. That may show whether a change in budget requires a major change or simply a tighter negotiating limit.
Buyers may trade property features before location
When a budget tightens, the first compromise does not always have to be moving farther away.
Sunny Katyal, an Aussie Buyer's Agent, said some buyers were becoming more flexible about finishes and floor plans rather than abandoning their preferred area.
“Buyers are shifting away from the 'turnkey perfect' mindset,” he said. “They are compromising on a fourth bedroom or reducing land size to stay within preferred postcodes rather than being pushed further out geographically.”
A tighter budget may mean comparing an established home that needs cosmetic updates with a newer property, or looking at a townhouse rather than a detached house. Buyers should weigh any lower purchase price against renovation costs, strata levies, maintenance and restrictions on future changes.
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Kit said the house-to-townhouse shift was a common compromise in his local market.
“I often see first-home buyers who have grown up in the area and want to buy locally, but I have to break it to them that they can't afford what they're looking for and need to consider more affordable areas,” he said.
“That can come as a shock, particularly when they have just assumed they could buy down the road from their parents.”
For buyers anchored to an area by work, school or family support, changing the dwelling type may be less disruptive than changing suburbs. For others, widening the search by one or two adjoining suburbs may preserve the preferred number of bedrooms or land size.
Neither compromise is automatically better. The choice depends on why the location matters, how long the buyer expects to live there and the costs or restrictions attached to the alternative dwelling.
A lower limit does not always mean starting again
Some buyers may still have enough headroom in their lender’s serviceability assessment that a small rate change has little or no effect on their indicative borrowing capacity, according to Aussie Christies Beach Broker Vicki Hanna.
“In some instances, the purchase price may need to be lowered, or perhaps the area or location may need to be reconsidered,” Vicki said. “If there is a small shortfall, there is the possibility of a genuine gift from a family member.”
Buyers considering family assistance should confirm the lender’s requirements, including whether the funds must be a genuine, non-repayable gift and what evidence may be required.
Income such as overtime, allowances, bonuses or commission may also be assessed differently between lenders. More recent earnings do not necessarily increase borrowing capacity, and lenders may require a history of that income before including some or all of it.
This is where recalculating the position can be more useful than assuming the original plan is no longer possible. Depending on the buyer's circumstances, a broker may compare lender policies, model different loan sizes and repayments, and identify whether the shortfall can be addressed without placing the household under undue pressure.
Check the numbers before making the next offer
An existing pre-approval should not be treated as an unconditional promise to lend. It is generally time-limited and subject to conditions, including confirmation of the applicant's finances and the lender being satisfied with the property.
Aussie Woodvale Broker Dean Cokis said buyers should ask three questions after a rate change: “Has this rate rise changed how much I can borrow?”, “What are my repayments going to look like now?” and “Is my pre-approval still okay?”
He also cautioned against treating the maximum approved amount as a spending target.
“Just because the bank says you can borrow $900,000 doesn't mean you have to go out and spend $900,000,” Dean said.
Before making an offer, buyers may wish to confirm:
whether their indicative borrowing capacity or pre-approval has changed
the repayments at the proposed loan size and at a higher interest rate
how much cash must remain for transfer duty and other purchase costs
whether the lender has restrictions relating to the property's type, size or location
whether the amount leaves room for regular costs, unexpected bills and changes in circumstances.
“Credit enquiries are probably the thing I see catching younger borrowers out the most,” Kit added.
“Many have no idea that applying for multiple loans or credit cards can affect their credit score and how lenders view their applications.”
Buy now, pay later accounts, personal loans and unused credit card limits may also be considered in a lender's assessment, depending on its policy.
Focus on the trade-offs you can control
A rate rise can reduce options for some buyers, but it does not affect every application in the same way. A practical next step may be to replace the old borrowing figure with an updated search budget and test it against real properties.
That may involve looking below the maximum, changing the property type, widening the search area or allowing more time to strengthen savings and reduce liabilities. It may also confirm that the original plan remains within reach.
“We go through the 'what ifs' with them — what happens if rates rise again, repayments increase or their circumstances change — so they understand all the possible scenarios before making a decision,” Dean said.
An Aussie Broker can help buyers review their borrowing power, compare loan options and model repayments, based on your circumstances, so they can understand what may be achievable based on their circumstances before they inspect, bid or make an offer.