Rate hikes slash home buyer’s budgets $214,000

The average family’s borrowing capacity has shrunk by $214,600 as a result of seven months of interest rate rises.

According to, higher interest rates and the sharp increase in the cost of living are making it more difficult for borrowers to access finance.

Seven months ago, a family with two kids, on a combined annual income of $150,000 before tax, could borrow a maximum of $995,800.

Once the November rate increase hits, the same family will be able to borrow about $781,200, which is $214,600 less – a 22 per cent drop since April.

Come May next year, if the cash rate rises to 3.85 per cent, as forecast by Westpac, the family’s borrowing capacity would drop to about $711,700, which is $284,100 less than before the hikes began – a 29 per cent drop in potential borrowing capacity. Research Director, Sally Tindall said borrowing capacity has been sharply reduced as mortgage rates have increased.

“Many people’s home buying budgets have taken a hammering over the last seven months due to rising interest rates,” Ms Tindall said.

“That’s because borrowers are now expected to hand over more of their monthly salary to the bank in interest.”

“As a result, the average family earning $150,000 a year will have seen the maximum amount they can borrow from the bank shrink by around $214,600 across the last seven hikes.

“People who weren’t planning to borrow at capacity are less affected.”

Ms Tindall said the higher interest rates had already resulted in fewer people prepared to borrow.

“ABS data released this week shows the value of new lending has dropped to its lowest value in almost two years – a trend that’s likely to continue as both sellers and buyers put their plans on ice,” she said.

“Falling property prices will make it easier for first home buyers to save for a deposit, one of the biggest barriers to getting into the market.

“However, this won’t automatically make it smooth sailing for these buyers.

“They’ll still need to show the bank they can repay the mortgage at a rate of over 7.5 per cent – a difficult hurdle on a limited salary.”

Ms Tindall said the other factor weighing on borrowing capacity was APRA’s decision to lift their serviceability buffer to 3 per cent.

“In November 2021, APRA increased the mortgage stress test to make sure new borrowers could handle a 3 per cent increase to mortgage rates,” she said.

“Fast forward 12 months and new buyers are struggling under the weight of this test, while many who overstretched themselves to buy at or near the peak are wondering whether their budgets will hold up against the cash rate rises.

“APRA may decide to bring the stress test back down to 2.5 per cent, but it’s unlikely to rush into the decision.

“The regulator will be looking for a clearer position of where the cash rate is likely to land before stepping in again.”

As interest rates rise people applying for a loan are seeing the maximum amount they can borrow from the bank fall because they are paying more in interest. Increased cost of living expenses are also having an impact.

This comes one year after APRA increased the mortgage stress test to make sure new borrowers could handle a 3 per cent increase to mortgage rates. The stress test before this was 2.5 per cent.

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.