Rate rises could reduce the amount you can borrow on a home loan by 20%

Sydney houses by the beach.

While the impact of rising interest rates on existing borrowers is well publicised, those purchasing a home will also be forced to make adjustments, namely settling for a smaller loan.

In a recent speech, Reserve Bank head of domestic markets Jonathan Kearns said this year’s rate hikes have already decreased the amount of debt prospective borrowers can take on by as much as one fifth.

“Given this 225 basis point increase in the cash rate has been fully passed through to mortgage interest rates, it will have reduced borrowers' maximum loan size by around 20 per cent,” he said.

This comes almost a year after APRA introduced stricter guidelines around serviceability buffers, which are used by banks when assessing borrowers’ ability to continue paying their loan at a higher rate.

Previously, banks were required to apply an interest rate buffer of at least 2.5 percentage points to their loan product rates. This was lifted to 3.0 percentage points to ensure stability in the financial system and as a contingency for future rate rises.

At the time, the change lowered the maximum loan size a borrower could take out by up to 5 per cent, a difference which Kearns points out has been dwarfed by the current round of rate hikes.

“The increase in the cash rate since May has been 225 basis points, and so this has had a much larger impact on maximum loan size than APRA's requirement.”

“And because the assessment rate also applies to any existing debt, the decrease in borrowing capacity is even larger for prospective borrowers who have existing debt, such as property investors.”

Fortunately, it’s uncommon for borrowers to take out the maximum amount a bank is willing to lend them, with banks reporting that these customers only make up around 10 per cent of their loan books.

RELATED: How high will mortgage rates go in 2022?

“As a result, even if all borrowers' maximum loan size is reduced by 20 per cent in response to higher interest rates, not all new borrowers will have to take out a loan that is 20 per cent smaller,” said Kearns.

“For many borrowers, the amount they spend on a new home would decline only slightly or not at all (including because their savings to be used as a deposit need not decline with higher interest rates).”

However, Kearns points out that the rapid lift in interest rates, which is set to continue until the RBA can bring inflation within target, also means new borrowers will be making larger repayments on their loans. 

“For example, with the 225 basis point increase in the mortgage interest rate – from average mortgage rates prior to May – monthly payments on a new (principal and interest 25-year) loan will be around 25 per cent larger,” he said.

“This increase in mortgage payments can influence how much people want to borrow.”

Importantly, this won’t necessarily apply to existing borrowers, many of whom are paying above the minimum repayment amount set by their lenders or making regular contributions to their offset accounts.

Fixed rate loans also make up a significant portion of the residential mortgage market — currently around 35 per cent — and these borrowers won’t face an increase in repayments until their fixed terms expire.

For information on interest rates and lending trends, head over to our home loan statistics page. And if you’re in the market for a home loan, visit our home loan comparison page, or browse the selection below.

Mozo may receive payment if you click the products below. We don’t compare the entire market, but you can search our database of 472 home loans.
Last updated 14 June 2024 Important disclosures and comparison rate warning*
  • Basic Home Loan

    Fixed, Owner Occupier, Principal & Interest, LVR<70%

    interest rate
    comparison rate
    Initial monthly repayment
    6.25% p.a.
    fixed 3 years
    6.20% p.a.

    No upfront or ongoing fees. Free extra repayments and redraw facility. Option to earn Qantas points. Min 30% deposit required. Borrow up to $750,000.

  • Variable Home Loan 90

    Principal and Interest, LVR <90%

    interest rate
    comparison rate
    Initial monthly repayment
    6.04% p.a. variable
    6.06% p.a.

    Affordable home loan rate for buyers or refinancers. No monthly or ongoing fees. Option to add an offset for 0.10%. Access to savings with unlimited redraws available. Minimum 10% deposit required.

  • The Better Home Loan Special Offer

    Owner Occupier, Principal & Interest, LVR<80%

    interest rate
    comparison rate
    Initial monthly repayment
    6.14% p.a. variable
    6.14% p.a.

    Enjoy a variable rate home loan with a bunch of features from Police Credit Union. Make extra repayments at any time without penalty. No monthly, annual or upfront fees. Free online redraw. Minimum 20% deposit. Qualifying criteria applies. Minimum loan amount is 200K. For new customers only. Mozo Experts Choice Home Lender Credit Union of the Year 2023.

  • Discount Variable Home Loan

    Owner Occupier, LVR<70%

    interest rate
    comparison rate
    Initial monthly repayment
    5.99% p.a. variable
    6.01% p.a.

    A low rate home loan for owner-occupiers packed with great features including unlimited extra repayments, free online redraw, no application or monthly admin fees. Rate will vary depending on LVR. Winner of a Mozo Experts Choice 2024 Low Cost Home Loan Award^


* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.