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Borrowing power shrinks by almost $250K after 12 RBA hikes

Laine Gordon avatar
Laine Gordon
- 3 min read
Borrowing power shrinks by almost $250K after 12 RBA hikes

Rapidly rising interest rates could see the average family’s maximum borrowing capacity shrink by $247,700, compared to April last year, once the latest RBA hike takes effect.

As interest rates rise, the maximum amount a person can borrow from the bank decreases because they pay more in interest to the lender.

Research from RateCity.com.au has found a family of four, where one parent works full-time and the other part-time at half the wage, on a combined annual income of $143,221 before tax, will have seen their maximum borrowing capacity drop by $247,700 as a result of the 12 RBA hikes.

This assumes they have no other debts, minimal expenses and have had a 3.75 per cent pay rise over the last year.

These calculations are estimates only. The amount someone can borrow depends on their personal situation and/or their lender.

FAMILY OF FOUR: Impact on maximum borrowing capacity – April 22 vs June 23

DateIncomeRateStress testBorrowing capacity
Apr-22$138,0442.29%5.29%$874,500
Jun-23$143,2216.29%9.29%$626,800
Difference+$5,177+4%+4%-$247,700

Source: RateCity.com.au. See notes at end.

For a single person earning the average wage, with no debts, no dependents and minimal expenses, the maximum amount they can borrow from the bank will have dropped by $180,000 in the last 14 months.

SINGLE: Impact on maximum borrowing capacity – April 22 vs June 23

DateIncomeRateStress testBorrowing capacity
Apr-22$92,0302.29%5.29%$681,100
Jun-23$95,4816.29%9.29%$501,100
Difference+$3,451+4%+4%-$180,000

Source: RateCity.com.au. See notes at end.

RateCity.com.au research director, Sally Tindall, said: “People on the hunt for a new home have been dealing with a market that’s defying gravity, on a budget that gets smaller by the month.”

“After 12 RBA hikes, the maximum amount an average family of four can borrow has dropped by an incredible $247,700 in the space of just 14 months,” she said.

“That’s enough to leave some families’ property buying plans in tatters, particularly considering prices are now on the rebound, despite the hikes.

“Once this latest cash rate decision takes effect, the big banks’ ongoing variable rates are likely to be over 6 per cent, which means borrowers will soon be stress tested at rates of over 9 per cent.

“That’s a staggering hurdle to clear, particularly for first home buyers with limited savings and smaller incomes.

“If prices don’t come down, potential first home buyers could end up sitting on the sidelines altogether, unless they can get a sizeable leg up from their family.

“The last 11 rate hikes should have sent property prices sliding, but a severe lack of stock has the market moving in the other direction.

“If the cash rate keeps climbing, we could see an increase in ‘For Sale’ signs in the second half of this year, as over-leveraged investors offload part of their portfolio and over-burdened families relocate to get some relief.

“Even there, we’re unlikely to be in a market full to the brim with stock. Australia has a housing supply crisis that’s not going to be solved easily or within a short timeframe,” she said.

Notes: Calculations are estimates based on CBA’s serviceability calculator on a 30-year principal and interest loan with a big four bank. Assumes the borrower has no additional debts and minimal expenses. Includes forecasted wages growth of 3.75% p.a. These calculations are estimates only.

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Product database updated 20 Jun, 2024

This article was reviewed by Research Director Sally Tindall before it was published as part of RateCity's Fact Check process.