RBA hikes shrink home buying budget by over $214K for average Aussie family

The average family’s maximum home buying budget has shrunk by an estimated $214,600 as a result of the last seven months of RBA rate rises.

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 2.50 per cent.

As interest rates get higher, this test gets harder to pass.

Impact of rate hikes on average family’s borrowing budget

RateCity.com.au research has found a family with two kids, on a combined annual income of $150,000 before tax, could borrow a maximum of $995,800 seven months ago.

Once the November rate hike kicks in, they can borrow an estimated maximum of $781,200, which is $214,600 less – a 22 per cent drop since the start of the rate hikes.

However, by May next year, if the cash rate rises to 3.85 per cent, as forecast by Westpac, this family would be able to borrow an estimated maximum of $711,700, which is $284,100 less than they could have before the hikes began. This is a 29 per cent drop in potential borrowing capacity.

These calculations are estimates and assume one parent works full-time and the other part-time at half the wage. Calculations include an annual pay rise at the start of the financial year. The exact amount someone can borrow depends on their personal situation and/or their lender.

Family earning $150,000 at the start of the hikes:

Estimate of maximum amount they can borrow from the bank

Source: RateCity.com.au. See notes below.

Impact of rate hikes on a single person’s borrowing budget

A single person earning $100,000 before tax in April 2022, with no dependents and no debts, will see the maximum amount they can borrow fall by $161,400 as a result of the last seven RBA hikes (including November) – a 21 per cent drop.

By May next year, this person’s borrowing capacity could drop by a total of $214,900 if the cash rate hits 3.85 per cent. This is a 28 per cent drop in potential borrowing capacity.

Single person earning $100,000 before hikes began:

Estimate of maximum amount they can borrow from the bank

Source: RateCity.com.au. See notes below.

RateCity.com.au research director, Sally Tindall, said: “Many people’s home buying budgets have taken a hammering over the last seven months due to rising interest rates.”

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

“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.

“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.

“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.

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

“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,” she said.

Notes for calculations: Calculations are estimates based on CBA’s serviceability calculator on a 30-year principal and interest loan on average big four lowest variable rate rising in line with Westpac cash rate forecasts. In April 2022, the big four bank’s floor rates applied. No additional debts. Minimum expenses are applied. Includes a wage rise of 3% at the start of the financial year. Family one parent works full time, one works part time at half the wage.

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