2022 has seen the first cash rate rises in over 11 years and financial markets are pricing in a 3% increase in the RBA cash rate over the next 18 months.
If we were to see this scenario play out and assume that lenders pass on these rises to mortgage customers in full, we can expect to see current levels of around 2.8% increase to 5.8%. So what does this mean for borrowing capacity for new or refinancing borrowers? Here’s two scenarios to consider:
Scenario One
Emile and Anna are a couple with a two-year-old son and are looking to buy their first property. Each earns $100K p.a. base salary. They have savings to cover a 20% deposit and stamp duty, and hold no other debts or credit cards. Our table pictures how a 3% rate rise would effect what they could borrow.
Summary
$200K total base salary
1 dependent
No other debt
No credit cards
Difference in borrowing capacity with a 3% rise in interest rates: $330,000 or 30% decrease
| RBA Cash Rate | Mortgage Rate | Max Borrowing Capacity |
| 0.85% | 2.80% | $1,380,000 |
| 1.00% | 2.95% | $1,350,000 |
| 1.25% | 3.20% | $1,320,000 |
| 1.50% | 3.45% | $1,280,000 |
| 1.75% | 3.70% | $1,250,000 |
| 2.00% | 3.95% | $1,220,000 |
| 2.25% | 4.20% | $1,190,000 |
| 2.50% | 4.45% | $1,160,000 |
| 2.75% | 4.70% | $1,130,000 |
| 3.00% | 4.95% | $1,100,000 |
| 3.25% | 5.20% | $1,080,000 |
| 3.50% | 5.45% | $1,050,000 |
| 3.75% | 5.70% | $1,030,000 |
| 4.00% | 5.95% | $1,010,000 |
| 4.25% | 6.20% | $980,000 |
| 4.50% | 6.45% | $960,000 |
Scenario Two
Jaimie and Leah are looking to upsize their family home to accomodate their two growing teenagers. They are both earning $250K p.a. base salary and currently hold enough equity in their home to cover a 20% deposit and stamp duty. The currently have a credit card with a $15,000 limit but no other debts.
Summary
$500K total base salary
2 dependents
No other debt
Credit card – $15,000 limit
Difference in borrowing capacity with a 3% rise in interest rates: $830,000 or 35% decrease
| RBA Cash Rate | Mortgage Rate | Max Borrowing Capacity |
| 0.85% | 2.80% | $3,475,000 |
| 1.00% | 2.95% | $3,440,000 |
| 1.25% | 3.20% | $3,350,000 |
| 1.50% | 3.45% | $3,260,000 |
| 1.75% | 3.70% | $3,180,000 |
| 2.00% | 3.95% | $3,100,000 |
| 2.25% | 4.20% | $3,025,000 |
| 2.50% | 4.45% | $2,950,000 |
| 2.75% | 4.70% | $2,880,000 |
| 3.00% | 4.95% | $2,810,000 |
| 3.25% | 5.20% | $2,740,000 |
| 3.50% | 5.45% | $2,680,000 |
| 3.75% | 5.70% | $2,620,000 |
| 4.00% | 5.95% | $2,560,000 |
| 4.25% | 6.20% | $2,500,000 |
| 4.50% | 6.45% | $2,450,000 |
How likely is this to occur?
Financial market predictions are by no means certain, the trajectory changing as the local and global context shifts and changes. Lenders already include a 3% buffer above current rates when assessing the serviceability of your home loan – it is an Australian Prudential Regulation Authority (APRA) requirement. If interest rates were to rise as predicted, we may see APRA relax this buffer to ease the impact on customers’ borrowing capacity. Watch this space and, in the meantime, it’s worth considering requesting a mortgage review to be sure you are on the best rate and product for your situation.