Shrinking borrowing power: Homebuyers borrowing $126,000 less since 2020

If you applied for a home loan for a median-priced capital city house in October 2020, your borrowing power may have been $126,400 higher than a home buyer today, according to new research from RateCity.

Property prices have been rising in every capital city since 2020 and this, in tandem with eight hikes to the cash rate in 2022, has significantly cut down Australia’s borrowing power.

RateCity analysis shows that since October 2020, an Australian earning 90,000 a year with a 20% deposit, has seen their borrowing power for the median capital city property value fall by $126,400.

This makes things extremely difficult for would-be borrowers, as the median house price for combined capitals increased by $124,670 over the same period. 

Difference in borrowing power: Oct-20 vs Jan-23

Source: RateCity.com.au, CoreLogic Home Value Index (Oct-2020 vs Dec-2022 figures), Commonwealth Bank Borrowing Power Calculator. *See below for disclaimers

In October 2020, you may have been approved to take out a home loan of $658,700, while median house prices across the combined capitals was $735,014. However, now you may only be approved for a mortgage of $532,300, while the median house price for combined capitals has risen to $859,684.

Put simply this creates a gap between the amount an individual can borrow, and the actual cost of a property they want to buy. This is because, for the most part, both property prices and interest rates have increased at the same time. 

Ordinarily, rising interest rates will impact the borrowing power of home buyers. The higher the cash rate, the higher the rates that lenders will test your ability to service a home loan. When interest rates are low debt is more affordable and, as a result, you may be approved to borrow more – and vice versa when they’re higher. 

When property prices are also experiencing the same upward momentum, it creates a much more unaffordable environment for home buyers who now need approval for a higher mortgage amount just to get a foot on the property ladder.

When will borrowing power improve?

Whether you’re hoping to nab your first home in 2023, or you’re considering a new investment property, your borrowing power plays a significant role in how much you can spend on the home. 

Unfortunately, economists from the big four banks predict that more hikes to the cash rate can be expected in 2023. This will likely continue to decrease the borrowing power of many homebuyers.

Big four bank cash rate hike predictions for 2023

• CBA: One more 0.25% hike in February 2023.
• Westpac: Three more 0.25% hikes in February, March and May 2023.
• NAB: Two more 0.25% hikes in February and March 2023.
• ANZ: Three 0.25% hikes in February, March and May 2023.

In terms of property prices, values are still sitting much higher than pre-COVID levels, with combined capital city dwelling values 11.7% higher than they were at the onset of COVID in March 2020, according to CoreLogic.

However, while it may not look like it, property prices have been falling over the last year. CoreLogic data shows that housing values fell 5.3% throughout 2022. This was the biggest calendar year decline since 2008, where values dropped by 6.4% as a result of the Global Financial Crisis and cash rate rises.

The good news for your next home purchase is that big four bank economists predict that property prices will continue to fall in 2023, if the cash rate continues to rise. 

This may help to soften the blow of higher interest rates on your borrowing power in 2023. If you’re curious as to how much you can afford to borrow right now, it may be worth using RateCity’s Borrowing Power Calculator. 

Simply enter a few details, like your income and expenses, and you’ll be given an estimate of how much you could borrow for a mortgage if you applied today. 

Table disclaimers:

Note: Based on a borrower with a 20% deposit for median house price for combined capital cities in 31st October 2020 and 31st December 2022 (most recent CoreLogic data). Borrower has an annual wage of $90,000 p.a. for both time periods. Based on CBA's variable rate for owner-occupiers paying principal and interest in October 2020 of 2.69%, versus 4.97% in January 2023. Data accurate as of 15/01/2023.

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