If you feel like your dream home is suddenly out of reach, you’re not crazy. Across Australia, borrowing power has been cut significantly – buyers can afford less now than they could a few years ago.

The average borrowing capacity has fallen by approximately 32% since 2020, with a further decline from last year. The shift is largely due to higher interest rates and tighter lending standards.

This really means something simple: even if your income hasn’t changed, banks now see you as being able to borrow less money than before

Why Borrowing Power Has Dropped So Much

When lenders are working out if you can borrow, they look at two things: risk and affordability. Both of these have changed dramatically in the last few years.

The biggest reason is the rise in the RBA cash rate, which directly impacts home loan interest rates. Higher rates mean more expensive repayments, so banks restrict lending to prevent borrowers from overextending themselves.

Another important factor is the serviceability cushion. This is an additional interest rate margin that banks add to your borrowing power. Even if your actual rate is lower, banks will still test your affordability at a higher “stress rate” so you can still pay if rates rise again.

In total, these changes have dramatically reduced the amount Australians can borrow, even if their income does not change.

The Impact of Interest Rates on Borrowing Power

Interest rates are the number one driver of borrowing capacity.

When rates were at historic lows, repayments were cheaper, so borrowers could get much bigger loans. But as rates rise, the same income has to cover higher repayments, which reduces affordability.

In simple words:

• Lower interest rates = more power to borrow
• High interest rates = less buying power

That is why many who could have easily afforded a certain property in 2020 now find they can only borrow a much smaller amount.

For first-time buyers and investors who rely heavily on their maximum borrowing capacity, the impact is even greater.

Your Deposit’s Role in Borrowing Power

Your deposit is a huge factor in how much you can borrow because it determines your Loan to Value Ratio (LVR).

LVR is the percentage of the property value that you are borrowing against what you put in up front.

The more money you deposit, the lower the LVR, so you are less of a risk for lenders. This can result in:

• Higher borrowing power
• Reduced repayment pressure
• Avoiding Lenders Mortgage Insurance (LMI) if below 80% LVR

Even if they make the same amount, a person with a 20% deposit is usually better off than someone with a 10% deposit.

This is why saving a larger deposit is still one of the best ways to increase your borrowing power, even in a high interest environment

Why Different Lenders Have Different Borrowing Capacity

Not all lenders work out borrowing power in the same way.

One of the biggest differences is the buffer rate. That’s the extra percentage that gets added into your interest rate when banks assess your loan application.

Most lenders test your loan with a buffer of around 3%, where they assume interest rates are higher than they currently are.

Some lenders use a lower buffer (around 2%) which can boost your borrowing capacity because under their assessment model your repayments look cheaper.

That may not sound like much, but it can change the amount you can borrow by tens of thousands of dollars, depending on your income and expenses.

Lenders also have different assumptions for expenses, and that can mean one bank’s estimation of your living costs is higher or lower than another’s – impacting your borrowing capacity even more.

The Growth of Borrowing Power

Over the past several years, the ability to borrow has gradually fallen for all types of borrowers.

This applies to individuals and couples. Higher interest rates mean that banks are lending less than they were, even if the income is the same.

Australians today have, on average, significantly less borrowing capacity than in 2020, and even a noticeable decrease from a year ago.

This decline is not a blip — it’s a bigger move by lenders to manage risk in a higher-rate environment.

How to Increase Your Borrowing Capacity

Lending power may be down, but there are practical things you can do to improve your position.

Increasing your deposit is one of the most effective strategies. A bigger deposit reduces your LVR and can help you qualify for better lending conditions.

Another approach is to choose the right lender, as borrowing capacity can vary enormously based on their policies and buffer rates.

Other external factors may help in the near future. Government initiatives such as the Help to Buy scheme, and tax changes including Stage 3 tax cuts, could help increase disposable income and affordability for some buyers.

These do not directly increase borrowing limits but can improve your overall financial position, which indirectly helps with loan approvals.

Why Picking the Right Lender is Important

One of the most overlooked factors in borrowing power is the type of lender you select.

Different lenders will weigh risk differently, so two borrowers with the same income and expenses can be approved for very different borrowing amounts.

Some lenders are more conservative, some more flexible in their assessment of:

• Cost of living
• Credit limits
• Stable earnings
• Interest rate buffers

That’s why it’s so important to shop your lenders. If you choose wisely, you can greatly increase the amount you are able to borrow without changing your financial situation.

Final Thoughts on How Much You Can Borrow in Australia

Australian borrowing power has certainly tightened, and a lot of buyers are feeling the pinch.

But it’s important to understand it’s not just about affordability – it’s about how lenders are reading risk in today’s market.

However, with the right strategy – such as improving your deposit, choosing the right lender, or optimising your financial profile – you may still be able to improve your borrowing position.

The important thing to understand is that borrowing power is not fixed – it fluctuates based on rates, lender policies and your financial structure.