How does a rate rise affect your borrowing capacity?

Quick answer: When the cash rate rises, lenders usually lift their rates, and the rate they test you at rises too. Lenders check that you could still manage repayments at a rate at least three percentage points higher than your loan rate. That means a rise can reduce how much you can borrow, even if you’re comfortably meeting your repayments today.

Most people think about a rate rise in terms of repayments. Lenders think about it in terms of a test.

Understanding that test is the difference between knowing where you stand and finding out at the worst possible moment.

Will interest rates go up?

Nobody can tell you that honestly, and we won’t try. The RBA Board sets the cash rate at eight meetings a year, and each decision depends on the latest inflation, jobs and spending figures.

So the useful question isn’t “will rates go up?” It’s “what does my position look like if they do?” You can answer that one at any time.

How do lenders decide how much you can borrow?

A lender looks at your income, your living expenses and your existing debts. Then it works out whether you could manage the new loan, but not at the rate you’d actually pay.

APRA currently requires banks to assess new borrowers’ ability to meet their repayments at a rate at least three percentage points above the loan’s actual rate. The point is to leave room for things going wrong over the life of the loan. Banks can make exceptions case by case where it’s prudent.

Why can a rate rise cut your borrowing when you’re already paying fine?

Because the test moves whenever rates move.

When a lender passes on a rise, the loan rate goes up and the test rate goes up with it. A borrowing estimate from a few months ago may have been worked out against a test rate that no longer applies.

That’s what catches people out. Your income hasn’t changed and your spending hasn’t changed. You might be comfortably on top of your current loan. But the number a lender will lend you has moved anyway, because the test changed, not you.

What else affects your borrowing besides the cash rate?

• Living costs. Lenders check the spending you declare against benchmarks for living expenses, and those benchmarks go up as prices go up. Higher everyday costs leave less room for a loan.

• Debt-to-income limits. APRA caps the share of new mortgage lending banks can do at high debt-to-income levels. If your total debts are already large compared with your income, there may be less room than you’d expect.

• Credit limits, not balances. Lenders generally count the full limit on a credit card, even one you pay off every month.

  
  

What can you do before rates move again?

• Keep your borrowing estimate current. If it’s more than a few months old, it may have been done against a different test. Ask what it looks like as rates stand today, and what changes if they rise.

• Check your pre-approval. Look at the expiry date and the conditions. A pre-approval isn’t a guarantee. Lenders generally reassess at formal approval, using the rates and policies in place at that time.

• Tidy what you control. Close or lower credit card limits you don’t use, clear buy-now-pay-later accounts, and keep your recent bank statements consistent.

• Have your documents ready. When something shifts, being ready to move is worth more than being right about the decision.

  
  

What the RBA decides is out of your hands. Knowing where you stand either way isn’t.

Frequently asked questions

How often does the RBA decide interest rates?Eight times a year. Each decision is announced at 2:30pm Sydney time on the final day of the Board’s meeting.

What is the APRA serviceability buffer?Banks have to test whether you could manage repayments at a rate at least three percentage points above your loan’s rate. It’s a safety margin, not the rate you’ll pay.

Does every cash rate rise affect my borrowing?Usually. Lenders aren’t required to pass on a cash rate change, but when they lift their rates, the rate they test you at rises too.

Does a pre-approval protect me if rates rise?Not fully. A pre-approval is an early indication. Lenders generally reassess your application at formal approval, using the rates and policies in place at that time.

Do all lenders assess borrowing the same way?No. Each lender applies its own policy on income, expenses and buffers, and lenders that APRA doesn’t regulate set their own tests. The same person can get different answers from different lenders.

About the author

Paul Frazis is a Director of George Capital Finance Solutions and won Commercial Broker of the Year at the Australian Broking Awards 2026. He works with home and business borrowers across Australia. (02) 9072 9288

General information only. Not financial advice. Individual circumstances and lender assessment apply.