How interest rates impact your borrowing power

Whether you’ve just started saving for a deposit, spent months on realestate.com.au, or you’re midway through the pre-approval process, catching wind that interest rates are on the move can raise a few questions. 

How much can I borrow for a home loan now? 

How do interest rates impact my borrowing power? 

And better yet – how much can I actually afford without living off two-minute noodles for the next 30 years?

The short answer: interest rates down, the more you can borrow (aka borrowing power)

Lower rates = more borrowing power.

Higher rates = less borrowing power.

When interest rates are lower, your borrowing power increases because the cost of borrowing money decreases.

That’s because when rates are low, less of your regular repayment will go toward interest, leaving more room to pay down the principal balance. So lenders will be able to approve you for a larger loan.

Of course, the opposite is also true. Just as borrowing power grows when rates fall, it can shrink when rates rise, since a larger portion of your payments could be going toward interest rates, not paying down your principal balance. 

Slow down. What is borrowing power?

Also known as ‘borrowing capacity’, your borrowing power is how much a bank is willing to lend you so you can buy a property. 

Think of it as the upper limit of your home loan. It ultimately sets the tippy top of your price range when you’re house hunting.

• It’s based on your financial situation, like income and expenses.
• It can change depending on market conditions (especially interest rates).
• The higher your borrowing power, the more property options you’ll have to choose from.

Want a clearer idea? Use Finspo’s borrowing power calculator to find out how much you can potentially borrow.

What determines my borrowing power?

Your borrowing power is largely based on your unique situation (and a little bit the market conditions, like interest rates). The calculation looks at your “ins” versus “outs” (income versus expenses).

While ‘borrowing power’ is often confused with ‘purchasing power’, they’re not quite the same.

• Borrowing power is how much the bank will lend you.
• Purchasing power is how much you can afford when you factor in your deposit, assets and other costs (like stamp duty and fees).

Here’s a simple formula: Purchasing power = borrowing power + deposit – purchasing costs.

So, borrowing power is a good place to start to get an idea of what you can afford. Whereas purchasing power is more relevant when you’re seriously looking at properties and keen to make an offer. 

Check out our borrowing power calculator to get a ballpark figure.

How do I calculate my borrowing power? 

You don’t need to bust out the spreadsheets. Most online calculators (like ours) do the heavy lifting for you. 

Still keen to know the calculation behind it? It’s based on your total income, less your total expenses. 

Your income can be considered as an individual or a couple, and your total expenses include all your living expenses – from the basics (like food, water, entertainment and electricity) through to additional expenses, like repayments on other debts you have (like personal loans and credit cards).

Check out Finspo’s borrowing power calculator 

What will a bank want to look at to know how much I can really afford?

Unfortunately, banks don’t just look at your income and say “yep, that’ll do.” They’ll do a deep dive into your finances. Things like:

• Income: Salary, bonuses, rental income or government benefits. Types of income also matter, as they’re not all equal in the lenders eyes. Consistency also matters (especially if you’re self employed). 
• Expenses: Think groceries, bills, subscriptions and everyday living costs. 
• Debts: Credit cards, car loans or HECS-HELP loans will also be factored in – even if you’re not actively using those credit cards.
• Credit score and history: Can ultimately impact how much trust a lender places in you.
• Interest rates: As we covered earlier, the higher the interest rate, the higher your regular repayments will be, and therefore the lower your borrowing power.
• Deposit size and Loan-to-Value Ratio: A bigger deposit often gives you more borrowing flexibility and could unlock better loan options.

But how much should I borrow?

Just because a bank is willing to lend you a certain amount doesn’t mean you should take the full amount. 

The real question is: how much are you comfortable borrowing? And more importantly, how much do you want to repay each month? If you max out your borrowing power, you might need to tighten the belt on other areas of your life (ahem, UberEats). 

On the flip side, borrowing a little less could give you more breathing room and flexibility.

While dropping interest rates might boost your borrowing power, they’re not locked in forever. 

Rates can rise over the life of your loan, so it’s worth asking yourself: if interest rates go up, can I still manage the repayments? Lenders apply a ‘serviceability buffer’ (usually 2–3%) to account for this, but you can always choose to be even more cautious. 

At the end of the day, it’s about what you feel comfortable with – not just what the bank says is possible.

What if I don’t feel comfortable borrowing what the bank says I can?

Sometimes a lender will come back with a number that looks great on paper, but feels a bit uncomfortable in real life. Especially when rates are dropping. 

It’s worth stepping back and thinking about what works for you. What kind of lifestyle do you want to maintain? What are you willing (or not willing) to sacrifice to make your repayments?

Remember: borrowing power is a limit, not a goal. A good mortgage broker won’t just look at the numbers, they’ll take the time to understand your broader life plans, from holidays and kids to career changes and future costs. They’ll help you balance property goals with everything else that matters to you.

Chat with a Finspo broker (or home loan expert as we call them) to get started. 

What if I’m a first home buyer?

Lenders don’t treat you differently just because you’re a first time buyer.

But there may be Government grants and schemes that help to reduce upfront costs (like stamp duty concessions or waivers) or reduce the deposit needed (like the First Home Guarantee).

These can ultimately improve borrowing power or purchasing power by reducing the other costs associated with property purchase. 

A good broker (we know a few of those) will walk you through what you’re eligible for and help you make the most of it.

So, how much money can I borrow for a house?

A great place to start is our borrowing power calculator — it’ll give you a quick estimate based on a few key details. 

But for a more accurate (and personalised) number, chat to a Finspo mortgage broker. We’ll take the time to understand your full financial picture. No pressure, no confusing jargon, and all online (phew!)

1. Book a chat with a friendly Finspo expert 
2. Tell us about yourself and provide any additional info
3. We’ll do the heavy lifting and present you with some loan options and a recommendation.

Chat with a friendly Finspo expert today for free. 

About us

Finspo is an online mortgage broker, offering home loan solutions to clients Australia-wide. Our point of difference is that not only do you get a great Finspo mortgage broker, you also get a proposition supported by cutting-edge technology to give you a five-star mortgage broking experience.

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