How Rising Interest Rates Can Affect Your Borrowing Capacity

7 March 2024

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rising interest rates in australia

Interest rates rose by +0.25 on 5 separate occasions in 2023 causing stress and frustration for homeowners and potential buyers. Understanding how rising interest rates can affect your borrowing capacity is essential for anyone contemplating a major financial commitment. Those looking to buy their first home are now being forced to re-evaluate their loan applications as their borrowing power is impacted. Rising interest rates means that more of your income has to be allocated to paying off your home loan when being assessed. So, how do rising interest rates impact your borrowing capacity? Here is everything you need to know.

Mortgage Affordability

Interest rates play a pivotal role in determining the cost of borrowing. As rates rise, it can affect everything from mortgages to personal loans. Your monthly repayments are directly impacted, leading to an increase in the overall cost of your loan. For those navigating the real estate market, rising interest rates can affect the affordability of your dream home. Even a modest increase in interest rates can lead to higher monthly mortgage repayments, potentially influencing the type and value of property you can comfortably afford. Whether you have bought multiple homes before, or are purchasing your first property, the Brokerage has the skills and knowledge to provide you with assistance in maintaining or obtaining a home loan in this economic climate.

Reduced Borrowing Capacity

One of the most immediate consequences of rising interest rates is a reduction in borrowing capacity. Lenders assess your ability to repay a loan based on a combination of factors, including your income, expense and debt liabilities, and prevailing interest rates. When rates climb, lenders may be more conservative in their assessments, potentially approving lower loan amounts. The bank will add a buffer on top of the interest rate when assessing your borrowing capacity to ensure that you’re able to afford to repay the debt in the case that interest rates do rise. This essentially means that you are assessed as if the rate was higher than it really is, meaning you must have higher financial capacity.


If you’re currently repaying a mortgage, rising interest rates may prompt you to reassess your existing loan. Exploring the possibility of refinancing to secure a more favourable interest rate becomes a strategic move to mitigate the impact on your monthly repayments and overall borrowing capacity. The Brokerage offers several refinancing solutions that can be a way to overcome rising interest rates.

Budget Evaluations

As interest rates rise, it becomes crucial to reassess your budget and financial goals. Adjusting your spending habits and building a financial buffer can help cushion the impact of increased loan repayments. This proactive approach allows you to maintain financial stability despite fluctuations in interest rates.

Given the complexity of financial markets, seeking advice from a financial advisor or mortgage broker can be valuable. Professionals can guide you through the intricacies of interest rate movements, helping you make informed decisions about borrowing, refinancing, and navigating the ever-changing financial landscape.