Why your borrowing power dropped in 2026 (and how to lift it)

If you applied for a home loan in mid‑2025 and then tried again in early 2026, you probably noticed a sharp drop in your maximum loan amount. You are not imagining it. Borrowing power has fallen for most Australian households, driven by a combination of official cash rate increases, a new regulatory debt‑to‑income cap, and tighter lender risk policies.

In this article we explain exactly what changed in 2026, why your borrowing power is lower, and – most importantly – what you can do to lift it back up. We cover the numbers, the rules, and the practical steps that can increase your borrowing capacity without waiting for the market to turn.

The three forces that cut borrowing power in 2026

Three distinct factors combined to reduce the amount lenders are willing to offer. Understanding each one helps you see which levers you can pull.

1. The RBA cash rate climb

The Reserve Bank of Australia (RBA) raised the official cash rate from 4.10% in late 2024 to 4.35% by the end of 2025, and held it there through the first half of 2026. Although the pace of hikes slowed, the cumulative effect is significant.

Lenders assess your ability to repay at a higher rate than the actual interest rate. For most home loans, that assessment rate is the variable rate plus a serviceability buffer. As variable rates moved up, the assessment rate rose as well. Even if your actual loan rate is lower, the buffer still pushes the test rate higher. In 2026, the average lowest variable rate is around 5.69%, which means the assessment rate (including the APRA‑mandated 3% buffer) sits near 8.69%.

That extra 3% – unchanged since APRA confirmed it in 2024 – means a household with a $120,000 gross income and minimal debts might have been assessed at a lower rate in 2024, when the variable rate was 5.10%, compared with 8.69% now. The difference in monthly repayment at the test rate can reduce borrowing power by tens of thousands of dollars.

2. The APRA DTI limit (the “speed limit”)

In February 2026, the Australian Prudential Regulation Authority (APRA) introduced a formal debt‑to‑income (DTI) cap of 6 times household gross income for new loans. This is not a hard ban – lenders can still write loans above a 6:1 ratio – but they must hold additional capital against them, which makes those loans expensive and unattractive for most banks.

· DTI = total loan amount ÷ total annual gross income (including bonuses, rental income, etc.) · A household earning $150,000 can now borrow no more than $900,000 under the standard cap ($150,000 × 6)

Before the cap, many lenders would offer up to 7 or even 8 times income for high‑saving borrowers. That flexibility has disappeared. The DTI cap is a blunt ceiling: even if your expenses are low and your deposit is large, the lender cannot exceed the 6:1 ratio without a special exemption that most won’t grant.

3. Tighter lender appetites and discretionary policies

Beyond regulation, individual lenders have tightened their own credit policies in 2026. Common changes include:

· Reducing the maximum loan‑to‑value ratio (LVR) for investment properties to 80% (down from 90%). · Applying higher “living expense” benchmarks that assume the Household Expenditure Measure (HEM) plus a coefficient of 1.1 or 1.2, instead of using actual lower expenses. · Limiting interest‑only periods to 5 years for new borrowers. · Reducing acceptable rental income assumptions – some now only count 75% of projected rent instead of 80%.

These discretionary changes can shave another 5–10% off your borrowing power, on top of the DTI and rate‑buffer impact.

How much has borrowing power actually fallen?

To give you a concrete figure, consider a typical dual‑income household earning $180,000 combined ($90,000 each) with one credit card ($5k limit) and no other debts. In mid‑2025, this household could typically borrow about $850,000. By mid‑2026, the same household faces:

· Assessment rate: 8.69% (buffer + lowest variable) · DTI cap: $180,000 × 6 = $1,080,000 (but the buffer reduces it further) · Tighter living expenses: adds ~$400/month to assumed costs

Result: maximum loan falls to roughly $710,000–$740,000 – a drop of about 13–16%.

If you are a single borrower earning $100,000 with a credit card and small personal loan, your borrowing power could drop by 18–22% depending on the lender’s expense benchmarks.

Practical steps to lift your borrowing power in 2026

You may not be able to change the RBA or APRA rules, but you can improve your personal position. Here are six strategies that genuinely work in this environment.

Reduce your living expense assumptions

Lenders don’t use your actual spending if it’s below their minimum benchmark. However, they do use your stated expenses when they are higher than the HEM. If you have been reporting optional expenses (gym, subscriptions, eating out) as larger than necessary, consider cutting those back for three months and then submitting new bank statements that show lower spending. A reduction of $200 per week in “discretionary spending” can add around $30,000–$40,000 to your borrowing capacity at the assessment rate.

Pay down or close credit cards

Credit cards are assessed at the full limit, even if you pay the balance every month. For example, a $10,000 card limit is treated as a debt that requires 3% monthly repayment ($300) in the serviceability calculation. Closing that card can free up enough buffer to increase your loan size by roughly $40,000–$50,000.

· List all cards and store cards. · Cancel any you don’t use. · Reduce limits on remaining cards to the minimum you need.

Boost your genuine savings and deposit

Lenders now scrutinise savings history more closely. A larger deposit not only reduces LVR (and therefore the risk premium), but also signals a low‑spending lifestyle. Aim to show at least 5% genuine savings as cash over three months, but 10% gives you a stronger negotiating position. A 20% deposit lets you avoid Lenders Mortgage Insurance (LMI), which also improves serviceability because LMI premiums add to the loan amount.

Choose a lender with a lower assessment rate

Not all banks use the standard 3% serviceability buffer. Some non‑bank lenders and smaller ADIs apply a 2.5% or even 2% buffer for borrowers with pristine credit and low LVRs. However, you must weigh this against potentially higher interest rates. In 2026, a few lenders offer a variable rate as low as 5.69% with a 2.5% buffer, giving an assessment rate of 8.19% instead of 8.69%. That 0.50% saving on the test rate can increase borrowing power by about 6–8%.

Include all verifiable income

Many borrowers forget to include:

· Consistent overtime or shift allowances · Bonuses averaged over the last two years · Freelance or side‑hustle income (if at least 12 months of tax returns) · Rental income from a current investment property (lenders typically use 75–80% of gross rent) · Government benefits (Family Tax Benefit, child care subsidy) that are likely to continue

Make sure your payslips, tax returns, and bank statements reflect these. A single omitted $10,000 of additional verifiable income could increase your DTI cap by $60,000 (6× $10,000).

Use a mortgage broker or direct lender comparison

Your borrowing power can vary by as much as 20% between lenders for the same profile. A broker (like HomeLoanAI) can access a panel of 40+ lenders and find the one whose policy fits your situation best – for example, a lender that offers a higher DTI cap for borrowers with low LVRs, or one that uses a lower expense benchmark.

The new government schemes that can help

Several federal and state schemes have been updated for the 2026 financial year. These can reduce the deposit you need, which indirectly improves your borrowing power because you can borrow a smaller amount while still entering the market.

First Home Buyer Guarantee (FHBG) – now without an income cap

From 1 July 2026, Housing Australia removed the income cap on the First Home Buyer Guarantee. The scheme lets eligible first home buyers purchase with a 5% deposit and no LMI, with the government guaranteeing up to 15% of the property’s value.

· Price caps: Sydney $1.5 million, Melbourne $950,000, Brisbane $1 million, Perth $850,000, and caps for other cities/regional areas. · Eligibility: Australian citizens or permanent residents, first home buyer or previous owner who hasn’t owned property in the last 10 years. · No income cap: Any income level qualifies.

Because your loan is smaller (95% LVR instead of 80%), your required borrowing is lower, and you might fit under the DTI cap more easily.

State‑based stamp duty concessions

Many states have increased their stamp duty thresholds for first home buyers in 2026. For example:

· New South Wales: no stamp duty on homes up to $1 million (first home buyers only). · Victoria: duty‑free up to $700,000, with concessions up to $950,000. · Queensland: concessions vary by value – check the Queensland Revenue Office.

Lower stamp duty means you need to borrow less, improving your loan‑to‑income ratio.

Frequently asked questions

Q: My income is $120,000 and I have no debts. How much can I borrow in 2026?
A: Under the DTI cap of 6:1, the maximum loan you can get is $720,000. However, the assessment rate buffer and living expenses will likely reduce that further. A typical result for a $120,000 single earner with good credit and a 10% deposit is between $550,000 and $620,000.

Q: Does the DTI cap apply to refinancing?
A: Yes, APRA’s DTI limit applies to new loans, including refinances with your existing lender or a new bank. If your current loan is above a 6:1 DTI ratio, you may find it difficult to refinance unless you can reduce the loan amount.

Q: Can I use rental income from an investment property to increase my borrowing capacity?
A: Yes, but lenders today typically apply a “haircut” of 20–25% to gross rental income. For instance, if you expect $30,000 annual rent, the lender may use only $22,500–$24,000. That still helps with serviceability, but it’s less generous than before.

Q: How long does it take to see my borrowing power increase after reducing credit card limits?
A: Immediately on application, once you show the card is closed or the limit reduced. Close cards at least 2–3 weeks before applying to ensure the credit bureau reflects the change.

Q: What if my DTI is already at 6:1 but I want a bigger loan?
A: You can consider applying with a non‑major lender that uses a higher internal DTI cap (e.g., 6.5–7x for high‑equity borrowers), or combine with a co‑borrower to increase household income. Alternatively, saving a larger deposit reduces the loan size needed.

Sources

· Australian Prudential Regulation Authority (APRA) – Debt‑to‑income limits for residential mortgage lending, February 2026. · Reserve Bank of Australia (RBA) – Cash rate target and monetary policy decisions, June 2026. · Housing Australia – First Home Buyer Guarantee scheme updates – 1 July 2026. · State Revenue Office (NSW) – First home buyer stamp duty concessions 2025‑2026. · Australian Bureau of Statistics – Household Expenditure Measure (HEM) benchmarks, 2025–26 update.

Want to check your own borrowing power?

Use our free borrowing power calculator to see exactly how much you can borrow with current rates, buffers, and DTI limits. It’s customised for 2026 policy settings.

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· How much can I borrow in 2026? – a detailed walk‑through of serviceability. · APRA serviceability buffer 2026 – why the 3% buffer is still in place. · DTI speed limit 2026 – how lenders apply the 6:1 cap.