In early 2025, first home buyers across Australia caught a break. The RBA cut rates three times in February, May, and August, bringing the cash rate down to 3.60%, and borrowing capacity recovered meaningfully from its 2023 lows. The market responded. First home buyer activity picked up. Pre-approvals improved. The deposit-to-entry timeline looked achievable for the first time in years. Then 2026 arrived and quickly reversed the picture. Three consecutive RBA rate hikes in February, March, and May have now taken the cash rate back to 4.35%. And for first home buyers who borrow close to their maximum, which almost all of them do, the impact on borrowing power is direct, cumulative, and immediate.
Hike by Hike: What Three Rate Rises Have Done to Borrowing Power
Each 0.25% cash rate increase reduces borrowing capacity by approximately $15,000–$25,000 per hike for an average household. For a couple on $180,000 combined income, the three 2026 hikes combined have trimmed $50,000–$60,000 from their maximum loan amount.
Here is what that progression looks like:
Source
Why First Home Buyers Feel This More Than Anyone Else
Most property buyers choose to borrow somewhere below their maximum. First home buyers rarely have that luxury. They are entering the market at the tightest point of their financial position, with the highest loan-to-income ratio, smallest savings buffer, and highest LVR, and they are typically stretching to reach a suburb or property type that is already on the edge of what their income supports.
When borrowing capacity falls by around $50,000+, an existing homeowner with equity or a larger deposit may have more room to adjust. But for a first home buyer relying heavily on maximum borrowing power, that drop can remove an entire tier of properties from their search.
For example, a first home buyer who had pre-approval at $650,000 and now has a revised capacity of around $596,000 may have lost access to an entire tier of the property market. Pre-approvals issued before a rate hike may no longer reflect current lender serviceability settings, so buyers should recheck their numbers before making an offer.
Why the Buffer Makes the Impact Bigger Than the Hike Itself
Here is the compounding mechanism most borrowers don’t realise. Lenders are required to assess every new application at the borrower’s contracted rate plus 3 percentage point of the APRA serviceability buffer. So when the RBA cash rate rises 0.25%, the buffer moves with it. The assessment rate doesn’t just rise 0.25%; it rises 0.25% on top of the 3% that was already there.
With a variable rate now approximately 5.75% after the May hike, lenders assess first home buyer loan applications at around 8.75%. On a $600,000 loan, the repayment at 8.75% over 30 years is significantly higher than at the actual rate, and your income has to demonstrate it can cover that higher figure, even though you won’t actually pay it. This is why three hikes of 0.25% each create $50,000+ in lost borrowing capacity rather than a number that sounds proportionate.
What This Means for the Sydney and NSW Property Market
The capacity compression is already showing up in market data. Housing market momentum is slowing in Sydney and Melbourne, with lower-priced segments remaining more resilient due to continued first-home buyer demand. This points to a specific dynamic: buyers are not leaving the market entirely; they are being pushed down the price ladder into smaller properties, outer suburbs, and higher-density options they wouldn’t have considered before the hike cycle resumed.
For OM Financials clients across Rouse Hill, Box Hill, Kellyville, Schofields, Riverstone, and the Hills District of NSW, this is a market worth understanding carefully before making any pricing assumptions. Outer growth corridors with strong infrastructure pipelines are holding up better than central suburbs, where buyers are being priced out of their original targets.
What First Home Buyers Can Actually Do Right Now
→ Use the First Home Guarantee before any price cap changes
The First Home Guarantee (now with unlimited places from October 2025) allows eligible first home buyers to purchase with a 5% deposit and no LMI. On a $700,000 purchase, avoiding LMI saves approximately $15,000–$22,000 in upfront costs, capital that can go toward an offset account or a larger deposit buffer. The scheme is currently open to all eligible buyers without a waitlist. Check eligibility with OM Financials before your first property search.
Also Read: 5% Deposit Scheme: What Buyers Must Know in 2026
- Get a current pre-approval, not last month’s
Any pre-approval obtained before the May 2026 hike should be rechecked. Lenders reassess serviceability when rates change, and a figure approved earlier in the year may no longer reflect current lender serviceability settings. Submitting an offer based on an outdated pre-approval can create problems for first home buyers in a rising-rate environment. - Reduce credit card limits before applying
Many lenders assess a monthly repayment based on your total credit card limit, not just what you currently owe. For example, if a lender applies a 3% assessment rate, a $15,000 limit you never use could still add $450 per month to assessed expenses. Reducing or cancelling unused credit card limits before applying can help improve borrowing capacity. - Access the lender that suits your income profile, not just any lender
Borrowing capacity can vary significantly across lenders because each applies its own expense benchmarks, income treatment, credit card treatment and credit policy. A broker who works across 50+ lenders, as OM Financials does, can identify which lender may suit your specific profile before an application is submitted.
How OM Financials Helps First Home Buyers in 2026
Shyam Maggo and the OM Financials team work with first home buyers across NSW from Rouse Hill and Kellyville to Castle Hill, Hornsby, and Marsden Park through every phase of the rate cycle. The 2026 environment is challenging, but it is not without opportunity. The First Home Guarantee, Help to Buy scheme, and stamp duty concessions in NSW still provide meaningful assistance to eligible buyers. And in the current market, where competition has eased slightly in some segments, buyers who have the right finance structure and current pre-approval are in a stronger negotiating position than they were 12 months ago. The key is knowing what you can borrow at today’s rates, not what you could borrow before the hike cycle resumed.
FAQ: My pre-approval is from three months ago. Do I need to recheck it?
Answer: Yes, immediately, if you haven’t already. Pre-approvals are typically valid for 90 days from the lender’s assessment date, but every RBA hike changes the serviceability threshold used to calculate your maximum loan. After three 2026 hikes, your assessed limit may be $30,000–$60,000 lower than the pre-approval figure. OM Financials rechecks your borrowing capacity across current lender criteria at no charge before any offer is made.
Borrowing Power Is Down: But the Path to Home Ownership Still Exists
First-time home buyers are losing borrowing power again in 2026. Three rate hikes have taken back a meaningful portion of what the 2025 cuts restored, and the squeeze is felt most sharply by buyers who were already at the edge of their capacity. But the government schemes are stronger than they have ever been, competition has eased from its peak, and the buyers who act with accurate, current information are the ones who find the property that the others are still waiting to afford.
Book a free consultation with OM Financials or call Shyam to get your current borrowing capacity calculated, your scheme eligibility confirmed, and your application ready for the right lender.
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