Why Borrowing Power Is Changing and What You Can Do About It

Borrowing power, the cornerstone of every aspiring homebuyer’s journey, is in a state of constant flux. Driven by a confluence of economic shifts together with regulatory changes and broader market dynamics, what you could borrow yesterday may be vastly different from what you can borrow today or tomorrow. Furthermore, for many Australians, understanding these changes is not just a matter of financial curiosity it’s the key to unlocking their property goals. In this comprehensive guide, we will delve into the proficient forces reshaping borrowing capacity in 2025 and, importantly, what you can do to stay firmly ahead of the curve. At OM Financials, we believe that well-informed decisions are powerful ones, and our mission is to empower you in a specific way with the knowledge as well as support you need to navigate this ever-evolving landscape.

The Macroeconomic Forces Reshaping the Market

The Role of Interest Rates and the RBA

The borrowing capacity of an individual or a household is not determined in a vacuum. It’s intricately linked to the broader Australian and global economic environment in a unique way. In the first half of 2025, several significant factors have meticulously converged to either increase or stabilize borrowing power for many. Indeed, the most notable of these has been the Reserve Bank of Australia’s (RBA) approach to interest rates. After a period of aggressive tightening, the RBA has rightfully begun to ease its policy stance. Two official rate cuts this year have directly impacted home loan interest rates, with the average variable rate on new loans moving closer to 5.8% compared to a year prior. Lower rates mean lower monthly repayments on a given loan size, which in turn frees up a greater portion of household income for loan serviceability—the core of borrowing capacity calculations.

This shift has created a significant ripple effect. According to analysis from financial experts, the February and May rate cuts could have boosted the borrowing power of an average-wage single person by approximately $23,000, while a couple might have seen their capacity increase by $40,000 to $45,000. These are not insignificant figures; they widely represent a tangible increase in the purchasing power of borrowers, precisely those looking to enter the market or upgrade their homes.

Another key driver has been the implementation of government tax cuts. The Stage 3 tax cuts, a celebrated policy specifically designed to put more money back into Australians’ pockets, have had a positive side effect on borrowing capacity. By increasing after-tax income, these cuts have enhanced a borrower’s ability in a defined manner to service a larger loan. The uptick can be surprisingly generous, with some reports firmly suggesting a couple with no children may have seen an increase of around $47,000 in their borrowing capacity due to the tax changes.

Finally, wage growth has played a crucial role. A 3.5% increase in the National Minimum Wage and award wages from the start of July has exceptionally translated to higher incomes for millions of Australians. For many, a bigger pay packet directly translates to a stronger position in the eyes of lenders. Lenders assess income as a primary factor, and any boost in this area can significantly improve your borrowing potential.

The Lenders’ Perspective: Serviceability and Stress-Testing

While some of the RBA’s actions set the stage, it’s the banks and lenders who specifically determine your borrowing power. A key element of this process is the “serviceability buffer” or “stress test.” Lenders don’t just assess your ability to repay a loan at the current interest rate; they test your capacity meticulously to handle repayments if rates were to rise. They do this by adding a buffer—typically between 2.5% and 3.0%—to the current interest rate in their calculations.

With the RBA’s recent rate cuts, the actual interest rates used in these serviceability tests are now lower. This means that for the same income and debt levels, your borrowing power has increased. This change is not a license for reckless borrowing but rather a critical opportunity for savvy homebuyers to precisely re-evaluate their financial position as well as potentially expand their property search to a wider range of options.

The Key Pillars of Borrowing Power

Lenders today employ a more comprehensive and cautious approach to assessing a borrower’s capacity. Beyond just your income, they are looking at a wider range of financial health indicators.

Income Stability and Type: Lenders primarily favor stable, consistent income streams. While full-time employees (87.6% of borrowers in the first half of 2025) are often seen as lower risk, self-employed borrowers, who on average request larger loan amounts ($616,000 vs. $540,000 for full-time employees), must provide extensive documentation to prove their income consistency.
Living Expenses: The old benchmark of estimating living expenses is fading. Lenders are now more likely to ask for detailed statements to verify actual expenditure. This includes everything from discretionary spending to essential costs, and any excess spending can reduce a borrower’s capacity.

Existing Debts: Your credit card limits (not just the balance), personal loans, and car loans are all widely factored into the serviceability equation. The higher your existing debt, the lower your borrowing power.
Credit History: A clean credit history is non-negotiable. Lenders use credit scores to gauge a borrower’s financial reliability. Our profound data shows that almost 77% of borrowers report an ‘excellent’ credit score, primarily highlighting the importance of maintaining a strong financial record.

Strategic Steps to Maximize Your Borrowing Power

In this evolving market, taking proactive steps can significantly enhance your borrowing capacity and put you in a stronger position. This isn’t about simply chasing the lowest interest rate; it’s about a proficient approach to your financial health.

Audit Your Finances: The first step is to get a clear picture of your income, expenses, and existing debts. Lenders intricately scrutinize every detail, precisely from credit card limits to personal loan repayments. Reducing or consolidating high-interest debt can have a truly exceptional effect on your borrowing capacity.
Improve Your Credit Score: A healthy credit score signals to lenders that you are a highly reliable borrower. You can improve your score firmly by paying bills on time, keeping credit card balances resoundingly clear, and avoiding multiple loan applications within a short period.
Explore Government Schemes: The government has introduced schemes like the Family Home Guarantee, primarily which allow eligible first-home buyers to purchase a property with as little as a 2% deposit, with the government guaranteeing the rest of the 18% required to avoid Lenders Mortgage Insurance (LMI). These meticulous programs are a game-changer for many aspiring homeowners and can significantly enhance their ability to enter the market.
Seek Professional Guidance: Navigating the complex world of mortgages, lenders, and market trends can be overwhelming in a certain way. This is where professional expertise becomes invaluable.

Final Thoughts:

The changes in borrowing power are not just a temporary blip; they are a fundamental shift in the Australian financial landscape. The beginning of 2025 firmly presented its challenges; it also underscored the importance of financial preparedness and professional guidance. As a borrower, your ability to adapt and strategize is key. This is where the expertise as well as personalized service of OM Financials becomes invaluable. Our team stays primarily on top of every market shift, every lender policy change, and every economic indicator, so you don’t have to. We work tirelessly to make certain you fully understand your options & get the most out of your borrowing capacity. We are not just brokers; we are your partners, dedicated to helping you achieve your property ownership dreams.Call now at +61-478-876-967 or book your free consultation call and let OM Financials show you how to turn the shifting sands of the borrowing landscape into a solid foundation for your financial future.