Rate hike trims $18k in borrowing power as market cools

The RBA's third hike in 2026 cuts median-income household borrowing capacity by $18,000 and adds $119 a month to the average mortgage repayment.

The Reserve Bank of Australia's 5 May decision to lift the cash rate to 4.35% is having measurable consequences for borrowing capacity, property values and housing market momentum. Research from Cotality's Head of Research, Gerard Burg, published by Property Update, puts precise numbers on what the third 2026 rate hike means for buyers, existing owners and investors.

Borrowing Power Has Dropped Again

The mechanics of a rate rise are straightforward: higher rates reduce how much a bank will lend for the same income. Using average market interest rates, a 20% deposit and a 30-year principal and interest loan, today's 25-basis-point increase reduces the borrowing capacity of a household on the median income by around $18,000.

This is the third such reduction in 2026. The cumulative effect across 75 basis points of cash rate increases since February has meaningfully compressed buying capacity, particularly for households already stretched at the outer edge of serviceability.

For existing mortgage holders, the impact arrives as higher repayments. The average size of a new mortgage written in the December quarter of 2025 was $736,000. Full pass-through of today's hike adds approximately $119 per month — around $55 per fortnight — to minimum repayments on a loan of that size. Across the three 2026 hikes, total repayment increases on the average loan are running at well over $300 per month, depending on the outstanding balance and remaining loan term.

The arithmetic matters especially for those who bought near the top of their borrowing capacity when rates were lower. Use our [borrowing power calculator](/calculators/borrowing-power) to see exactly what you can service at today's rate level, and to understand the impact of any further moves.

Property Values Are Responding

Cotality's national Home Value Index grew by just 0.3% month-on-month in April 2026 — compared with a 1.3% monthly increase in October 2025. The deceleration has been steady since the RBA signalled its shift in policy stance in late 2025. More significantly, values in Sydney and Melbourne are now falling outright.

The pattern is not uniform. Lower-priced market segments are showing considerably more resilience than the mid-to-upper tiers. First home buyer demand — supported by government policy — is sustaining competition in entry-level price ranges. [Explore first home buyer loan options](/home-loans/first-home-buyer) to see what's available in the current market.

The supply side of the equation remains tight in a way that complicates the picture for buyers hoping price falls translate quickly into improved affordability. New dwelling prices rose 4.5% year-on-year in February, and RBA Governor Michele Bullock noted at the post-decision press conference that builders — particularly of high-rise apartments — are finding it increasingly uneconomic to complete projects because sale prices don't cover construction costs. That dynamic won't ease quickly, and it means structural undersupply will persist even as demand softens.

Rental CPI eased marginally in the March figures, but Cotality's market rent data shows an acceleration in rents in recent months. The official CPI rental measure is lagged, pointing to the risk that rental inflation will move higher in the data before it peaks — a factor the RBA will be monitoring closely.

Is Another Hike Coming?

Trimmed mean inflation — the RBA's preferred measure — has been unchanged at 3.3% since December last year, sitting firmly above the 2–3% target band despite three rate hikes. That persistence is the clearest signal that the board is unlikely to pivot toward easing any time soon.

Interbank markets have at least one further hike fully priced in, with a second seen as a high probability by January 2027. Westpac is currently the only major bank forecasting two additional increases; the other Big Four banks are tipping the RBA to hold for the foreseeable future. Labour market data offers little relief for the RBA's position — unemployment sat at 4.3% in March, largely unchanged since April 2024, indicating the economy still has enough momentum to sustain inflationary pressure from the demand side.

For buyers and investors, this ongoing uncertainty means stress-testing scenarios at 4.60% and 4.85% is not paranoid planning — it is responsible budgeting. Use our [repayment calculator](/calculators/repayment) to model how your monthly commitments look under different rate outcomes, and review [current investor loan rates](/home-loans/investor) if you are assessing yield and cash flow on an investment property.

Housing conditions are likely to continue softening from here. The demand-side headwinds — reduced borrowing capacity, higher repayments, eroded sentiment — build over time, and they don't reverse quickly. Even with supply constrained, the market is in a different place than it was a year ago.

Full Cotality analysis is available via [Property Update](https://propertyupdate.com.au/rba-fully-unwinds-last-years-rate-cuts-with-risk-tilted-for-further-hikes/).