How do rate drops affect borrowing capacity and what does this mean for the property market?

As of the 26th May, the ASX 30 Day Interbank Cash Rate Futures July 2025 contract was trading at 96.3, indicating a 75% expectation of an interest rate decrease to 3.60% at the next RBA Board meeting on the8th July. According to recent announcements by the Reserve Bank Board, the key factors driving the reduction in the cash rate target include slower than expected recovery in consumer demand, inflation tracking within the target band, global uncertainty and geopolitical tensions leading to potential increases in unemployment and stagnating growth. In terms of output, unit costs remain high while productivity remains low.

Homeowners, business owners, and others carrying debt should look to take advantage of the rate drops expected throughout the remainder of 2025. If most forecasts prove correct, and a further 0.50% reduction materialises, this will not only reduce lender repayments but also assist borrowers in servicing their debt and increasing their borrowing capacity.

How much do rate drops affect your borrowing capacity?

The answer isn’t simple without a personalised assessment, but, depending on variables like income, liabilities, dependents, and living expenses, a 0.25% (25 basis point) rate drop can increase borrowing capacity by approximately 3%. That means there could be a capacity swing of up to 15%-20% throughout 2025. RBA modelling indicates a 0.25% cut can boost borrowing capacity by roughly $20,000 to $30,000 for median-income households.

What happens to the property market?

The key question lingers, will the rate cuts stabilise the market or could they trigger another surge like the one seen in 2020, when the cash rate was slashed to 0.10%. There’s a strong argument that as borrowing capacity rises, buyers will naturally be inclined to spend more, having access to additional funds. As of February 2025, CoreLogic estimated that a 1% (100-point) decline in the cash rate could lead to a national house price increase of 6.1%, with significantly higher growth projected in Melbourne (12–18% for houses) and Sydney (16–19% for houses). In contrast, KPMG predicted a more moderate view in January 2025, estimating national house price growth of 3.3% in 2025 and 6% in 2026. Additionally, Westpac’s consumer sentiment survey showed an improvement in confidence, with the index rising 2.2% to 92.1 in May, recovering nearly a third of April’s decline, which was largely driven by tariff related concerns.

So what can you do to be prepared for rising property prices?

Whether you’re a first home buyer or a sophisticated investor, preparation is key. Understand your borrowing capacity, research your desired market, and develop a clear strategy. Surround yourself with the right professionals to guide your decisions. A mortgage broker, accountant, conveyancer, legal advisor, and buyer’s advocate can all help you assess your situation and position you for the best possible outcome. While the future is always uncertain and market conditions can change, recent data trends indicate an increase in borrowing capacity, alongside signs of renewed property market activity. For those observing the market, this may be a useful time to consider available options based on personal circumstances and goals.