The Reserve Bank has lifted the cash rate three times in 2026, in February, March and May, taking it to 4.35% and cancelling out nearly all of last year's cuts. For anyone planning to borrow, the consequence is direct: you can borrow less than you could a year ago, and the gap is larger than the rate move alone suggests.

The hikes, and what reversed

Three consecutive increases of 0.25% each. The cash rate went from 4.10% at the start of the year to 4.35% by the May meeting, undoing the relief variable-rate borrowers got from the three cuts in 2025. The driver was inflation: headline CPI hit 4.6% in March, its highest rate since 2023. On a $600,000 loan over 25 years, the three hikes add about $272 a month to repayments.

Why your borrowing capacity falls faster than the rate

When a bank assesses how much it will lend you, it does not test you at the actual rate. It adds a serviceability buffer, currently 3 percentage points under APRA's guidance, and checks that you could still pay at that higher rate. With variable mortgage rates sitting higher again, the assessment rate you are tested against now lands around 9% or above. As a rough guide, each 0.25% rate rise trims borrowing capacity by around 2 to 3% for a typical borrower. Across three hikes, that can remove something in the order of 6 to 9% of your maximum loan.

Where rates go next

The banks are split. ANZ and CBA expect the cash rate to hold for the rest of 2026. NAB forecasts one more hike in August to 4.60%. Westpac sees two more, in August and September, taking it to 4.85%. None of the major forecasts has rates falling this year, with cuts not expected until 2027 at the earliest.

The takeaway

The cheap-money window has closed. Your borrowing capacity today is smaller than it was, the assessment rate testing you is around 9%, and the market you are buying into has not discounted to compensate. Knowing your real, current capacity is the first move before you start looking.

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