Why can I borrow less even though house prices are falling?

Borrowing capacity is set by interest rates and the bank's buffer, not by property prices. Rate rises reduce what the bank will lend, and falling prices generally don't offset all of it.

What is the 3% serviceability buffer?

Most lenders test whether you could afford repayments at your actual rate plus around 3%. Some smaller lenders use 2%, and most have a minimum floor rate. It's the bank's stress test.

Do falling property prices make up for lower borrowing capacity?

Partly. Lower prices bring some properties back within reach, but for most people this year the drop in borrowing has been larger than the drop in prices.

How do I know if I can afford more or less than earlier this year?

Rerun your numbers at today's rates and compare them with current prices for what you're looking at. That tells you whether the market has come back to you.

Home / Straight Answers / Prices down, borrowing down

Straight Answers · How this works

Prices are dropping, so why can I borrow less?

Bayley Clarke · Mortgage broker on the road · Last checked 16 October 2026 · 3 min read

The short answer

Because how much you can borrow is driven by interest rates, not property prices. The rate rises this year have cut borrowing capacity, and the bank is stress testing you on top of that by adding a 3% buffer to the rate.

Prices coming down does help. Some of the prices you were seeing in January, February, March don't exist anymore. It may even out a little, but generally not enough to be like for like, because the rate rises have really moved the needle.

The 60 second version, filmed from the driver's seat. The rest of this page is the detail underneath it.

Two different things moving at once

Property prices and borrowing capacity feel like they should move together, but they're set by different things. Prices come from buyers and sellers. Your borrowing comes from the bank's calculation of whether your income can carry the repayments, and that calculation runs on interest rates.

So when rates go up, your borrowing drops, regardless of what prices are doing. If prices drop at the same time, both numbers are falling. The question is which one fell further. For most people this year, borrowing has fallen faster.

Why the buffer makes it bite harder

The bank doesn't test you at the rate you'll pay. Most lenders add a buffer of around 3% and check you could still afford the repayments at that higher rate. Some smaller lenders use a 2% buffer, and most also have a minimum floor rate they won't test below.

Every rate rise lifts that tested rate too. So the same income is being stretched over a more expensive repayment on paper, and the loan it supports shrinks. That's why a handful of rate rises can take tens of thousands off what you can borrow, which is more than prices have generally come back.

What that means for your search

The good news is that some of the properties that were out of reach at the start of the year have come back toward you. The not so good news is that your ceiling may have come down to meet them, or further.

So for you that means the price you had in your head earlier in the year isn't the number to plan around. Neither is what you see on the listings. The number to plan around is what the banks will lend you today, plus your deposit, less your costs. Know that, and you can tell straight away whether a dropping market is working for you or not.

The honest bit: nobody can tell you how this nets out without your numbers

Whether falling prices outweigh your lower borrowing depends on what you were looking at, where, and what your income and debts look like now. For some people it's close to a wash. For most, the rate side has hit harder.

If you don't know your numbers, we need to have a chat about it, because otherwise you're guessing at both sides of the equation.

Want to know where your ceiling sits now?

A 30 minute call. We run your income, debts and spending through the lenders at today's settings and put it next to what you've been looking at, so you know whether the market's come back to you.

Book a 30 minute call Call 0437 189 939

No cost to you. The bank pays me when a loan settles. · How I get paid

Next question

I live rent free with family. Why does the bank add a rent expense?

Banks assume you won't live at home forever, so they add a notional rent expense.