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

With two 25 basis point rate cuts already implemented in 2025, how many more can we expect? There are mixed opinions across the lenders, with CBA and Westpac predicting a further 50 basis points by the end of the year. ANZ is forecasting another 25 points in August and an additional 25 points in Q1 2026, while NAB remains the most bullish—originally predicting a further four cuts to reach 2.6% by February 2026. However, they overestimated expectations at the May meeting and have since increased their forecast to 3.1% by December 2025.

As of 26 May, the ASX 30-Day Interbank Cash Rate Futures July 2025 contract was trading at 96.3, indicating a 75% expectation of an official cash rate decrease to 3.60% at the next RBA Board meeting on 8 July.

According to recent announcements by the Reserve Bank of Australia (RBA), 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 investors 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 borrowing capacity.

How much do rate cuts affect your borrowing capacity?

The answer isn’t simple without a personalised assessment. However, depending on variables like income, liabilities, dependents, and living expenses, a 0.25% (25 basis point) rate cut can increase borrowing capacity by approximately 2%–3%. This means there could be a capacity swing of over 10% with the conservative outlook of a total of four rate cuts through 2025.

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 basis 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 2025—recovering nearly a third of April’s decline, which was largely driven by tariff-related concerns.

What can you do to be prepared for rising property prices?

Whether you’re a first home buyer or a seasoned 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 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, now may be an opportune time to explore options based on your circumstances and goals.