The official cash rate has lifted again this week to 4.75%. This is the highest the rate has been since January 2009. Wednesday's hike was the 10th straight rise, with experts predicting the OCR to peak at 5.5% later this year.

The increase will impact any homeowner with a variable-rate, or anyone considering taking out a new loan. But it isn’t only repayments that will be impacted. The increasing cash rate also impacts borrowing power. But what is borrowing power and how much does an increase in cash rate and its flow-on effect to interest rates impact it?

What is borrowing power?

Borrowing power is the amount of money a lender is willing to let you borrow to purchase property. This is also sometimes referred to as your borrowing capacity. The way it is calculated varies depending on the lender, but in general it takes into consideration your income, assets, liabilities, credit health, debts, deposit amount and the value of the property.  

Lenders will often use a ‘test rate’ when calculating your ability to service a loan. This ‘test rate’ calculates a borrower’s ability to repay the loan at an interest rate higher than the current one. They do this to ensure that a borrower would be able to maintain repayments if rates were to increase in the future.

When you speak to your mortgage adviser, we calculate your borrowing power across the criteria of a number of lenders to give you an idea of how much you could borrow and therefore the top value of properties you may want to consider in your search.

When interest rates rise, your borrowing power is likely to decrease. This is because the repayments will increase and if your income isn’t also increasing, your ability to service that loan will drop.

What if I have pre-approval?

Pre-approval is when a lender indicates they are satisfied you meet their criteria to borrow a specified amount. This is very helpful in refining your property search and bidding with confidence. However, something to keep in mind is that pre-approvals are conditional. If your circumstances change or interest rates increase, it could impact your pre-approval.

Because of this, it is a good idea to get pre-approval when you are likely to start making offers rather than waiting until the end of the pre-approval period. If something has not become available until later in your pre-approval period, speak to your adviser to find out if it could have been impacted.

The important thing to keep in mind is that increasing interest rates do not mean doom and gloom. We have a panel of over 20 lenders and can find the right one for your needs. There are still competitive deals available, and we can help optimise your borrowing power through a number of steps and matching you with the right lender.