RBA May 2026 Rate Rise: Borrowing Power Hit

The RBA has raised the cash rate twice in 2026 already, in February and March, lifting it to 4.10%. Now all four major banks are predicting a third rise at the May board meeting, pushing it to 4.35%. Westpac goes further, forecasting two more hikes in June and August that would take the cash rate to 4.85% by the end of August, its highest level since 2008.

For first home buyers who are currently pre-approved, actively searching, or still building a deposit, each rate move has a direct dollar impact on what you can borrow and what you will repay each month. Here is what the numbers actually look like.

Where rates stand right now

The cash rate at 4.10% translates to standard variable mortgage rates of roughly 6.85% to 7.10% across major lenders. A 25 basis point rise in May would push variable rates to approximately 7.10% to 7.35%.

The driver is persistent inflation in services, particularly rent, insurance, and healthcare costs, which have remained above the RBA's 2% to 3% target band. The futures market is pricing in approximately 70% probability of a May rise as of late April 2026.

Whether the full Westpac scenario of three consecutive hikes plays out depends heavily on Q1 2026 inflation data due in late April. If services inflation surprises to the downside, the RBA may pause after May. But the market consensus has clearly shifted: further tightening is the base case, not an outlier scenario.

What a 25bps rise does to your repayments

On a $600,000 loan over 30 years, the repayment increase from each 25 basis point rise is modest in isolation but accumulates quickly:

If Westpac's full scenario lands, a borrower with a $600,000 variable loan would be paying $224 more per month by August compared to today, or roughly $2,688 extra per year. Use the Interest Rate Shock Tester to run the same calculation for your specific loan amount.

The serviceability buffer double-hit

When you apply for a home loan, the bank does not assess your ability to repay at the current variable rate. Under APRA guidelines, lenders must test that you can afford repayments at the loan rate plus 3%. This serviceability buffer applies on top of whatever the rate is at application time.

At today's variable rate of ~6.85%, lenders are already assessing your repayment capacity at roughly 9.85%. If the May rise pushes variable rates to 7.10%, the assessment rate rises to 10.10%. Every rate rise tightens both your actual repayment and the test rate simultaneously.

How this reduces borrowing capacity by income

The table below shows estimated maximum borrowing for a single applicant with no other debts, using the assessment rate (variable rate plus 3% buffer) and the standard HEM living expense floor. These are indicative figures only.

A buyer on $100,000 could see their maximum borrowing shrink by approximately $55,000 between now and August if Westpac's full forecast is correct. For buyers targeting properties near the top of their current approval limit, this is a meaningful constraint. For buyers using the Borrowing Power Calculator, model the "worst case" scenario at 7.60% variable to understand how much buffer you have.

Three scenarios for buyers right now

You are pre-approved and searching

Pre-approvals typically remain valid for 90 days, though lenders can reassess at settlement if rates move materially. If your April approval was issued before a May rise, the lender may honour it through to the settlement date, but this is not guaranteed. Talk to your lender or broker now about whether your approval is subject to reassessment on rate changes. If you find a property before the May meeting, consider whether the timeline to exchange contracts is feasible.

You are still saving for a deposit

Each month of additional saving adds to your deposit but may cost more in borrowing capacity than it gains if rates continue rising. At $20,000 to $25,000 capacity reduction per 25bps rise, a $500 deposit increase each month is unlikely to offset the capacity loss if two or three more hikes land. Consider whether the available government schemes could bring forward your purchase timeline. The First Home Guarantee allows you to buy with a 5% deposit and no Lenders Mortgage Insurance, which can reduce the deposit hurdle significantly.

You are weighing fixed vs variable

Banks have already moved fixed rates up in anticipation of RBA decisions. Two-year fixed rates are currently around 7.20% at major lenders. If Westpac's peak of 4.85% cash rate eventuates and the cash rate then eases in 2027 (as economists currently forecast), borrowers who fixed at 7.20% today would be paying above the eventual variable rate for the tail end of their fixed term. If the Westpac scenario does not fully play out, fixing at 7.20% for two years is effectively paying a premium for certainty. This is a risk-tolerance question rather than a clear mathematical winner. Use the Mortgage Repayment Comparison to model both paths side by side with a fixed-to-variable rollover.

One practical note for buyers using the First Home Guarantee or Help to Buy: both schemes require the lender to be on the relevant panel. Fixed rate products are not available from every panel lender, so check before committing to a fixed structure.

The silver lining: a two-speed market

Rising rates are having uneven effects across the country. In Sydney and Melbourne, where prices are already cooling, further rate rises may accelerate the price correction. SQM Research is forecasting falls of 1% to 6% for both cities across 2026. For buyers in those markets, a reduction in borrowing capacity may be partly offset by lower purchase prices.

In Perth and Brisbane, that trade-off is less clear. Prices in both cities are still rising despite two rate hikes already, driven by tight listing supply rather than demand strength. Buyers in those markets are being squeezed on both fronts: capacity falling and prices still climbing.

If you are in QLD: the $30,000 First Home Owner Grant drops to $15,000 on July 1, 2026. That grant deadline is the dominant factor for many QLD buyers right now, independent of what the RBA does. The Grant Stacker shows the full picture of what is available and expiring in your state.

How government schemes change the maths

Rate rises hurt proportionally more on larger loans. This is where schemes that reduce your loan size become more valuable in a rising rate environment, not less.

Under Help to Buy, the government takes a 30% to 40% equity share, which means a buyer purchasing a $700,000 property with a 40% equity contribution from the government would borrow approximately $406,000 rather than $665,000 (at 5% deposit). The monthly repayment difference between those two loan sizes at 7.10% is around $1,760 per month. Every future rate rise applies to a smaller base, so the impact per hike is roughly 40% lower than it would be on the full loan.

The Scheme Comparison Tool models Help to Buy against the 5% Deposit Guarantee across your income, state, and property price to show which structure leaves you better positioned in a rising rate environment.

What to do before the May meeting

• Run a stress test now: use the Interest Rate Shock Tester to see your repayments at 7.35% (post-May) and 7.60% (post-August). If either number is uncomfortable, your budget needs adjusting before you commit.
• Recheck your borrowing capacity: if you last modelled your numbers at a lower rate, open the Borrowing Power Calculator and update to the current variable rate. Add 0.25% to that to model the May scenario.
• Check your pre-approval conditions: ask your lender whether the approval locks in the assessed rate or resets on settlement.
• Compare scheme options: if rising rates are pushing your target property price toward your capacity limit, check whether Help to Buy or the First Home Guarantee would meaningfully change your position. The Scheme Comparison Tool makes this comparison straightforward.
• Check grant deadlines in your state: QLD and TAS both have June 30 cutoffs for grants worth $15,000 to $30,000. If you are in either state, the grant clock may matter more than the rate clock.

Bottom line

A May rise of 25 basis points is widely expected and is largely priced in to fixed rate offers already. The more consequential question is whether June and August hikes follow. If the full Westpac forecast plays out, buyers approved today for a particular price point may find that same property at the outer edge of their capacity by September. The practical response is to either move sooner with the numbers you have now, stress-test those numbers thoroughly against the worst case, or reduce your target price to create headroom. Running the numbers specifically, with your income, your state, and the current rate, is more useful than any general forecast.