Prospective home buyers seeking loans are still challenged despite lower property prices, as banks run the ruler over living expenses, sticky rates constrain borrowing capacity and settings for investor lending change, mortgage brokers say.

Home-loan demand has plunged amid a higher cash rate and economic uncertainty, and the country’s largest home lender, Commonwealth Bank, on Wednesday said new applications for mortgages had fallen 15 per cent since the May budget. But even buyers in the market are finding it hard to borrow as much as they could previously.

Chief executive of mortgage broker Finspo, Angus Gilfillan, said it remained difficult for property buyers, as three interest rate rises this year cut borrowing power. The Reserve Bank on Tuesday kept the cash rate steady at 4.35 per cent.

“Whilst [property] prices might be down 1 to 2 per cent across a number of the capital cities, that’s off the back of substantial price increases over the last three or four years,” he said, noting three rate rises typically sliced borrowing capacity by about 7 per cent.

For first home buyers, even those on stable incomes who would have qualified in a lower-rate environment, could fall just short on affordability when updating their “approval in principle” which generally needs to be done every three months, said Gilfillan.

“We’re seeing that some of those customers are actually getting approved for a smaller amount because of the impact of three cumulative rate rises.”

More first home buyers were hoping to buy for a lower price, to value lifestyle over a better property, in a shift from even 12 months ago, said Whale Finance director Andrew Wheatley.

“One thing I’m hearing a lot more lately from first-time buyers isn’t ‘can I borrow more?’ it’s ‘I’m worried I won’t be able to afford the repayments’,” he said.

At the same time, cost-of-living pressures have reduced the amount of money people have for mortgage repayments, said Gilfillan, with lenders getting more granular on living expenses as inflation fuels price rises.

“Petrol prices, price of food and groceries are all up, and that is all taken into account when lenders assess your borrowing capacity,” he said, noting the Household Expenditure Measure benchmark used by many lenders to estimate living expenses.

“The lender will always assume a minimum amount of expenses, but if the customer declared expenses are higher than that, they’ll take that higher amount.”

Chris Foster-Ramsay, of Foster Ramsay Finance, agreed that lenders were considering up-to-date data on the rising cost of living for prospective borrowers.

“Because they use the higher of the two, there are cases where your borrowing capacity is impacted,” he said.

Banks were scrutinising expenses as living costs had risen, with applicants having to “declare everything”, said high-net-worth specialist Matthew Mohl, head of private clients at mortgage broker Alcove Private.

Lenders who also hold a loan applicant’s banking accounts have access to a client’s profile via AI software, he said.

“They’ve got a rough idea and then through the software they’ve got, they can actually go ‘this is Uber Eats, this is Uber Eats’, ... they can actually pinpoint, ‘oh … this customer has insurances, memberships, school fees, everything’.”

Alongside higher interest rates, investors are mulling reforms to negative gearing and capital gains tax and re-evaluating investment strategies. Westpac this week forecast growth in demand for housing credit from investors would sink to 4.4 per cent in the 2028 financial year from 9.1 per cent in FY 2026.

Prospective investors were having to reassess if they could afford to hold an investment property without getting the negative-gearing benefits each year in their tax return, Wheatley said.

“It has just changed the whole calculus of, ‘can we afford this?’” he said. “A lot of my clients who were planning to get investment properties this year and were getting pre-approvals this year, said, ‘I am just going to put it on pause’.”

A range of lenders, Mohl said, had modified their borrowing calculators following the budget reforms.

“When it comes to investor loans … some banks are doing negative gearing for this year and then none for the remaining portion after a certain time next year,” he said. “Some banks are just going … ‘we’re just going to do a blanket stop from here’, and that has significantly reduced people’s ability and capacities to borrow.”

As an example, Mohl said one investor who could borrow $900,000 in January, may only be able to get $700,000 today.

Still, Gilfillan said Finspo had experienced a bounce-back in investment-loan appetite in August after a slowdown earlier this year, potentially as subdued property prices might look like buying opportunities.

“There’s still a very strong cultural element in Australia around property and willingness to buy property, invest in property,” he said.

“Lenders were very quick to change their treatment of negative gearing … So we’re certainly seeing that has also impacted customers’ ability to get their loan size, and their borrowing power has come down since those changes.”

More: