The Rate Floor Has Landed: What a 4.35% Baseline Means for Your Borrowing Power

Last week's Federal Budget grabbed most of the headlines, and rightly so. But there's a second story running alongside it that matters just as much to anyone thinking about a mortgage right now: the formalisation of the Big Four banks' 4.35% servicing baseline.

These two developments — the Budget's tax overhaul and the new lending floor — are compounding each other in ways that create real challenges for borrowers. Here's what you need to know.

The 4.35% Servicing Baseline: What Does It Actually Mean?

When banks assess your loan application, they don't use the actual interest rate you'll be paying — they stress-test your repayments at a higher rate to ensure you can handle increases. This is called the serviceability buffer or assessment rate.

With the cash rate sitting at 4.35%, the major banks have now hard-coded this into their servicing calculators. Combined with the standard 3% serviceability buffer applied by APRA, effective assessment rates are now in the range of 7–9% depending on the lender.

In practical terms: the amount you can borrow has fallen. If you were pre-approved 12–18 months ago, it's worth getting that figure reassessed against current settings.

"Borrowing power is facing a double-sided squeeze — higher assessment rates from the RBA's rate settings, combined with the removal of negative gearing 'boosts' from bank calculators for established investment purchases."

Negative Gearing Removed from Servicing Calculators

Here's where the Budget and the lending environment collide. Banks have historically allowed investors to count their negative gearing tax benefit as part of their income when assessing serviceability. That is, the tax refund you'd receive from offsetting rental losses against personal income was treated as a cash flow positive.

With negative gearing for established properties now quarantined, lenders are removing this boost from their calculations for established investment purchases. The result: lower assessed borrowing capacity for investors looking at established properties.

For new builds, this doesn't apply — negative gearing remains intact, and the serviceability treatment follows accordingly.

ABS Data Confirms the Trend

The latest ABS lending data released this week showed a 6.2% drop in new home lending. This validates what many brokers have been seeing on the ground — the combination of high property prices and a 4.35% cash rate is genuinely impacting consumer confidence and borrowing capacity.

This isn't simply a sentiment issue. The maths has changed. Fewer people qualify for the loan sizes they need at current prices and current rates.

A Two-Speed Market Is Emerging

The rate environment isn't hitting every market equally. Sydney and Melbourne, where the gap between incomes and property prices is largest, are feeling the squeeze most acutely. Demand is cooling at the higher end, and borrowers are finding their options more constrained.

Meanwhile, Perth and Brisbane continue to be pushed forward by supply shortages. Investors and buyers in those markets are competing hard, despite the tighter lending environment. This is creating a genuinely confusing picture for anyone trying to make national investment decisions.

What This Means If You're Buying or Refinancing

Whether you're a first home buyer, an upgrader, or an investor, the practical implications are similar: your borrowing power needs to be reassessed against today's numbers, not last year's.

A few things worth considering right now:

•      If you have a pre-approval, check whether it's still valid under the current assessment rate settings

•      If you're an investor weighing established vs. new build, the lending treatment and tax position now both favour new construction

•      If you're refinancing, compare carefully — lenders are interpreting the new environment differently and there's real variation in what's on offer

•      If you hold investment property in a trust, factor in the 2028 trust tax changes when modelling your long-term position

The good news is that lenders are competing for quality borrowers, and there are still strong options available. The key is understanding the new parameters and working within them strategically.

Let's Talk Through Your Numbers

Every client's situation is different. Some will find their capacity has reduced only modestly; others may need to rethink their approach more significantly. Either way, getting clarity sooner rather than later gives you more options.

I'm available to run through your specific borrowing position under the current settings — reach out any time and we'll work through it together.

Phil Aldridge  |  Mortgage Broker  |  This article is general information only and does not constitute financial or legal advice. Please consult a qualified professional regarding your individual circumstances.