Australia’s housing finance market is facing its steepest downturn since the height of the COVID-19 pandemic, driven by a simultaneous retreat from the market by two of its largest buyer groups: first-time homeowners and property investors. New data released by credit reporting agency Equifax confirms that a toxic combination of repeated central bank interest rate increases and recent federal government policy changes have sent broader mortgage demand crashing, pushing key metrics into deep negative territory.
Kevin James, chief solutions officer for Equifax Australia, told NewsWire that both first-time buyers and existing property owners seeking additional investment mortgages have pulled back sharply from the market in recent months. “We saw first-home buyers drop fairly substantially and anyone who has two or more mortgages applying for a second or a third one, we saw that drop dramatically as well,” James explained.
The ripple effects of rate increases have drastically reduced how much prospective borrowers can afford to borrow. Every 25 basis point rate hike cuts an individual’s borrowing capacity by between $20,000 and $40,000, James said, eroding purchasing power for buyers already stretching to enter the market. The Reserve Bank of Australia (RBA) has lifted the official cash rate three times in 2026 – by 25 basis points each in February, March, and May – as part of its ongoing fight to bring persistent inflation back within its 2-3% target range. While the RBA held rates steady at 4.35% in June, and markets broadly expect another hold after the August board meeting, the cumulative impact of earlier hikes has already priced out many aspiring buyers.
First-time buyers have borne the brunt of the current downturn, with government policy designed to lower entry barriers actually compounding pressure from rising rates. The federal government’s 5% deposit scheme, which aims to help buyers save for a deposit by removing the requirement for lenders mortgage insurance, has increased the total amount buyers need to borrow to secure a home in their desired location. “Because you’re not putting 20 per cent in, you actually need to borrow more if you want to get into the property and the area that you want to get into,” James said. “Then you get hit with this capacity challenge again about how much do I earn, how much I need to earn, how much on my payments. When interest rates go up, it’s the loss of capacity to borrow and buy in the same area.”
Additional policy shifts introduced in the May federal budget have also dampened activity among both first-time buyers and investors. Changes to negative gearing and capital gains tax (CGT) now limit negative gearing concessions for residential investment properties to new builds only, replacing the 50% CGT discount with cost base indexation. The policy changes have hit a common first-time buyer strategy particularly hard: rentvesting, where buyers purchase an affordable property in one location to build equity while continuing to rent in their preferred area. That strategy is now far less financially viable than it was before the budget changes.
Official Equifax figures illustrate the scale of the current downturn: mortgage demand swung from a 3.7% annual increase in the 12 months to March 2026 to a 12.5% annual contraction in the 12 months to June. Between the first and second quarters of 2026, the average size of a new mortgage application dropped by $8,000 nationally. Major capital cities on Australia’s eastern seaboard have recorded the sharpest declines: Brisbane saw an average $15,000 drop in application size, followed by Sydney at $12,000 and Melbourne at $11,000, all outpacing the national contraction by a wide margin. “We haven’t seen such a big quarter-on-quarter drop since Covid, that was the last time we saw that,” James noted.
Beyond suppressing new demand, the higher rate environment has put growing financial pressure on existing mortgage holders, with a rising share of Australian households struggling to meet their repayment obligations. Equifax data shows that requests for mortgage hardship assistance rose 5.3% quarter-on-quarter in June.
Sally Tindall, data insights director at comparison site Canstar, advised borrowers struggling with rising repayments to proactively shop around for better rates, noting that loyal customers who stay with their existing lender often pay far more than necessary. “We’ve done the maths on this and it is really quite startling how much someone can gain by going from a compliant borrower into a proactive one,” she said. For example, a borrower who took out a $600,000 mortgage five years ago with 25 years remaining and has not adjusted their rate since could be paying a variable rate of 6.98%. Switching to a rate below 6% would save them nearly $11,000 over two years, even after accounting for a typical $1,150 break fee, Tindall calculated.
While banks are no longer running the aggressive mortgage price wars seen in 2022, Tindall said there are still significant benefits for borrowers who negotiate or switch. She added that borrowers facing severe financial hardship should reach out to their lender proactively rather than ignoring the problem. “If you’re looking like you’ll miss a mortgage repayment, don’t put your head in the sand,” she said. “If that is becoming the reality, it’s so important to call your bank before you miss a repayment. There’s more options available to you if you let them know in advance, they can put you on a hardship plan.” While entering a hardship plan will be recorded on a borrower’s credit file, Tindall noted that banks are generally willing to work with borrowers to find a sustainable solution.