What rising prices mean for your home loan strategy in 2026

Melbourne house prices forecast to hit $1.17M in 2026. Learn how to structure your home loan, calculate deposits, and get pre-approved to secure property in a rising market.

The Australian property market is heading for another strong year in 2026, with Domain forecasting record prices across all capital cities. Melbourne’s median house price is tipped to hit $1.17 million - an increase of around $87,000 from current levels.

If you’re planning to buy property this year, understanding how these price movements affect your borrowing capacity, deposit requirements, and financing options isn’t just helpful - it’s essential.

Here’s what you need to know about securing finance in a rising market.

The 2026 market: Three forces reshaping property finance

Three major factors are driving price growth this year, and each one creates specific implications for your home loan strategy.

First Home Guarantee Scheme creates early momentum

The expanded First Home Guarantee Scheme is expected to lift prices by up to 6.6% in its first year. Domain’s research suggests this effect is similar to several interest rate cuts happening simultaneously.

For first home buyers, this scheme remains powerful. You can enter the market with just a 5% deposit without paying Lenders Mortgage Insurance. That’s $40,000 instead of $160,000 for an $800,000 purchase.

But there’s a catch: every other first home buyer has access to the same scheme. The surge in FHB activity will be most pronounced in the first half of 2026, creating intense competition for entry-level properties.

Finance implication: Get your pre-approval locked in early. January and February will see high application volumes. Lenders take longer to process applications during peak periods, and you don’t want to miss out on a property because your finance wasn’t ready.

Interest rate environment remains cautious

The RBA is expected to maintain a cautious approach throughout 2026. While some easing is anticipated, don’t expect dramatic drops.

Domain’s Chief of Research, Dr Nicola Powell, noted that “a cautious RBA should help the market move toward more balanced conditions by the end of 2026.”

This means borrowing costs will remain relatively stable but elevated compared to the pandemic-era lows.

Finance implication: Don’t wait for major rate cuts before buying. The modest easing expected won’t offset rising property prices. A 0.25% rate reduction saves you roughly $1,250 annually on a $500,000 loan. Meanwhile, a 7% price increase on an $800,000 property costs you an additional $56,000 in purchase price.

New housing supply moderates growth later in year

Building activity is finally picking up after years of supply constraints. New housing stock will start entering the market as 2026 progresses, moderating price growth in the second half.

For buyers, this creates a strategic decision point: buy early in a competitive market, or wait for more stock and potentially cooler conditions later in the year.

Finance implication: Your strategy depends on your buyer category and financial position. First home buyers using government guarantees benefit from moving early. Upgraders with equity might prefer waiting for more choice. Investors should weigh early capital gains against rental yield compression as new supply hits.

Deposit requirements in a rising market: Running the numbers

Let’s be specific about what rising prices mean for your deposit and upfront costs.

Melbourne’s median house price is forecast to reach $1.17 million. For a property at this price point, here’s how different deposit levels affect your total upfront costs:

Most buyers won’t be purchasing at the median. Here’s the same breakdown for an $800,000 property - more typical for first home buyers or downsizers in Melbourne’s outer suburbs:

The key insight: while a smaller deposit gets you into the market sooner, LMI adds significant cost. For the $800,000 property example, the difference between a 5% and 20% deposit is $82,000 in cash upfront - but you’re also paying $38,000 in LMI with the smaller deposit.

If you capitalise that LMI into your loan at 6.5% interest over 30 years, you’ll pay an additional $50,000+ in interest on top of the original $38,000 premium.

Buyer type strategies: Tailoring your finance approach

Different buyer categories face different challenges in the 2026 market. Here’s how to structure your finance strategy based on your situation.

First home buyers: Move fast, but move smart

The First Home Guarantee Scheme gives you a genuine advantage, but only if you use it strategically.

Your edge: 5% deposit without LMI. On an $800,000 property, this means entering the market with $40,000 instead of $160,000. That’s $120,000 you can keep in savings, investments, or use to furnish your new home.

Your challenge: Every other first home buyer has the same advantage. Competition will be fierce, especially in January-March when scheme momentum peaks.

Finance strategy:

• Get pre-approved now. Don’t wait until you find a property. Pre-approval takes 2-7 business days with complete documentation, longer during peak periods. Having pre-approval means you can make offers with confidence.

• Understand your true borrowing capacity. Lenders assess your ability to service a loan at higher interest rates than you’ll actually pay (the assessment buffer). With property prices rising, you need to know your absolute ceiling to avoid wasting time viewing properties you can’t afford.

• Factor in rate rises. Even modest increases in rates affect your repayments. On a $760,000 loan at 6.5%, a 0.5% rate rise adds $320 monthly to your repayments. Make sure your budget has breathing room.

• Consider smaller deposits carefully. Yes, you can borrow with 5% down, but that doesn’t mean you should. If you can save 10% ($80,000) instead of 5% ($40,000), you’ll borrow $40,000 less and save approximately $65,000 in interest over the loan term.

Upgraders: Equity is your weapon

If you already own property, you’re entering 2026 with a significant advantage: your existing home has likely increased in value.

Your edge: Rising prices mean more equity. If your Melbourne home was worth $900,000 last year and is now worth $1 million, you’ve gained $100,000 in usable equity (assuming you keep 20% in your current property).

Your challenge: You’re competing with first home buyers who have government backing and downsizers with large cash deposits. In suburbs where all three buyer types converge, expect fierce competition.

Finance strategy:

• Get a current valuation. Many upgraders underestimate their available equity. Desktop valuations are free and take 24-48 hours. Knowing your exact equity position helps you determine what you can afford to borrow.

• Understand cross-collateralisation. If you use your current property as security for your new purchase, you’re cross-collateralising. This can work well, but it also means you can’t sell or refinance one property without lender consent on both.

• Time your purchase and sale carefully. Buying before selling creates certainty but requires bridging finance. Selling before buying creates cash but means temporary rental accommodation. With prices tipped to moderate in the second half of 2026, selling in Q1-Q2 and buying in Q3-Q4 could be optimal.

• Consider offset accounts. If you’re selling with a long settlement period (60-90 days), park your sale proceeds in an offset account against your new loan. This reduces interest immediately while keeping funds accessible if needed.

Downsizers: You’re in the box seat

Domain’s forecast specifically mentions downsizers will be “in a favourable position with higher sale prices and more options, particularly in the unit market.”

Your edge: You’re selling into a strong market and buying into a segment (units) where supply is increasing. This creates genuine negotiating power.

Your challenge: Emotional attachment to the family home can delay decision-making. Meanwhile, the market moves.

Finance strategy:

• Explore equity release if not selling immediately. If you want to buy before selling, a reverse mortgage or equity release lets you access your home’s value without monthly repayments. This suits retirees with limited income but substantial property equity.

• Factor in downsizer contributions to super. If you’re 55+ and selling your home, you can contribute up to $300,000 from the sale proceeds into superannuation. This doesn’t count toward contribution caps and can create significant tax advantages.

• Consider interest-only loans short-term. If buying before selling, an interest-only loan on your new property keeps repayments low while you prepare your current home for sale. Once sold, you can pay down the loan and switch to principal and interest.

• Don’t over-borrow based on old income. Lenders assess retirees differently. Even with substantial assets, limited income restricts borrowing. If you need a mortgage in retirement, expect to prove your pension, super drawdowns, and investment income can service the loan comfortably.

Investors: First half strength, second half caution

Domain’s research suggests investors will benefit from “strong conditions in the first half of 2026, supported by solid rental yields and early capital gains, though growth may slow once new stock becomes available.”

Your edge: Rental market pressure continues, with rents forecast to increase 3-4% across capitals. Strong rental demand means lower vacancy risk and solid cash flow.

Your challenge: New supply hitting the market in the second half could compress yields and slow capital growth.

Finance strategy:

• Maximise deductibility. Investment loans should be structured to maximise tax deductions. Interest-only loans are common for investors because they maximise cash flow and deductibility while you’re building equity through capital growth.

• Consider debt recycling. If you have equity in your home and cash savings, debt recycling involves borrowing against your home to invest in property while simultaneously paying down your non-deductible home loan. This converts non-deductible debt to deductible debt.

• Structure for portfolio growth. Use offset accounts against your home loan, not your investment loan. This preserves maximum deductible interest on the investment while giving you flexibility to use funds if needed.

• Factor in depreciation. Brand new properties offer higher depreciation deductions. In 2026’s market where new supply is increasing, buying new or near-new could deliver better after-tax returns than established properties, even if the purchase price is higher.

The pre-approval process: Why timing matters in 2026

Pre-approval isn’t just a formality. In a competitive market, it’s the difference between securing a property and missing out.

Here’s what the pre-approval process actually involves:

Documentation requirements

Lenders need to verify your income, expenses, assets, and liabilities. The more straightforward your finances, the faster the process.

Employed applicants need:

• Recent payslips (usually last 2-3)
• PAYG payment summaries or tax returns (last 1-2 years)
• Employment contract or letter
• Bank statements (last 3 months)
• Details of all assets (savings, shares, super)
• Details of all liabilities (credit cards, personal loans, HECS)

Self-employed applicants need:

• Tax returns (last 2 years, sometimes 3)
• Notice of assessments
• Business financial statements
• Business Activity Statements
• Accountant’s letter confirming income
• Bank statements (business and personal)

All applicants need:

• Identification (driver’s licence, passport)
• Details of the property you’re buying (or the type if you haven’t found one yet)
• Evidence of genuine savings (if required)

Processing timeframes

Standard pre-approval takes 2-7 business days with complete documentation. But several factors affect timing:

Fast track (2-3 days): Permanent employee, straightforward income, excellent credit history, complete documents submitted upfront.

Standard (5-7 days): Most applications fall here. Self-employed applicants, those with multiple income sources, or applications during peak periods.

Extended (1-2 weeks): Complex income structures, credit issues that need explanation, incomplete documentation, or peak application periods (January-March).

The biggest factor: document completeness. Having everything ready upfront can halve processing time.

Pre-approval validity

Most pre-approvals last 90 days, though some lenders offer up to 6 months. This matters in 2026 because:

• If you get pre-approved in January, it expires in April
• Properties in competitive segments might take months to secure
• Rate changes during your pre-approval period can affect your borrowing capacity

Pro tip: If your pre-approval is about to expire and you’re still searching, contact your broker to renew it before it lapses. Renewal is typically faster than a new application.

Rate strategy: Fixed vs variable in 2026

Interest rate decisions affect your repayments for years. With the RBA taking a cautious approach in 2026, here’s how to think about fixed versus variable rates.

The fixed rate case

Benefits:

• Certainty of repayments for 1-5 years
• Protection if rates rise
• Easier budgeting, especially for tight cash flow

Drawbacks:

• Miss out if rates fall
• Break fees if you need to refinance or sell
• Usually higher than variable rates currently

Who suits fixed: First home buyers with tight budgets, anyone who values certainty over flexibility, borrowers who think rates will rise.

The variable rate case

Benefits:

• Usually lower rates currently
• Flexibility to make extra repayments
• No break fees if you refinance
• Benefit immediately if rates drop

Drawbacks:

• Repayments can increase
• Requires buffer in your budget
• Less certainty for planning

Who suits variable: Borrowers with cash flow buffers, investors who want maximum flexibility, anyone planning to make significant extra repayments.

The split strategy

Most borrowers don’t need to choose exclusively. Splitting your loan - say 50% fixed, 50% variable - gives you both stability and flexibility.

Example: On an $800,000 loan, fix $400,000 at 6.49% for 3 years, keep $400,000 variable at 6.29%. You get certainty on half your repayments, flexibility to make extra repayments on the other half, and partial protection if rates move either direction.

New housing supply: What it means for buyers

Domain’s forecast highlights that “new housing supply is starting to come to market as building activity picks up.” This matters because supply dynamics directly affect both prices and your purchasing strategy.

First half vs second half market dynamics

Q1-Q2 2026 (January-June):

• First Home Guarantee creating strong demand
• Limited new stock available yet
• Strongest price growth expected
• Most competitive conditions

Q3-Q4 2026 (July-December):

• New supply entering market
• Demand moderating as early buyers exit
• Price growth slowing
• More choice for buyers

Finance implications by half

If buying first half:

• Get pre-approval early (December-January)
• Expect faster price appreciation
• Budget for potential missed opportunities (need to act quickly)
• Consider slightly higher offers to secure property

If buying second half:

• Pre-approve closer to purchase (May-June)
• More time to find right property
• Potentially more negotiating power
• Less pressure to stretch budget

Neither strategy is inherently better. Your choice depends on whether you prioritise certainty (buy early) or selection (buy later).

Borrowing capacity: How much can you actually borrow?

With Melbourne’s median house price hitting $1.17 million, many buyers are wondering: can I even afford this?

Borrowing capacity depends on five key factors:

1. Your income

Lenders assess your gross income but consider net income for serviceability. They’ll also apply a buffer - typically assessing your ability to service the loan at 2-3% higher than the actual interest rate.

Example: If applying for a loan at 6.5%, the lender assesses whether you can afford repayments at 9.0%. This protects both you and them if rates rise.

2. Your expenses

Lenders use the Household Expenditure Measure (HEM) to determine your living costs. Even if you claim low personal expenses, they’ll use HEM minimums.

For a couple with two children, HEM might be $3,000-4,000 monthly regardless of what you actually spend.

3. Your existing debts

Every liability reduces borrowing capacity. Credit cards are particularly damaging - lenders assume you’ll use the full limit, not the current balance.

Example: A $20,000 credit card limit might reduce your borrowing capacity by $80,000-100,000, even if you never use it.

4. Your deposit size

Larger deposits mean smaller loans and lower LVRs, which reduces lender risk. Some lenders offer better rates for LVRs under 80%.

5. Your employment type

Permanent employees generally borrow more than casual workers, even at the same income level. Self-employed applicants need longer income history - usually two years.

Improving your borrowing capacity

If you’re short of your target property price, consider:

• Cancel unused credit cards and personal loans. Even zero-balance facilities reduce capacity.

• Pay down existing debts. Reducing your car loan by $10,000 might increase borrowing capacity by $30,000+.

• Increase your deposit. Borrowing less means easier serviceability assessment.

• Add a co-borrower. Buying with a partner, spouse, or even a parent as guarantor significantly increases capacity.

• Choose a longer loan term. Extending from 25 to 30 years reduces monthly repayments and improves serviceability, though you’ll pay more interest overall.

Regional variations: Where your dollar goes further

While Melbourne’s median is forecast to hit $1.17 million, significant variation exists across suburbs and property types.

Inner Melbourne: Established houses well above median, units offering relative affordability.

Middle suburbs (5-15km): Houses at or above median, units $600,000-900,000 range.

Outer suburbs (15km+): Houses $700,000-1,000,000, units $400,000-650,000.

Growth corridors: New estates offering entry-level houses $600,000-800,000.

Finance strategies by location

Inner Melbourne buyers:

• Larger deposits required (20%+)
• Strong serviceability needed
• Consider units if houses unaffordable
• Premium lenders offer better inner-city rates

Middle suburb buyers:

• Standard lending criteria apply
• Good balance of price and amenity
• Both houses and units viable depending on budget
• Consider established over new for better value

Outer suburb buyers:

• Often first home buyer territory
• Government guarantees most useful here
• New vs established price gap narrower
• Factor in transport costs to your budget

Growth corridor buyers:

• Many new builds available
• Builders may offer incentives (stamp duty, upgrades)
• Higher depreciation benefits if investing
• Research infrastructure plans before buying

Action steps: Getting finance-ready for 2026

If you’re planning to buy in 2026, start preparing now. Here’s your timeline:

3 months before buying

Financial housekeeping:

• Check your credit score (free via Equifax, Experian, or illion)
• Close unused credit cards and facilities
• Start paying down personal debts
• Gather documentation (payslips, tax returns, bank statements)
• Set savings target based on deposit requirement

Research and planning:

• Calculate genuine borrowing capacity with broker
• Research suburbs in your price range
• Understand scheme eligibility (First Home Guarantee, etc.)
• Compare fixed vs variable rates
• Review your budget for post-purchase expenses

1 month before buying

Pre-approval:

• Submit complete pre-approval application
• Don’t apply for new credit during this period
• Maintain stable employment
• Avoid large deposits or withdrawals from accounts

Property search:

• Attend inspections armed with pre-approval
• Understand contract terms before signing
• Get building and pest inspections arranged
• Research comparable sales in your target suburb

During purchase process

Finance finalisation:

• Submit formal loan application within 24-48 hours of offer acceptance
• Provide property details to lender immediately
• Respond to any lender requests within 24 hours
• Confirm settlement date works for all parties

Practical preparation:

• Arrange building insurance from exchange date
• Book removalists if needed
• Set up utilities for settlement date
• Budget for immediate post-purchase expenses (furniture, minor repairs)

Post-settlement

Loan management:

• Set up offset account if included
• Consider extra repayments if variable rate
• Review loan annually for refinancing opportunities
• Keep documentation for tax time (especially investors)

Financial health:

• Rebuild emergency fund (aim for 3-6 months expenses)
• Resume regular savings patterns
• Review insurance coverage (home, contents, income protection)
• Update estate planning documents if needed

The bottom line: Finance strategy matters more in rising markets

Property prices reaching new records across Melbourne in 2026 means one thing: your finance strategy matters more than ever.

You can’t control the market. You can’t control interest rates. You can’t control when new supply hits or how first home buyers respond to government schemes.

But you can control how prepared you are. How early you get pre-approved. Whether you’ve structured your deposit to minimise LMI while maintaining financial breathing room. Whether you’ve chosen loan features that give you flexibility as circumstances change.

In a rising market, the difference between securing your ideal property and missing out often comes down to finance readiness. Not property knowledge. Not negotiation skill. Finance readiness.

Get your numbers right, get pre-approved early, and you’ll navigate 2026’s property market with confidence - regardless of what the forecasts say.

Further questions

This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.