The window is opening for first home buyers. Don't climb through it blind.

The Australian property market is in an unusual position. Prices in Sydney and Melbourne are falling, auction clearance rates have hit near-record lows, and there is less competition at open homes. For first time home buyers, this looks like good news. However, alongside this opportunity is a significant, overlooked risk: your borrowing capacity may have dropped substantially over the past 12 months.

Many online calculators show how much you can potentially borrow based on your financial situation. This figure matters, because if you are relying on a borrowing capacity from 12 months ago, you may be shocked. The RBA's three rate hikes have not only increased repayments on existing loans, but they have also reduced how much lenders will approve in the first place.

Lenders assess your borrowing capacity by testing whether you can afford repayments at a rate typically 3% above the loan rate, a buffer required by APRA. As rates rise, that test rate rises with it. Simply put, the same income and deposit will secure you a significantly smaller loan than they would have 12 or 18 months ago.

To put it in real terms: on a household income of $120,000, three rate rises of 0.25% each can reduce borrowing capacity by roughly $40,000 to $60,000 depending on the lender and your expenses. That's not a marginal shift. For buyers in Sydney or Melbourne, that's the difference between the suburb you want and the one you'll settle for.

So what should you do? If you're serious about buying a home, consider recalculating your borrowing capacity. Use an online calculator or speak to a mortgage broker, but make sure you know how much you can borrow before you set your heart on a property.

Negative equity happens when the value of your property falls below the amount you still owe on your loan.

For example, when you buy a $900,000 property in Sydney today with a 5% deposit, you're borrowing $855,000. If property prices fall 7%, which, at the time of writing, is within current forecasts, that home would be worth $837,000. If your outstanding loan is higher than this amount, you can end up owing more than the property is worth. This is known as negative equity.

In most cases, negative equity isn't an immediate crisis. If you can keep making your repayments and you don't need to sell, time typically works in your favour as values recover.

However, it can become a significant problem if interest rates rise further and you can no longer meet the higher repayments, or if your circumstances change. A job loss, a relationship breakdown, or a need to relocate can force a sale at the wrong time. In that scenario, you would have to repay the bank from the sale proceeds, cover any shortfall out of your own pocket, and potentially walk away with nothing.

First home buyers can be particularly exposed because they often enter the market with small financial buffers. While a 5% deposit can help you buy sooner, it leaves you with very little equity. This may not mean you shouldn't buy, but it means your borrowing capacity and repayment buffer require careful consideration.

"This is the question we get asked constantly right now, and the honest answer is that it depends entirely on your individual circumstances, not just what the market is doing," says Pravin Mahajan, Bheja Founder and Principal Mortgage Broker

"If you're buying a home to live in for the next seven to ten years, short-term price movements are often less important than they are for someone investing for capital growth. Australian property has historically rewarded long-term owners, but that doesn't mean stretching beyond what you can comfortably afford, particularly if interest rates remain higher for longer.

"If your borrowing capacity is solid, your deposit is genuine, your employment is stable and you've considered whether your repayments would still be manageable if interest rates were to rise, the current market may offer opportunities that haven't been available for several years. In many parts of Australia, buyers are seeing more choice, less competition and vendors who are more willing to negotiate.

"If, on the other hand, you're borrowing right up to your limit, relying on a single income with little financial buffer, or hoping prices move in your favour, it may be worth taking more time to prepare. Buying a home is a long-term financial commitment, and entering the market before you're financially ready can have consequences that extend well beyond the purchase itself."

A few principles worth keeping in mind if you're actively looking:

Know your actual borrowing capacity. Not last year's number. Recalculate it based on current rates and your current expenses. Be honest about what's changed.

Stress test your repayments. Can you manage if rates rise once more? If the answer is no, or not comfortably, you may need to reconsider.

Don't treat the deposit as the finish line. Stamp duty, legal fees, moving costs, and an emergency buffer should all be factored in before you make an offer. Buyers who spend every dollar of their savings on the deposit leave themselves exposed in the early months.

Understand what you're buying and why. A home you intend to live in for a decade is a different decision to one you're buying hoping to sell in two years.

Get your pre-approval in place before you start seriously looking. In a market where conditions are shifting, knowing your number can prevent the heartbreak of falling for a property you can't afford.