In short
- When rates move, your repayments, the amount a lender will lend you and your weekly cost all move with them.
- Rent does not follow the rate. That gap is where most of the strain, or most of the relief, shows up.
- Banks and other lenders that take deposits must test you at a rate at least 3 percentage points above your loan’s rate, so a rise can shrink what you can borrow next, even if you are coping today.
- The useful question is not “will rates move?” but “could I hold this property through the next move?”
Rate days feel louder than they are
If the Reserve Bank’s decision has you checking the news, you are not on your own. Rate days make a lot of noise. What helps is knowing which parts of your own position move, and by roughly how much.
The Reserve Bank sets the cash rate. Banks then set their own home loan rates.
What moves, and what does not
Four parts of your position can change when rates move. Two move straight away. Two move slowly, or not at all.
| Part of your position | When rates rise | Speed |
|---|---|---|
| Your repayments | Go up on a variable loan | Fast |
| What a lender will lend | Usually comes down | Fast |
| The rent you receive | Does not follow the rate | Slow |
| The tax side | Interest deductible to the extent the loan earns income | Yearly |
Your repayments move fast. On a variable loan, the lender can pass on a change. A fixed loan holds until the fixed term ends, and then the new rate arrives all at once.
What a lender will lend you also moves fast. Banks and other lenders that take deposits must test you at a rate above the one you pay, so a higher rate lowers the most they will lend.
The rent you receive moves slowly. Rent is set by what tenants will pay and by your lease, not by the Reserve Bank, so a rate rise is not met by a rent rise on the same day.
The tax side moves once a year, when you lodge. Interest on a loan is deductible to the extent the borrowed money is used to produce assessable income. How the tax side works, including the loss rule for homes bought after 12 May 2026, is in What can you claim on an investment property?.
Your repayments: a simple way to see it
You can work out the size of a move yourself. Take the amount you owe and multiply it by the change in your rate. The answer is roughly the change in a year’s interest, before tax.
For example, on a loan of $500,000, a rate one percentage point higher costs about $5,000 more interest a year. That is close to $96 a week. A quarter of a point costs about a quarter of that, close to $24 a week.
| Loan owed | Rate up 0.25 points | Rate up 0.5 points | Rate up 1 point |
|---|---|---|---|
| $400,000 | $1,000 a year | $2,000 a year | $4,000 a year |
| $500,000 | $1,250 a year | $2,500 a year | $5,000 a year |
| $700,000 | $1,750 a year | $3,500 a year | $7,000 a year |
Said plainly: on $400,000, a quarter-point rise adds about $1,000 a year, a half-point rise about $2,000, and a full point about $4,000. On $500,000 those become about $1,250, $2,500 and $5,000. On $700,000 they become about $1,750, $3,500 and $7,000. These are changes in interest alone, before tax, and a rate cut works the same way in reverse.
The borrowing test moves more than your repayments
A rate rise bites hardest here for someone building a portfolio. When you apply for a loan, ADIs (banks and other lenders that take deposits) must apply a buffer of at least 3 percentage points over the loan’s interest rate when they test whether you could repay. So when your rate goes up, the test rate goes up with it.
Rent counts in that test, but not all of it. APRA’s guidance says sound lending takes at least 20 per cent off expected rent, and in a 2017 letter APRA said a prudent lender would take the cut off the rent before costs, not after. That means a lender counts no more than about 80 per cent of the rent you expect. That last step is our reading of the guidance, not a rule in itself.
Put those together and you can see why a rise can stop the next purchase even when today’s repayments are fine. The buffer sits on top of a higher rate, and the rent counted does not rise to meet it.
Where rates have been
Rates have moved a long way in a short time before. The Reserve Bank keeps the standard variable rates that banks advertise for investors. These are headline rates, not the discounted rates most borrowers pay.
| 30 June | Investor standard variable rate |
|---|---|
| 2021 | 5.10 per cent |
| 2023 | 9.10 per cent |
| 2026 | 9.35 per cent |
In words: the advertised standard variable rate for investors was 5.10 per cent at 30 June 2021, 9.10 per cent at 30 June 2023 and 9.35 per cent at 30 June 2026. Most people pay less than these headline rates, but the size of the change is the point. In two years, the advertised rate rose by four percentage points.
Go back further and the standard variable home loan rate sat at 17 per cent at every month-end from June 1989 to March 1990.
What you can do before the next move
You cannot set rates. You can set how much room you have when they move.
Know your buffer. Work out what a one point rise would cost you each week, using the table above, and check you could carry it from income for a year.
Look at your cash reserve. Some people keep a few months of the property’s costs set aside for a rate rise or an empty month.
Look at how your loans are set up. Fixed or variable, interest only or principal and interest, one loan or several: each choice changes how a rate move reaches you. Your broker and your accountant can model the options for your own figures.
If you are thinking about a next purchase, the lender’s test rate, not today’s rate, is the one that counts.
My view
In my view, the people who do well through rate cycles are rarely the ones who guessed the next move. They are the ones who bought a property they could hold if the guess was wrong. You may see it differently, and that’s fine.
One easy next step
If you would like to see each of these steps in order, the free building lessons by email will look at borrowing, cash flow and holding through a rate cycle, one short lesson at a time. All you need is your first name and email.
Education only, not personal or financial advice.