Key Takeaway

Recent RBA rate rises have increased monthly mortgage repayments for borrowers on variable-rate home loans and reduced the maximum amount new buyers can borrow. A 1 percentage point rise in the cash rate typically adds around A$300 to A$400 per month to a A$500,000 loan, while serviceability tests mean buyers may qualify for 5 to 10 per cent less than before the rises. Fixed-rate borrowers are insulated until their fixed term ends, but face higher rates when they revert to variable or refinance.

How RBA Rate Rises Increase Repayments

The Reserve Bank of Australia sets the cash rate, which directly influences the interest rates Australian lenders charge on variable-rate home loans. When the RBA raises the cash rate, most lenders pass the increase through to existing variable-rate borrowers within weeks. According to the Reserve Bank of Australia, each 0.25 percentage point rise adds approximately A$75 to A$100 per month to a A$500,000 loan over 30 years, depending on the remaining term and loan-to-value ratio.

Borrowers on fixed-rate loans are protected from rate changes during their fixed period (commonly one to five years), but when the fixed term ends they revert to the lender’s standard variable rate, which will reflect the cumulative rate rises. Principles of Finance (2022) explains that interest rate movements change the cost of borrowed capital, and for long-term loans like mortgages, even modest rate rises compound into significant additional repayment obligations over the loan term.

Impact on Buyer Budgets and Borrowing Capacity

Lenders assess borrowing capacity using serviceability tests that model whether the applicant can afford repayments at current rates plus a buffer (typically 3 percentage points). As rates rise, the same household income now qualifies for a smaller loan because the higher interest rate means larger repayments. ASIC MoneySmart notes that a rate rise of 1 percentage point can reduce borrowing capacity by approximately 5 to 10 per cent, depending on the applicant’s income, expenses and existing debts (MoneySmart, 2024).

This reduction in borrowing power affects buyer budgets directly. A household previously pre-approved for A$600,000 may now qualify for only A$540,000 to A$570,000, forcing buyers to adjust their property search downward, increase their deposit, or delay purchase until incomes rise or rates stabilise. The comparison rate (which includes most fees and charges) also rises with base rate increases, making the true cost of borrowing more transparent but higher.

Read also: Australian Mortgage Holders Face Rising Rate Pain: ‘We Never Would Have Bought’

What Existing Borrowers and Buyers Can Do

Existing variable-rate borrowers facing higher repayments should review their loan structure. Options include switching to a lower-rate product with the same lender, refinancing to a competitor offering a better rate or cashback, using an offset account to reduce interest charges, or making extra repayments when possible to shorten the loan term and reduce total interest paid. Some borrowers may benefit from splitting their loan between variable and fixed portions to manage rate-rise exposure while retaining flexibility.

First-home buyers and upgraders need to reassess affordability in light of reduced borrowing capacity. Confirm current borrowing limits with a licensed mortgage broker or lender before committing to a property, factor in state-based stamp duty (which varies by state and territory), and consider government schemes such as the Home Guarantee Scheme that allow eligible buyers to borrow with a smaller deposit and avoid lenders mortgage insurance (LMI). Market analysis from Finder Australia suggests buyers are increasingly targeting properties at the lower end of their budget range to preserve a buffer against further rate rises.

Rates and eligibility change frequently. Verify current cash rate settings, lender interest rates, and your personal borrowing capacity with a licensed lender or mortgage broker before making any purchase or refinancing decision. This article provides general information only and does not consider your individual financial situation, objectives, or needs. You should obtain personal advice from a licensed financial or lending professional before acting on any home-loan decision.