Interest rates set the bar your rental yield has to clear. On an interest-only loan at 80% of the property’s value, the gross yield needed just to cover the interest is your rate times 0.8, so at the 6.89% average investor rate you need about 5.5%. Most capital city properties yield well below that, which is why they’re negatively geared, and why rate rises in 2026 have made yield, not just growth, a bigger part of investors’ decisions.
Gross yield vs net yield
- Gross yield is the annual rent divided by the property’s value. A $750,000 property renting for $650 a week ($33,800 a year) has a gross yield of 4.5%.
- Net yield subtracts running costs, such as council rates, insurance, strata, management, repairs and land tax, before dividing by the value. If those costs are $8,500 a year, the net yield is about 3.4%.
Net yield is the number to compare with your loan rate, because the costs are real cash going out.
The yield you need to cover your interest
| LVR | At 5.94% (lowest investor rate) | At 6.89% (average investor rate) | At 7.89% (average plus 1%) |
|---|---|---|---|
| 80% | 4.8% | 5.5% | 6.3% |
| 70% | 4.2% | 4.8% | 5.5% |
| 60% | 3.6% | 4.1% | 4.7% |
Gross yield needed to cover interest only, on an interest-only loan, before other costs. Our calculations, using Canstar rates as at 2 October 2026.
Add roughly one percentage point of yield for running costs to see where a property breaks even before tax. A lower LVR, a lower rate or a higher-yielding property all bring that point closer.
How rate rises flow through
When rates rise, the interest bill rises within weeks, but rent usually only changes at lease renewal. The four rises in 2026 added $6,000 a year to the interest on a $600,000 interest-only loan, while rents rise more gradually. The gap is funded by you each week. Compare this with what a rate cut would do for your cash flow.
Higher rates can also support rents over time. When buying becomes less affordable, more people rent for longer, and investors who face higher costs try to pass some of them on. That doesn’t help immediately, but it narrows the gap over a few years.
Negative gearing and the 2027 changes
A property is negatively geared when its costs, including interest, exceed the rent. Until now, investors could deduct that loss against their salary, so a rate rise was partly offset by a bigger tax refund.
That changes for new purchases. From 1 July 2027, losses on established residential property bought after 7.30 pm AEST on 12 May 2026 can only be offset against residential property income and gains, not wages. Excess losses carry forward. Properties held before that time, and eligible new builds, keep the current rules.
For a newly bought established property, a rate rise now increases a loss you may not be able to use for years. Yield matters more, and so does keeping your loans structured efficiently. See structuring investment loans for tax.
Strategies when rates are high
- Target higher yield where growth prospects are still sound, or add income through a granny flat or dual occupancy where councils allow it.
- Reduce your rate. The gap between the average and lowest investor variable rates is close to 1%.
- Lower your LVR with savings in an offset, which reduces interest while keeping cash available.
- Review rent at each renewal in line with the local market and your state’s rules.
- Compare markets. Yields and rent growth vary widely between cities and regions. See investor loans by state.
Frequently asked questions
What rental yield do I need to cover my mortgage?
On an interest-only loan, the gross yield needed to cover the interest is your rate multiplied by your LVR. At 6.89% and 80% LVR, that’s about 5.5%. Add around one percentage point for rates, insurance, management and repairs to break even before tax. On a principal and interest loan, the required yield is higher again.
What is the difference between gross and net yield?
Gross yield is annual rent divided by the property’s value. Net yield deducts running costs first, such as council rates, insurance, strata, management and repairs. A property with a 4.5% gross yield might have a net yield of around 3.4%, and it’s the net figure that you should compare with your loan rate.
How do rate rises affect negative gearing?
They increase the loss on a negatively geared property, because interest rises while rent stays the same until the lease renews. For properties held before 12 May 2026, that loss can still reduce tax on other income. For established properties bought after then, losses from 1 July 2027 can only offset residential property income and gains.
Sources
- Canstar, Average home loan interest rates, as at 2 October 2026
- Australian Government, Negative Gearing and Capital Gains Tax Reform, Budget 2026-27
- Australian Taxation Office, Interest expenses on rental properties
General information only. It does not consider your objectives, financial situation or needs and is not credit, tax or financial advice.