Yes, home loan rates change the trade-off between high-yield and capital growth areas. When rates are high, rent has to cover more of the interest bill, so higher-yielding properties are easier to hold while low-yield growth properties cost more out of pocket each week. With the average investor variable rate at 6.89% in October 2026 and negative gearing limited for established properties bought after 12 May 2026, yield matters more than it has for years, but capital growth still drives most long-term wealth.
High yield vs capital growth: the difference
| High-yield area | Capital growth area | |
|---|---|---|
| Typical location | Regional centres, mining towns, units, outer suburbs | Inner and middle-ring suburbs of major cities, houses on land |
| Rent compared with price | Higher (often 5% gross or more) | Lower (often 3% to 4% gross) |
| Weekly cash flow | Closer to neutral or positive | Usually negative, needs topping up |
| Main source of return | Rental income | Rising property value |
| Main risks | Weaker or more volatile price growth, reliance on one local industry | Holding costs when rates rise, longer wait for returns |
Most investors end up somewhere in between. The right mix depends on your income, how much you can top up each week, and how long you plan to hold.
How today’s rates change the numbers
Here is the same $600,000 interest-only investment loan (80% of a $750,000 purchase) on two properties, with $8,500 a year of other costs such as rates, insurance, management and repairs.
| High-yield property | Growth property | |
|---|---|---|
| Rent | $720 a week ($37,440 a year) | $520 a week ($27,040 a year) |
| Gross yield | 5.0% | 3.6% |
| Interest at 6.89% | $41,340 | $41,340 |
| Other costs | $8,500 | $8,500 |
| Pre-tax result | -$12,400 a year | -$22,800 a year |
| Pre-tax result at 5.94% | -$6,700 a year | -$17,100 a year |
Our calculations, before tax and depreciation. The 6.89% rate is the average investor variable rate and 5.94% the lowest advertised investor rate, according to Canstar data as at 2 October 2026.
The growth property costs $10,400 a year more to hold, about 1.4% of its value. To come out ahead before tax, it needs to grow roughly 1.4 percentage points a year faster than the high-yield property. Every 1% change in your rate moves both results by $6,000 a year on this loan, so the more rates rise, the more weight falls on yield and cash flow.
The 2027 tax changes tilt the maths further
The negative gearing and capital gains tax changes passed by Parliament in June 2026 affect this choice directly:
- Negative gearing. 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 your salary. Unused losses carry forward. Properties you held before that time keep the current rules until sold, and eligible new builds keep full negative gearing.
- Capital gains. From 1 July 2027, the 50% CGT discount is replaced by indexing your cost base for inflation, with a 30% minimum tax on real gains. Gains made before that date keep the discount.
For a new purchase of an established property, a large weekly loss is no longer softened by a tax refund against your wage. That makes a high-yield or close-to-neutral property easier to carry, and it puts more emphasis on whether a growth property’s expected gains really outweigh the cost of holding it. Run your own numbers with our CGT calculator and get tax advice before you buy.
What the market is doing now
Rate rises through 2026 have hit higher-priced growth markets hardest. Cotality’s index fell for a sixth straight month in September 2026 and national values were 5.2% below their March peak. Over the year to September, Sydney values fell 7.0% and Melbourne 6.2%, while Perth rose 10.1%, Darwin 11.9% and the combined regional markets 5.6%.
That pattern is typical of a rising-rate period: buyers’ borrowing power shrinks, and the most expensive markets feel it first. It doesn’t mean growth markets have stopped working over the long run, but it shows why holding costs matter when rates are high. If you’re weighing regional property for yield, check that lenders will accept the postcode and how much they’ll lend there.
Do lenders charge different rates for different areas?
Not usually. Lenders price investment loans by loan purpose, repayment type and LVR, not by suburb. Where location matters is lending policy: some lenders cap the LVR in small regional towns, mining towns or for small or high-density units, which can mean a bigger deposit or LMI for exactly the properties that tend to have higher yields.
How to choose
- Start with cash flow. Work out the weekly top-up at today’s rate and at 1% to 2% higher. If you can’t comfortably carry it, look for higher yield.
- Check your purchase date against the tax rules. For established property bought after 12 May 2026, assume losses won’t reduce your tax on salary from July 2027.
- Look at the drivers of growth, such as population growth, jobs, infrastructure and limited supply, not just recent price rises.
- Diversify over time. Many investors buy one higher-yield property to support a growth property, or the other way round.
Frequently asked questions
Is high yield or capital growth better when rates are high?
High yield is usually easier to hold when rates are high, because the rent covers more of the interest. Capital growth properties can still deliver better long-term returns, but they need you to fund a bigger weekly shortfall, and from July 2027 losses on established properties bought after 12 May 2026 can no longer be offset against your salary.
What rental yield covers my loan repayments?
On an interest-only loan at 80% LVR and a 6.89% rate, a gross yield of about 5.5% covers the interest alone. Allowing for rates, insurance, management and repairs, you usually need a gross yield of around 6.5% to 7% for the property to pay for itself before tax.
Can one property offer both yield and growth?
Sometimes. Properties with a second dwelling, a granny flat, or in areas with strong rent growth and improving infrastructure can offer both. They are usually harder to find and may carry other trade-offs, such as council rules or higher maintenance.
Sources
- Canstar, Average home loan interest rates, as at 2 October 2026
- Australian Government, Negative Gearing and Capital Gains Tax Reform, Budget 2026-27
- Cotality, Australian housing values down for sixth straight month in September, 1 October 2026
General information only. It does not consider your objectives, financial situation or needs and is not credit, tax or financial advice.