Interest rate movements change an investment property’s cash flow straight away and its capital growth over the following months. Each 1% rise adds $6,000 a year to the interest on a $600,000 interest-only loan, and because higher rates also reduce buyers’ borrowing power, they tend to slow price growth at the same time. That double effect is why investors should model their returns at today’s rate and at least 1% to 2% higher before they buy.
The two ways rates hit your returns
- Cash flow, immediately. Interest is usually an investor’s largest cost. When a variable rate rises, your repayments rise within weeks, while rent usually changes only once a year.
- Capital growth, with a lag. Higher rates reduce how much buyers can borrow, by about 8% for each 1% rise, which slows or reverses price growth over the following months. Lower rates do the opposite.
The 2026 rises show both at work. The cash rate rose from 3.60% to 4.60%, adding about $6,000 a year to the interest on a $600,000 interest-only loan, and national home values fell for six straight months to September, according to Cotality.
Modelling cash flow at different rates
Take a $750,000 property bought with a $600,000 interest-only loan, renting for $650 a week ($33,800 a year), with $8,500 a year of other costs.
| Interest rate | Annual interest | Pre-tax cash flow | Weekly top-up |
|---|---|---|---|
| 5.89% | $35,340 | -$10,040 | $193 |
| 6.89% (average investor variable rate) | $41,340 | -$16,040 | $308 |
| 7.89% | $47,340 | -$22,040 | $424 |
| 8.89% | $53,340 | -$28,040 | $539 |
Our calculations, before tax and depreciation. Average investor variable rate from Canstar, as at 2 October 2026.
A 0.5% rate rise on this loan costs $3,000 a year, or about $58 a week. For how lower rates work in your favour, see how rate cuts improve cash flow.
Combining cash flow and growth
Cash flow only tells half the story. Here is the same property over five years, combining the total pre-tax cash flow with growth in value:
| Annual growth in value | Five-year result at 6.89% | Five-year result at 7.89% |
|---|---|---|
| 0% | -$80,200 | -$110,200 |
| 3% | +$39,300 | +$9,300 |
| 6% | +$173,500 | +$143,500 |
Our calculations, before tax, depreciation, buying and selling costs. Growth compounds on the $750,000 value.
The lesson: with modest growth, a 1% higher rate wipes out most of the gain. Properties with low rental yield rely more on growth, so they’re more exposed to a period of high rates and flat prices. See high yield vs capital growth.
Tax changes that affect the numbers
Two changes passed in June 2026 affect these projections for new purchases:
- 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 salary. Pre-tax losses like those above won’t reduce your income tax on wages for these properties.
- Capital gains. From 1 July 2027, gains are taxed using an inflation-indexed cost base with a 30% minimum tax, replacing the 50% discount for gains from that date. Model the after-tax result with our capital gains calculator.
Eligible new builds and properties held before 12 May 2026 keep the current negative gearing rules.
Strategies for rising and falling rates
When rates are rising:
- Build a cash buffer of three to six months of repayments and costs, held in an offset.
- Consider fixing part of the loan for certainty.
- Review rents at each lease renewal in line with the market.
- Ask your lender for a better rate or refinance; the gap between average and lowest investor rates is close to 1%.
When rates are falling:
- Decide whether to take the saving as cash flow or keep repayments the same to build equity.
- Remember prices often recover as borrowing power rises, so buying conditions can change quickly.
- Check whether interest-only still suits you, or whether switching to principal and interest makes sense.
Frequently asked questions
How much does a 0.5% rate rise cost an investor?
On a $600,000 interest-only loan, a 0.5% rise adds $3,000 a year in interest, about $58 a week. On a 30-year principal and interest loan of the same size, it adds about $200 a month. Scale it to your loan: each 0.5% costs $500 a year for every $100,000 borrowed on interest-only.
Do falling rates always lift property prices?
No. Lower rates increase borrowing power and usually support prices, but other forces can outweigh them, including rising unemployment, a surge in new supply, falling rents or changes to tax settings. Rate cuts also tend to happen when the economy is weakening, which can hold prices back.
How do I stress-test my cash flow?
Recalculate your weekly cash flow at your current rate plus 1% and plus 2%, with four weeks of vacancy a year and a realistic allowance for repairs. If you could still cover the shortfall from your income or buffer for at least a year, short-term rate rises are unlikely to force a sale.
Sources
- Reserve Bank of Australia, Monetary Policy Decision, 29 September 2026
- Canstar, Average home loan interest rates, as at 2 October 2026
- Cotality, Australian housing values down for sixth straight month in September, 1 October 2026
- Australian Government, Negative Gearing and Capital Gains Tax Reform, Budget 2026-27
General information only. It does not consider your objectives, financial situation or needs and is not credit, tax or financial advice.