• An interest rate rise can affect mortgage repayments, borrowing power and household budgets.
• The impact of interest rate rises isn’t the same for every borrower or buyer.
• Preparation can help reduce financial pressure if rates increase.
• Understanding your options early can help you make more confident home loan decisions.
No one can say for certain whether interest rates will increase in 2026. Interest rate decisions are made by the Reserve Bank of Australia (RBA) based on a wide range of economic factors, including inflation, employment, wage growth and global conditions.
This article doesn’t predict what the RBA will do. Instead, it explores what could happen if interest rates were to increase, who may be affected, and how different borrowers can prepare.
If you’re interested in how economists and major banks are currently viewing the next RBA decision, you can also read our latest expert predictions on interest rates.
Interest rate changes don’t affect everyone in the same way. The impact depends on factors such as your loan type, income, level of savings, and where you are on your property journey, whether you’re buying your first home, upgrading, investing, or refinancing.
How rising interest rates affect different types of buyers
An increase in interest rates generally means higher borrowing costs, but the real-world impact varies widely.
Borrowers with larger loans, tighter household budgets or less financial buffers may feel changes more quickly. Others may be less affected, particularly if they have strong income stability, significant equity, or savings in offset accounts.
It’s also helpful to look at recent contexts. After a period of rapid rate increases beginning from 2022, many borrowers adjusted to higher repayments.
The rate holds and cuts seen through parts of 2025 were significant because they offered some relief and stability. A potential increase in 2026 would represent another adjustment, rather than a return to historically low interest rate settings.
Impact on first-home buyers
How rate rises can affect first-home buyers
For first-home buyers, higher interest rates can affect both affordability and borrowing power.
Lenders assess loans using interest rate buffers above the actual loan rate to ensure borrowers can manage repayments if rates rise further.
When interest rates increase, these assessment rates also rise, which can reduce how much you’re able to borrow.
Higher rates may also mean larger repayments relative to income, leaving less room for other expenses. In some cases, this can lead buyers to delay entering the market or reconsider property type, location, or price range.
What first-home buyers can do to prepare
First-home buyers can take steps to prepare for potential rate increases by:
Building stronger savings buffers
Reducing non-essential debts where possible
Understanding borrowing capacity early
Stress-testing repayments before committing to a purchase
Other options that may help first-home buyers
Depending on eligibility and personal circumstances, some buyers explore options such as:
Government-backed schemes that may allow eligible buyers to purchase with a smaller deposit
Paying Lenders Mortgage Insurance (LMI) as a trade-off to enter the market sooner
Family guarantee structures
Buying below their maximum borrowing capacity
Eligibility criteria apply to all schemes, and professional guidance can help clarify what’s suitable.
You might also be interested in: First home buyer guide
Impact on upgraders
How rate rises can affect upgraders
Upgraders often have existing equity, but higher interest rates can still affect their options.
Increased assessment rates may reduce borrowing capacity, even if property values have risen. Larger loan sizes can also mean higher repayments, which may affect cash flow.
Timing can become more complex, particularly when buying and selling don’t align as planned. Bridging finance, where used, can carry higher risks in a rising-rate environment.
What upgraders can do
Preparation steps may include:
Assessing usable equity early
Reviewing affordability under higher-rate scenarios
Carefully planning buying and selling timelines
Strategic options for upgraders
Some upgraders consider:
Using equity rather than increasing debt where possible
Making trade-offs on property type or location
Structuring loans to manage cash flow during transition periods
You might also be interested in: The hidden costs of buying a bigger home in Australia
Impact on property investors
How rate rises can affect investors
For investors, higher interest rates can increase holding costs and place pressure on cash flow, particularly for negatively geared properties.
Lending policy changes may also affect how easily investors can expand or restructure their portfolios.
Over time, higher rates can influence investment yields and overall portfolio performance.
What investors can do to prepare
Investors may consider:
Reviewing rental income against interest costs
Modelling cash flow under higher-rate scenarios
Prioritising liquidity and financial buffers
Strategic options for investors
At a high level, some investors explore:
Loan reviews and restructuring
Fixing or splitting loans to balance certainty and flexibility
Reviewing long-term holding versus consolidation strategies
Tax and investment considerations vary, and professional advice is recommended.
You might also be interested in: Negative gearing your investment property
How an interest rate increase could affect borrowing power
When interest rates rise, lenders’ assessment rates typically increase, which can reduce how much a borrower is able to qualify for, even if their income hasn’t changed.
This can affect:
First-home buyers entering the market
Upgraders relying on equity
Investors expanding portfolios
In simple terms, buffer rates are designed to test whether a borrower could manage repayments if rates increased further, helping reduce financial stress.
Impact on property prices and market activity
Higher interest rates can reduce borrowing capacity, which may soften buyer demand. In some markets, this can slow price growth rather than cause prices to fall.
Property markets don’t move uniformly. Some areas may remain resilient due to limited supply, population growth, or local demand factors. Outcomes can vary widely by location and property type.
What the big banks are saying about interest rates
Major banks regularly publish economic outlooks discussing inflation trends, wages, and global conditions. These views often differ, reflecting varying assumptions and methodologies.
It’s important to note that bank forecasts change frequently and do not determine RBA decisions. They provide context, not certainty.
You might also be interested in: What experts predict for the RBA's February 2026 interest rate decision
How higher interest rates can affect household budgets
An increase in interest rates can affect household budgets in several ways:
Higher mortgage repayments
Reduced discretionary spending
Slower progress toward savings goals
For example, young families may need to reassess childcare or education expenses, while single-income households may feel cash-flow pressure sooner. Investors managing multiple properties may see cumulative impacts across their portfolio.
How to prepare if interest rates increase in 2026
Stress-test your mortgage repayments
Modelling repayments at higher interest rates, for example, increases of 0.5% to 1.5% can help you understand potential impacts on your monthly cash flow.
Review your loan type and features
Understanding the differences between variable, fixed, and split loans can help manage flexibility and certainty. Features such as offset accounts and redraw facilities can also reduce interest costs over time.
Build or strengthen a financial buffer
Maintaining emergency savings and reducing non-essential expenses can help absorb higher repayments if rates increase.
Check refinance and restructure options early
Exploring options before financial pressure builds can help avoid rushed decisions. It’s important to understand break costs, fees, and lender policies.
How a mortgage broker can help if rates rise
A mortgage broker can help explain options and scenarios, without guarantees.
This may include:
Reviewing your current loan against available options
Modelling different rate-rise scenarios
Explaining lender assessment buffers and policies
Structuring loans for flexibility
Supporting borrowers nearing fixed-rate expiry
Interest rate changes can feel uncertain but understanding how different scenarios may affect your home loan puts you in a stronger position.
If you’d like help reviewing your current loan or exploring options that suit your circumstances, an Aussie Broker can walk you through what’s worth considering at your pace.
Book a free^ chat with an Aussie Broker to review your options.