Understanding Interest Rates and Property Prices

Interest rates can affect property prices partly by changing how much people can borrow. When rates rise, borrowing power usually falls, and that can slow price growth. When rates fall, borrowing power usually lifts, and that can add pressure to prices.

For Department of Home Affairs staff, the useful question is not where prices will go next. It is how a rate change affects your own budget and the loan you can carry. This article looks at that link and at what you can control.

How Do Interest Rates Affect Property Prices?

Higher interest rates tend to reduce what buyers can borrow, which can ease demand and slow price growth. Lower rates tend to do the opposite. Prices are also driven by supply, wages, population and buyer confidence, so rates are only one part of the picture.

The RBA cash rate is currently 4.85% p.a. Lenders set their own home loan interest rate based on that cash rate, their funding costs and the risk of each loan. Your rate can therefore move differently from the cash rate, and it can differ between lenders.

Lenders also test your application at a higher rate than the one you will pay. This protects you if rates rise, but it also means a rate increase can reduce your borrowing capacity even before you sign anything.

What a Rate Change Does to Your Repayments

A small change in the interest rate has a noticeable effect on repayments, and the effect grows with the size of the loan. The figures below use an illustrative rate of 6.75% p.a., not a quoted rate.

Consider a Home Affairs officer borrowing $600,000 over 30 years on principal and interest. At the illustrative 6.75% p.a., the monthly repayment is about $3,891. If the rate rose by 0.5 percentage points to 7.25% p.a., the repayment would be about $4,093. That is roughly $201 more each month, or about $2,417 a year.

The same logic works in reverse for buyers. If a rate rise cuts what lenders will let you borrow, you may need to look at lower-priced homes. If rates fall, you may be able to borrow more, but you will often be competing with other buyers who can do the same.

Should You Choose a Variable Rate, Fixed Rate or Split Rate?

A variable rate moves with the lender's decisions, a fixed rate stays the same for a set period, and a split loan does both. The right choice depends on how much repayment certainty you need and how much flexibility you want.

A variable rate home loan often allows extra repayments and a linked offset account. The trade-off is that your repayments can rise if the lender lifts its rate.

A fixed rate gives certainty over the fixed term, which suits households with tight budgets. The trade-offs are that extra repayments are often capped, and leaving the loan early can trigger break costs. When the fixed term ends, the loan moves to a new rate, so it helps to plan ahead. Our page on fixed rate expiry explains what to expect.

A split loan divides the balance between the two. It spreads the risk, but it means managing two loan balances and two sets of terms.

Why Shift Work Income Matters When Rates Move

Home Affairs roles can include allowances and shift loading, and how a lender treats that income affects your borrowing power. Lenders differ in how much of that income they count and how long you need to have received it.

This matters most when rates rise, because the lender's higher test rate makes every dollar of assessable income count. Our page for Home Affairs staff covers how this income is often assessed. A broker can compare how different lenders treat it before you apply for a home loan.

Using an Offset Account to Soften Rate Rises

A mortgage offset account reduces the balance your interest is charged on, so it can limit the cost of a rate rise. The trade-off is that offset accounts are usually linked to variable loans, and some lenders charge a package or annual fee for them.

As an example, consider a buyer with a $600,000 loan who keeps $30,000 in a linked offset account. Interest is charged on $570,000 instead of $600,000, while the minimum repayment stays the same. At the illustrative rate of 6.75% p.a., that is about $2,025 less interest over a year. Because the repayment does not fall, more of each payment goes to the principal, which helps build equity over time.

The saving only lasts while the money stays in the account. If you spend it, the benefit goes with it. Your lender's offset terms and any fees should be checked before you commit.

Getting Your Budget Right Before You Bid

Knowing your borrowing capacity before you inspect homes keeps you inside a price range you can afford if rates move. A borrowing capacity calculator gives a starting figure, and home loan pre-approval gives you a clearer one from a lender. Pre-approval is conditional and usually expires after a set period, and the final approval still depends on the property and your circumstances.

A sensible habit is to check your repayments at a rate well above the one you are offered. If the higher repayment still fits your budget, a future rate rise is less likely to cause problems.

If you already have a loan, a loan health check can show whether your current rate still suits you. Our page on getting a lower interest rate covers how rate discounts work.

Public servants may also be able to access options aimed at their sector, including home loans for public servants, and some lenders offer LMI waivers for public servants when the deposit is smaller. Eligibility, loan to value ratio limits and conditions vary by lender, so check the terms before relying on any waiver.

To talk through how a rate change would affect your own numbers, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions