How Interest Rates Affect Your Mortgage

Interest rates are the single biggest factor in how much you pay on your mortgage. A small change can mean thousands of dollars per year.

Here's exactly how rate changes affect you and what to do about it.

How much does a 0.25% rise cost?

Let's use a $500,000 loan over 30 years:

• At 6.0%: $2,998/month
• At 6.25%: $3,079/month (+$81/month)
• Extra per year: $972

On a $700k loan, a 0.25% rise = $114/month extra ($1,368/year).

What about a 1% rise?

$500k loan example:

• At 6.0%: $2,998/month
• At 7.0%: $3,327/month (+$329/month)
• Extra per year: $3,948

That's a big jump. Use our Rate Rise Impact Calculator to see your exact numbers.

Why do rates change?

The Reserve Bank of Australia (RBA) sets the cash rate. When they move it, banks usually follow within days.

RBA raises rates when:

• Inflation is too high
• The economy is overheating
• They want to slow spending

RBA lowers rates when:

• The economy is struggling
• Unemployment is rising
• They want to encourage spending/borrowing

How to protect yourself from rate rises

1. Fixed rate loans

Lock in your rate for 1-5 years. Your repayments won't change during the fixed period.

Pros: Certainty, protection from rises

Cons: Higher rate than variable, break fees if you exit early

Read more: Fixed vs Variable Rates Explained

2. Offset account

Keep savings in an offset account. The balance reduces the interest you pay.

Example:

• Loan: $500k at 6.5%
• Offset: $30k
• You only pay interest on $470k
• Saves ~$1,950/year

Use our Offset Calculator to see your savings.

3. Make extra repayments

Pay more than the minimum. Even $200/month extra can save you $50,000+ over the life of the loan.

4. Refinance to a better rate

If your current rate is higher than what's available, switch lenders. A 0.5% drop = thousands saved.

Use our Refinance Calculator to see if switching is worth it.

What happened in 2022-2024?

The RBA raised rates 13 times between May 2022 and November 2023:

• May 2022: 0.10% cash rate
• Nov 2023: 4.35% cash rate

Variable mortgage rates went from ~2.5% to ~6.5%. A $500k loan went from $1,975/month to $3,248/month (+$1,273/month).

That's an extra $15,276/year.

What's happening in 2026?

Rates have been stable since late 2023. Most economists expect the RBA to start cutting rates in late 2026 or early 2027.

But no one knows for sure. The RBA's priority is inflation, not your mortgage.

Should you fix or stay variable?

Fix if:

• You think rates will rise
• You can't afford higher repayments
• You want certainty

Stay variable if:

• You think rates will drop
• You want flexibility (offset, extra repayments)
• You might refinance in 2-3 years

What if rates drop?

If you're on a variable rate, your repayments drop immediately. Banks usually pass on RBA cuts within a few days.

$500k loan example:

• At 6.5%: $3,160/month
• At 6.0%: $2,998/month (saves $162/month)

If you're on a fixed rate, you're stuck at the higher rate until your fixed period ends.

The 3% buffer rule

Banks approve your loan assuming rates will rise 3% from today. This is called the "serviceability buffer."

Example:

• You apply at 6% → Bank tests you at 9%
• If you can't afford repayments at 9%, you won't be approved

This is good (protects you from defaulting) but also limits how much you can borrow.

What to do if rates rise

• Option 1: Make extra repayments now while rates are manageable
• Option 2: Build a buffer in your offset account
• Option 3: Refinance to a better rate
• Option 4: Extend your loan term (lowers repayments but costs more long-term)
• Option 5: Call your bank's hardship team if you're struggling