When to Act as Interest Rates Shift Property Prices

Interest rates change what you can borrow, and that shapes what you can pay for a home. If you are weighing up a purchase, the useful question is not where prices will go. It is what repayment you can carry.

How Do Interest Rates Affect Property Prices?

When the interest rate on a home loan rises, repayments on the same loan go up, so many buyers can only borrow less. Lower borrowing power can reduce what buyers bid. Supply, demand, wages and local conditions also influence prices, so rates are one factor and not the whole story.

Lenders also work out how much they will lend by testing your income and expenses against your repayments. If repayments rise, the amount a lender will offer can fall. You can see where you stand with our borrowing capacity tools before you start inspecting homes.

Calculating Home Loan Repayments: A Worked Example

At an illustrative rate of 6.75% p.a., a $600,000 principal and interest loan over 30 years costs about $3,892 a month. Each extra $50,000 borrowed adds about $324 a month at that same rate.

Consider a buyer who has found a home they love and can set aside a maximum of about $3,900 a month for repayments. They had been looking at homes that needed a $650,000 loan. At the illustrative 6.75% rate, that loan would cost about $4,216 a month, which is over their budget.

A $600,000 loan would cost about $3,892 a month, which uses almost all of that $3,900 and leaves no buffer. If you have a variable rate, repayments would rise if rates went up. Lenders typically test repayments at a rate about 3 percentage points higher, and it makes sense to do the same. So the buyer works backwards from the repayment, not forwards from the asking price, and sets a loan ceiling below their maximum repayment. That way there is room if rates rise. Stamp duty and fees also come out of the buyer's funds, so they affect the deposit and the loan size. The buyer then looks only at homes that fit once those costs are covered.

These figures are illustrative only. Your own rate will depend on your deposit, your lender and your loan type. Try your own numbers in our mortgage repayment calculator.

Fixed Rate or Variable Rate When Rates Are Moving

A fixed rate locks your repayment for a set period, while a variable rate can move up or down with the lender's decisions. Neither is automatically the right pick, because each comes with a trade-off.

With a fixed rate, you know your repayment during the fixed period. The costs are less flexibility, limits on extra repayments with many lenders, and possible break costs if you leave early. With a variable rate, you may benefit if rates fall, but your repayments can rise if they go up.

Some buyers use a split loan to cover both. Part of the loan is fixed and part is variable, so you get some certainty and some flexibility. The trade-off is that you carry two loan balances, and the fixed portion has the same restrictions described above. Our page on split loans shows how this structure works when borrowing for a build.

Does a Linked Offset Account Help When Rates Rise?

An offset account can help because the money in it reduces the balance your interest is charged on. If your loan is $600,000 and you hold $30,000 in the offset, interest is generally calculated on $570,000.

The saving only exists while the money stays in the account. Some loans with an offset account carry an annual fee or a higher rate than loans without one, depending on the lender. Compare that cost against the balance you would realistically keep in the account.

When to Get Home Loan Pre-Approval

Get pre-approval before you start seriously bidding, especially when rates are changing. It is a lender's conditional indication of how much you may borrow, and it is not a promise of final approval.

Final approval still depends on the property, your circumstances at the time and the lender's checks. If your rate or finances shift while you wait, ask your broker to re-check your position.

If you already own a home, a review of your current loan can show whether your rate and structure still suit you. Our loan health check is a good place to start, and if a lower rate is available elsewhere, refinancing may be worth looking at. Refinancing can involve a discharge fee from your current lender, a break cost if you leave a fixed rate early, any application or settlement fees from the new lender, and a fresh credit assessment. Exit fees may still apply only to loans taken out before 1 July 2011. Weigh these costs against any saving.

Call one of our team or book an appointment at a time that works for you. We will look at your repayments, your borrowing power and your loan structure, so you can make your next move with a clear number in mind.

Frequently Asked Questions