At its first board meeting of the year, the Reserve Bank of Australia (RBA) raised the official cash rate by 25 basis points to 3.85%. This was the first rate increase since late 2023 and followed stronger-than-expected inflation data and robust economic activity in late 2025.
The Bank’s decision was unanimous and based on concerns that inflation remains above target and that private demand and labour market pressures were stronger than anticipated. The RBA indicated that inflation may remain elevated for some time, suggesting a cautious monetary policy outlook.
In simple terms, the cash rate is the benchmark interest rate that influences how much banks charge for loans and pay on deposits. When the RBA increases it, borrowing becomes more expensive for lenders, and over time those costs tend to be passed on to borrowers.
It doesn’t directly change your loan rate overnight, but it sets the direction for future changes in mortgage and personal loan pricing.
Practical Impact on Homeowners
Variable Rate Mortgage Holders
If you have a variable rate home loan, a rise in the cash rate typically means:
- Monthly repayments are likely to increase, especially once lenders pass the change through in their pricing.
- As a rough guide, a 0.25% rate increase can add around $80–$150 per month to repayments on a typical mortgage, depending on the loan size and term*
- Your budget will need to accommodate higher outgoings if banks pass on the full increase.
Even if your monthly repayments don’t change immediately, the interest portion of your repayment may rise behind the scenes, impacting the rate at which you pay down principal. If you’d like to understand how the rate change could affect your own repayments, you can explore different scenarios using the Elders Finance loan calculators.
Fixed-Rate Loans and Expiry
If your loan is on a fixed rate:
- Your rate and repayments won’t change until your fixed term expires.
- When your fixed rate rolls off, you’ll usually move to a standard variable rate, which may already be higher than before.
- Check the expiry date of your fixed term well in advance and consider comparing options (renewing a fixed rate, switching lenders, or moving to a hybrid loan structure) before it expires.
Budgeting
With higher rates:
- Review cash flow and essential expenses.
- Look at offset accounts or additional repayments to manage interest costs.
- Consider consolidating higher-cost debt if appropriate.
If You’re Buying a Home
Pre-Approval and Borrowing Capacity
Getting pre-approval from a lender gives you a clear indication of how much you can borrow based on your income, expenses, credit history and existing obligations.
In the current environment:
- Lenders still apply serviceability buffers, they don’t just test you at the current rate, they assess whether you could afford repayments at a higher rate in future. This is to protect you if rates rise again.
- Even if the RBA raises rates now, banks may test your borrowing capacity at a higher assumed rate (often 2–3% above the current rate) before they grant formal pre-approval.
- This can mean your approved borrowing amount is lower than the maximum you might calculate based on today’s advertised rates.
Why Serviceability Buffers Matter
Serviceability tests ensure you’re not overstretched if:
- Interest rates rise further.
- Your financial circumstances change.
- You face unexpected costs (e.g. repairs, household expenses).
Buffers are not “extra punishment”, they’re a safety measure built into lending to protect both borrowers and lenders.
If you’re planning to buy, understanding your borrowing options early can help you move with confidence. Elders Finance offers a range of home loan solutions designed to suit different buyer needs and stages.
If You’re Investing
Cash-Flow Sense–Check
For property investors, a rate rise matters because it affects your cost of borrowing and therefore your cash flow:
- Higher interest costs can reduce rental-income margins.
- Investors should check whether rent covers most or all of the loan interest and other costs. If not, you will need to contribute from other income sources.
Rental Assumptions
Review:
- Current rental yields: have rents kept pace with costs?
- Vacancy risk: periods without tenants reduce income.
- Borrowing levels: avoid over-leveraging (borrowing too much relative to your income or assets), as higher rates can quickly tighten cash flow.
Sound investment practice remains focusing on long-term cash flow stability rather than short-term gains.
Why This Matters Now
Even though this is just one rate move:
- It signals the RBA’s focus on inflation and a willingness to tighten further if needed.
- Markets are already pricing in the possibility of additional hikes later in 2026 if inflation doesn’t ease.
- For borrowers and investors, it’s a reminder that interest cost is a material part of financial planning, and that your strategy may need to adapt if rates stay elevated longer than expected.
In previous cycles when rates were cut, borrowers welcomed lower monthly costs — but when rates rise, costs increase more quickly than borrowers sometimes anticipate. Even modest increases can add several hundred dollars per month on larger loan amounts.
Next Steps Checklist
Use this simple practical list to take stock after the RBA decision:
- Review your budget
- Adjust your monthly cash flow projections for possible higher repayments.
- Look at essential vs discretionary expenses.
- Check your rate expiry
- Find out when any fixed rate period ends.
- Compare current market options before your fixed term rolls off.
- Compare options
- Talk to lenders or brokers about refinancing, offset accounts, split loan structures or features that support budgeting.
- Talk to a professional
- A broker, accountant or financial planner can help you interpret your personalised rate impacts, whether you’re a homeowner, buyer or investor.
Contact Elders Finance
If you’re unsure what today’s RBA cash rate decision means for your personal situation, whether you have a home loan, are gearing up to buy, or are holding investment property, it’s worth speaking with your local Elders Finance broker. They can help you review your current loan structure, check your borrowing capacity, and explore options that fit your goals and budget.
*Source: https://www.sbs.com.au/news/live-blog/rba-interest-rates-decision/hoc4etbow, https://www.rba.gov.au/media-releases/2026/mr-26-03.html