After hopes late in 2025 that inflation was easing, 2026 has opened with signs that price pressures remain. The RBA lifted the cash rate by 25 basis points to 3.85% in February, and major banks now expect another rise in May, with the possibility of further increases later in the year. Some economists disagree, but most acknowledge the risk is tilted upward.
Rather than predicting what happens next, this article focuses on how rising rates affect different borrowers—and the practical steps you can take to stay ahead.
First‑Home Buyers
First‑home buyers feel rate rises quickly. They usually borrow at higher loan‑to‑income ratios and put most of their savings into the purchase, leaving less room for unexpected increases. With lenders tightening serviceability tests, borrowing capacity is shrinking.
What to focus on:
- Check your borrowing capacity early. When seeking pre‑approval, factor in potential rate rises and how they affect your eligibility.
- Trim non‑essential spending and debts. This strengthens your position with lenders.
- Build a savings buffer. Even a small cushion helps absorb higher repayments. An Offset or paying extra into your loan is a good way to store your extra savings.
Upgraders
Upgraders—whether renovating or moving to a larger home—often carry sizeable existing mortgages. Rising rates increase the cost of bridging loans and reduce the advantage of accumulated equity. For families already juggling higher living costs, repayment increases can stretch budgets.
What to focus on:
- Review your cashflow and borrowing power. Larger loans amplify the impact of rate changes.
- If renovating, revisit your budget. Fixed‑price contracts offer certainty, and lenders often require them for major structural work.
- Have a realistic buffer to meet any contingencies. A 10% figure is considered reasonable in most instances.
- If buying and selling, plan your timing. Good sequencing can help you avoid bridging finance altogether.
Property investors
Higher interest costs can quickly erode returns, especially for highly leveraged investors. If rents don’t rise at the same pace, cashflow can tighten.
What to focus on:
- Compare rental income with rising interest costs. Understand your net position.
- Model different rate scenarios. Know how your cashflow holds up if rates rise further.
- Maintain a buffer. Vacancies or unexpected expenses can hit harder in a high‑rate environment. An amount equivalent to 3 months of repayments would be a good target.
- Review your loan structure. Consider whether interest‑only periods or a mix of fixed and variable rates suit your strategy.
Small businesses
Small businesses relying on variable‑rate loans, overdrafts, or equipment finance feel rate changes almost immediately. Higher borrowing costs reduce margins and can limit hiring, investment, and stock purchases. With inflation still elevated, businesses face rising input costs at the same time customers are tightening their spending.
What to focus on:
- Protect your margins. Look for cost‑saving opportunities or consider adjusting pricing.
- Monitor cashflow closely. Seasonal businesses should pay particular attention to inventory and debtor management.
- Review your credit needs early. Lenders may reassess risk and tighten access to finance.
Key Takeaways
Regardless of where you are in the property or business cycle, a few principles apply to everyone taking on new debt:
- Know your cashflow. If income isn’t rising, discretionary spending may need to fall.
- Stress‑test your plans. Make sure you’re not over‑committing if rates rise further.
- Build a savings buffer early. Even a modest cushion can make a big difference.
- Seek professional advice to understand your options.