What happens to your mortgage repayments when interest rates rise?

By Philippa Billings, Chief Advice Officer, Otivo

Here's something most borrowers don't realise about their own home loan. When the bank approved it, they didn't check whether you could afford the repayments at the rate you were offered. They checked whether you could afford them at three percentage points higher. That number — the rate you were tested at, not the rate you're paying — is the most useful figure in your loan file, and almost nobody knows theirs. After three cash rate increases in the first half of 2026, it's worth digging out. Here's how a rate rise translates into a repayment figure, and how to work out your own break point.

A one percentage point rate rise on a $600,000 mortgage over 30 years lifts monthly repayments from about $3,598 to about $3,993 — roughly $395 a month. As at August 2026 the Reserve Bank of Australia's cash rate target is 4.35%. Lenders must assess new borrowers at their loan rate plus a serviceability buffer of three percentage points, set by APRA.

How does a rate rise actually change a repayment?

Interest is the cost of borrowing. An interest rate is the percentage of the outstanding balance charged each year, so when the rate moves, the interest portion of every repayment moves with it — and on a variable loan, the lender recalculates the required repayment to keep the loan on track to be repaid by the end of its term.

The maths isn't linear in a way most people expect. On a $600,000 loan over 30 years, principal and interest, owner-occupier, fees excluded:

• At 6%, the monthly repayment is about $3,598.
• At 7%, it's about $3,993.
• At 8%, it's about $4,403.

Each percentage point costs roughly $400 a month at this loan size. The rule of thumb worth remembering is about $65 per month per $100,000 borrowed, per percentage point — close enough to do in your head at the kitchen table.

The Reserve Bank sets the official cash rate, which flows through to what lenders charge. At its 11 August 2026 meeting the Board held the cash rate at 4.35 per cent, after increases earlier in the year.

The three numbers that decide whether a rate rise hurts

A rate rise is uncomfortable for everyone and genuinely difficult for some. Which category a household falls into comes down to three figures.

1. Your current repayment as a share of gross household income. A commonly used rule of thumb in Australian housing research treats housing costs above 30% of gross income as the point where a household is under housing stress, particularly for lower-income households.
2. Your assessment rate. This is your loan rate at approval plus the APRA buffer of three percentage points. It's the repayment level your lender concluded you could manage.
3. Your actual monthly surplus. What's genuinely left after the mortgage and living costs, not what's left in a good month.

The gap between the first and second number is your headroom. The third tells you whether that headroom is real.

Why does the serviceability buffer matter so much?

APRA requires lenders to assess a borrower's capacity to repay at the loan's interest rate plus a buffer of at least three percentage points. The buffer has sat at three points since October 2021, and APRA confirmed in 2026 that it stays there, citing high household debt and continued economic uncertainty.

For a borrower who took a $600,000 loan at 6%, the assessment was run at 9% — a monthly repayment of about $4,828 against the $3,598 they actually started paying. That $1,230 gap is not a promise that the household can comfortably absorb a three-point rise. Circumstances change, and the assessment used assumptions about expenses at a point in time. But it is a useful reference point, and it's the closest thing most borrowers have to a documented break-even.

One consequence catches new buyers out. Because the buffer rides on top of the actual rate, every cash rate rise is magnified in borrowing capacity terms. A rate rise doesn't just increase repayments for existing borrowers — it reduces how much new borrowers can borrow at all. APRA has also capped high debt-to-income lending, limiting banks to writing no more than 20% of new owner-occupied and investor loans at debt-to-income multiples of six or above.

What does fixed versus variable change here?

The choice between rate types changes who carries the risk of a movement, not whether the movement happens.

A variable rate moves up and down over the loan term. When rates rise, repayments and total interest rise with them.

A fixed rate holds the repayment steady for a set period, usually one to five years. That's certainty for the fixed period — but average home loan terms run 25 to 30 years, so a fixed period ends well before the loan does, and the loan reverts to whatever the prevailing rate is at that point. Fixed loans also typically limit extra repayments.

Splitting a loan between fixed and variable portions is common with home loans. Options often include a full fixed period, a full variable rate, or a split, and which suits a household depends on income stability, how much certainty is worth to them, and whether they want to make extra repayments.

How can you work out your own number before it happens?

Many Australians find it useful to run the arithmetic before a rate decision rather than after one. The process is short.

1. Find your current loan balance, rate and remaining term.
2. Calculate the repayment at your current rate, then at plus one, two and three percentage points.
3. Compare each figure against your actual monthly surplus.
4. Note the point where the surplus runs out. That's your break point, and knowing it is worth more than any forecast.

The point of the exercise isn't to predict the Reserve Bank. It's to know in advance which rise is an inconvenience and which one is a problem, because the household that already knows has options the household finding out in real time doesn't.

Otivo's debt advice models repayment scenarios against a household's actual income and expenses, considering debt types, repayment details and living costs, as part of regulated digital financial advice provided under AFSL and Australian Credit Licence No. 485665. If the numbers point somewhere uncomfortable, there's a companion piece on what to do if repayments become hard to afford — and if things are already difficult, help is available through ASIC's MoneySmart, and every lender has a hardship team.

Frequently asked questions

How much does a 1% rate rise cost per month?

On a $600,000 loan over 30 years, roughly $395 a month. As a general guide, expect about $65 per month per $100,000 borrowed for each percentage point, assuming principal and interest repayments.

What is the APRA serviceability buffer?

It's the margin lenders must add to a loan's interest rate when assessing whether a borrower can afford it. APRA sets it at a minimum of three percentage points, so a 6% loan is assessed at around 9%. It has been at three points since October 2021.

When is a mortgage considered unaffordable?

There's no legal definition. A widely used rule of thumb treats housing costs above 30% of gross household income as housing stress, though what's manageable varies significantly with income level, household size and other debts.

Does a rate rise change my loan term or my repayment?

On a variable loan, lenders usually increase the required minimum repayment so the loan still finishes on schedule. Some lenders offer to extend the term instead, which lowers the repayment but increases total interest paid.

What is the cash rate right now?

The Reserve Bank held its cash rate target at 4.35 per cent at the 11 August 2026 meeting. The Board next meets on 29 September 2026.

Sources

• Reserve Bank of Australia, Statement by the Monetary Policy Board, 11 August 2026.
• Australian Prudential Regulation Authority, macroprudential policy settings, 2026.
• Australian Prudential Regulation Authority, Prudential Practice Guide APG 223 Residential Mortgage Lending.
• ASIC MoneySmart, Problems paying your mortgage.
• Repayment figures calculated on a $600,000 loan, 30-year term, principal and interest, owner-occupier, fees excluded.

Disclaimer

The information in this communication is current as at August 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.