Why Interest Rates Matter in Property Investment
Property investment is rarely a one-size-fits-all journey. Successful investors develop clear strategies aligned with their financial goals and personal circumstances. But no matter what strategy you follow—whether you’re in it for capital growth, positive cash flow, or long-term rental income—interest rates are a key variable that can make or break your outcome.
In Australia, interest rates don’t just influence your borrowing costs. They can also shape market conditions, impact property prices, and shift buyer and renter behaviours. So, whether you’re a seasoned investor or just beginning your journey, understanding how interest rates interact with the housing market is crucial.
VIDEO TRANSCRIPTION:
Once logged in on the main dashboard, click Tools and select Investment Property Cashflow Calculator.
You’ll be presented with 5 different property columns, where each column represents a different property. All fields have been pre-populated to help you get started. All non-gray fields or boxes are user editable.
You can change the values of Property Price, 10 Yr. Avg. Annual Capital Growth, Vacancy Rate, Deposit, Rent Per Week, Values under Recurring Costs and all the non-gray fields.
The Gray fields are non-editable as it has formulas on them.
The Stamp Duty is automatically calculated based on the state you selected.
You want to see how different interest rate increase will affect the cashflow of your existing property or the property you are buying.
As an example, on Property 1 let’s change the property price to $500k thousand, the Rent to $400 per week, and let’s leave the Deposit to 20%. Since the property is a house let’s put zero or nill on Strata.
Next, in the bottom of Property Column 1, click the “Copy inputs to Property 2 to 5” to copy all the values of Property 1 to Property 2, 3, 4, and 5.
All Property Columns now have the same exact values.
Next, change the Interest from Loan for each Property Column.
Let’s start from 3%, to 3.25%, and 3.5%, then 3.75%, and lastly 4%.
Looking at the Cashflow Before Tax section, where Green means Positive Cashflow and where Red means Negative Cashflow, it’s showing how much impact a change on interest rate will bring to your investment property’s estimated cashflow.
Our example shows that the property will be negative cashflow when the interest rate increases to 4%.
You can save it as a pdf for your reference or present it to a professional consultant such as your financial planner or accountant.
If you are a buyers’ agent you can use this and present it to your client or if you are a real estate selling agent you can use this to win a potential vendor.
Crunching numbers and stress testing a property with interest rate increase made fun quick and easy with SuburbsFinder’s Cashflow Feasibility Tool!
Check out “How to make use of Supply and Demand Indicators when it comes to investing property?“
The Bigger Picture: Interest Rates and the Economy
Interest rates are one of the most powerful tools in the Reserve Bank of Australia’s (RBA) economic toolkit. When rates are low, borrowing becomes cheaper, stimulating investment and spending. Conversely, when inflation gets out of hand, the RBA lifts rates to cool things down.
The pandemic saw rates fall to record lows, giving the property market a significant boost. But with inflation surging in 2022, the RBA began raising rates again. As of April 2022, the average Australian mortgage rate rose to 4.34%, up from 3.77% just a month earlier. This reversal has real implications for both homeowners and investors.
How Interest Rates Affect Investment Property Cash Flow
A single percentage point increase in interest rates can significantly affect your cash flow. If you own or plan to purchase an investment property with a mortgage, rising rates will increase your repayments, potentially turning a once positively geared property into a negatively geared one.
Let’s look at a simple example:
- Property price: $1,100,000
- Loan-to-value ratio (LVR): 80%
- Loan amount: $880,000
- Loan term: 30 years
At 4% interest, monthly repayments are about $4,240.
At 5%, they jump to $4,725.
That’s a $485 difference per month—or nearly $6,000 per year.
Stress-testing your investment using tools like a Cashflow Feasibility Calculator helps you see how different interest rates would affect your property’s performance. This kind of modelling is invaluable when evaluating whether a property is still viable under different economic scenarios.
“Get your Access to our Fully Customisable Investment Property Research and Analytics Tool Now!”
Rising Interest Rates and Property Prices
As borrowing costs increase, fewer people can afford large mortgages. This typically reduces demand in the property market, putting downward pressure on prices. Sellers may need to lower asking prices to attract buyers.
This environment may sound tough, but for cashed-up investors or those with strong borrowing capacity, it can create strategic buying opportunities. High interest rates often drive up rental demand as fewer people buy homes, putting upward pressure on rents—especially in tight markets with low vacancy rates.
So, while property values may soften temporarily, rental yields often improve, which can support cash flow-focused investors.
Investor vs. Owner-Occupier Behaviour in High-Rate Markets
Data from the Australian Bureau of Statistics showed that in early 2022, investors remained active in the market despite rising interest rates. However, owner-occupiers were more cautious. With higher repayments and lower borrowing power, many delayed purchases or scaled down their budgets.
This dynamic often leads to increased demand in the rental market—good news for landlords but challenging for tenants. It also highlights the importance of choosing the right location and property type to weather interest rate changes.
The Broader Impact of Rate Rises on the Housing Market
Let’s look at how higher interest rates shape the market more broadly:
- Decreased Borrowing Capacity: Banks reduce the maximum loan amount borrowers can access, limiting buyer competition and driving price stabilisation or drops.
- Increased Holding Costs: Landlords with variable-rate loans may see shrinking cash flow, especially in low-yield markets.
- More Renters, Fewer Buyers: With fewer people able to purchase homes, demand for rental properties increases—pushing rents higher in many regions.
- Shift Toward Regional Areas: Some buyers may exit expensive capital cities in search of affordable options in regional markets that offer better yields.
How to Future-Proof Your Portfolio
In a rising interest rate environment, investors should take a proactive approach. Here are a few strategies to consider:
- Stress Test Your Numbers: Model how your cash flow changes with 0.25%–1% rate increases.
- Reassess Your Strategy: If you’re negatively geared, consider how long you can afford the out-of-pocket expense.
- Target High-Yield Markets: Areas with low vacancy rates and rising rents can help offset the impact of higher repayments.
- Review Your Loan Structure: Fixing a portion of your loan may offer short-term stability.
- Maintain a Buffer: Set aside extra cash or redraw funds to cover increased costs and unexpected vacancies.
Opportunity in Uncertainty
Interest rate fluctuations are part and parcel of the property investment cycle. While they pose challenges—particularly for those over-leveraged or relying heavily on short-term capital growth—they also create opportunities.
Understanding how interest rates affect both your cash flow and property values helps you make smarter, more resilient investment decisions. Whether you’re buying your next property or reviewing your current portfolio, using the right tools and strategies can give you the edge in any market.
