Interest rate sensitivity. How a 100bp move changes serviceability and affordability.

Interest rate movements have an outsized effect on Australian property affordability. A 100 basis point (1%) rate change shifts monthly repayments by 5-8% on a typical loan, which in turn shifts the maximum loan a buyer can service by 8-12%.

For buyers timing the market or assessing how rate changes affect their position, the sensitivity table below is the cheat sheet.

Why rates matter so much

Australian buyers are heavily debt-funded. The typical first home purchase has 80-90% of the value funded by mortgage. The mortgage is at a variable or short-term-fixed rate.

When rates rise:

• Monthly repayments rise
• Borrower serviceability falls (banks lend less)
• Maximum purchase price falls
• Buyer demand contracts
• Price growth slows or reverses

When rates fall:

• Monthly repayments fall
• Borrower serviceability rises
• Maximum purchase price rises
• Buyer demand expands
• Price growth accelerates

The effect is faster on the demand side (buyers respond within weeks of a rate cut) than on the supply side (new construction takes years). The price response is therefore quick.

The maths: monthly repayment sensitivity

For a principal-and-interest mortgage over 30 years, the monthly repayment per $100,000 borrowed at various rates:

• 4.0%: $477 per month
• 4.5%: $507 per month (+$30)
• 5.0%: $537 per month (+$60)
• 5.5%: $568 per month (+$91)
• 6.0%: $600 per month (+$123)
• 6.5%: $632 per month (+$155)
• 7.0%: $665 per month (+$188)
• 7.5%: $699 per month (+$222)
• 8.0%: $734 per month (+$257)

The 100bp move from 6.5% to 7.5%: $67 per $100k per month. On an $850,000 loan, that is $570 per month additional repayment.

Over the loan life, the cumulative interest cost difference between 6.5% and 7.5% on $850k is approximately $206,000.

The maths: borrowing capacity sensitivity

Banks assess your serviceability using a benchmark rate that is typically 3% above the actual lending rate (the "serviceability buffer"). This protects against rate increases.

For a household with $150,000 combined income and $25,000 of existing debt servicing:

• At 6.5% lending rate (9.5% serviceability assessment): maximum loan approximately $850,000
• At 7.5% lending rate (10.5% serviceability assessment): maximum loan approximately $790,000

A 100bp lending rate increase reduces maximum loan capacity by approximately 7%.

For a higher-income household ($250,000), the impact is similar in percentage terms but larger in dollar terms:

• At 6.5%: maximum loan approximately $1,420,000
• At 7.5%: maximum loan approximately $1,320,000

What this means for property prices

If maximum borrowing capacity falls 7%, the willingness-to-pay of borrowing buyers also falls roughly 7%. The price effect is moderated by:

• Cash buyers (not affected by rates)
• Owner-occupiers vs investors (different price sensitivities)
• Supply conditions (low listings dampen price falls)

Empirically observed: a 100bp rate increase typically produces a 5-9% property price decline in the affected market over 12-18 months. The effect is faster and sharper at the high end (where investor buyers dominate) and slower at the low end (where owner-occupier buyers dominate).

The reverse: rate cut scenario

If the RBA cuts rates by 100bp:

• Borrowing capacity rises ~7%
• Buyer demand surges within weeks
• Property prices typically rise 4-8% in the following 12-18 months
• The effect is fastest in cities with constrained supply (Sydney, Melbourne)

The recovery from a rate-cut typically lasts 18-30 months before normalising.

Timing strategy implications

Three patterns:

Pattern 1: buy ahead of rate cuts

If RBA signalling and economic indicators suggest rate cuts in the next 6-12 months, buying before the cut captures the pre-cut price. After the cut, the same property is 4-8% more expensive.

The challenge: rate cut timing is uncertain. Buying "ahead" is a directional bet that can be wrong.

Pattern 2: refinance after rate cuts

If you bought during a high-rate period, refinancing after rates fall reduces your monthly cost. Worth doing when the rate gap exceeds approximately 50bp and you plan to hold for at least 18 more months.

Pattern 3: build a serviceability buffer

If you can service your mortgage comfortably at the current rate but would struggle at a 200bp higher rate, your buffer is thin. Building cash reserves or paying down debt strengthens the buffer.

What banks actually assess

Three considerations beyond the headline rate:

Consideration 1: HEM (Household Expenditure Measure)

Banks use HEM as a baseline for your living expenses, then verify actuals. If your actual expenses are below HEM, the bank uses HEM. If above, the bank uses actuals.

HEM varies by household composition (single, couple, dependents) and income tier. Higher-income households have higher HEM assumptions.

Consideration 2: existing debt

Other debts (credit cards, personal loans, car loans, HECS, BNPL) reduce your serviceability assessment by roughly 3% of the credit limit (not the balance) per year. A $20,000 credit card limit reduces your borrowing capacity by $5,000-8,000 even if the card is empty.

The fix before applying for a loan: close unused credit accounts.

Consideration 3: income stability

Variable income (commissions, bonuses, self-employment income) is heavily discounted in serviceability assessments. Typical haircut: 20-50% of variable income.

If a substantial portion of your income is variable, your assessed borrowing capacity is lower than your nominal income would suggest.

The serviceability buffer in context

APRA requires banks to assess serviceability at a benchmark rate at least 3% above the actual lending rate. The buffer is currently 3% (down from 3.5% at one point in 2023). If APRA reduces the buffer further, borrowing capacity rises for the same income.

Conversely, an APRA buffer increase tightens lending and reduces borrowing capacity. Worth watching as a policy signal.

Interest rates are one of the most variable inputs in property purchasing. Knowing how a 100bp move affects your specific situation lets you act decisively when rates change. The buyers who time the market well usually have done the maths in advance.