Australia's fifth interest rate rise of 2026 has added further pressure to property investors already dealing with higher mortgage repayments and rising holding costs.
The Reserve Bank of Australia (RBA) increased the cash rate by 0.25 percentage points to 4.85% in November, taking the cumulative increase this year to 1.25 percentage points.
For Melbourne investors holding negatively geared properties, the additional interest expense could be widening the gap between rental income and ongoing costs. And although existing investors can retain their negative gearing benefits under the federal government's new tax rules, those deductions only offset part of the financial impact.
With the RBA expecting inflation to stay elevated well into 2027, now is a good time to work out what your property is costing you to hold today and what it could cost if rates rise again.
This article is general information only and does not constitute financial, legal or tax advice. We recommend seeking advice from a qualified accountant and solicitor before making any decisions.
Five rate rises have changed the cash flow equation
The RBA's November decision followed stronger-than-expected inflation data, with annual trimmed mean inflation – the RBA’s preferred measure – reaching 3.6% in September, according to the Australian Bureau of Statstics.
In its November Statement on Monetary Policy, the RBA forecast that inflation would remain above its 2–3% target range until the end of 2027, before returning to the midpoint of the range in mid-2028.
That outlook suggests investors should prepare for an extended period of relatively high borrowing costs rather than relying on interest rate cuts to improve their cash flow.
The cumulative effect of this year's increases is significant. Consider an investor with a $750,000 variable-rate investment loan. If their lender passes on all five increases in full, lifting their interest rate from 6.0% to 7.25%, their annual interest costs would increase from $45,000 to $54,375, assuming the loan balance remains unchanged. That's an additional $9,375 a year, or approximately $781 a month, before accounting for any changes in rental income or other expenses.
Investors with multiple properties could be facing a considerably larger increase across their portfolios.
Rising rents aren't necessarily covering higher costs
Melbourne's rental market has continued to deliver income growth, but higher rents haven't necessarily kept pace with investors' expenses. According to Cotality, Melbourne house rents increased 4.4% annually in October, while unit rents rose 4.6%.
Gross rental yields were 3.6% for Melbourne houses and 5.2% for units.
However, Cotality noted that even though gross yields across the combined capitals have reached their highest level since May 2015, they remain insufficient to deliver neutral or positive cash flow for many investors. Gross yields don't account for mortgage interest, insurance, council rates, property management fees, maintenance or land tax where applicable.
Melbourne house values have also fallen 8.9% annually, while unit values declined 4.8%, potentially reducing the equity available to investors considering refinancing.
These conditions make it particularly important to assess an investment property's actual cash flow rather than relying on its rental yield alone.
Negative gearing only offsets part of the shortfall
Investors who purchased their properties before the federal government's May 2026 Budget announcement retain their existing negative gearing arrangements. Under the 2026–27 Budget reforms, properties held before 12 May 2026 are grandfathered, allowing eligible rental losses to continue being deducted against other taxable income, including wages.
However, negative gearing doesn't reimburse investors for the full amount of their losses. For example, if an investor with a $750,000 variable-rate investment loan incurs an additional $9,375 in deductible interest expenses over a year, assuming the loan balance remains unchanged, and has a marginal tax rate of 37%, the potential tax saving would be approximately $3,469, excluding the Medicare levy.
That still leaves the investor bearing around $5,906 of the additional annual interest cost after the illustrative tax benefit.
The actual outcome depends on the investor's taxable income, deductions and individual circumstances. Investors should discuss their position with a qualified accountant, particularly given the upcoming changes to property investment taxation.
How can investors stress-test their cash flow?
A cash flow stress test involves calculating whether an investment remains affordable under different interest rate and rental income scenarios. The aim is to understand how much cash the property requires each month, how that could change and whether the shortfall can be comfortably covered from other income or savings.
Start by comparing the property's annual rental income with all ongoing expenses, including interest, management fees, insurance, maintenance, rates and applicable taxes.
Then calculate what would happen if mortgage rates increased by another 0.25 or 0.50 percentage points. For instance, using our example of a $750,000 variable-rate investment loan, a further 0.50 percentage point increase would add approximately $3,750 to annual interest costs, assuming the loan balance remains unchanged.
Investors should also allow for a period without rental income, unexpected repairs or higher insurance premiums.
Could your investment loan be structured more effectively?
Although you can’t control the RBA's decisions, there may be opportunities to manage your borrowing costs.
Reviewing your interest rate is a good place to start. Existing investment loans may be priced differently from the rates lenders currently offer comparable borrowers. Negotiating with your lender or refinancing could potentially reduce interest expenses.
Loan structure could also play a role. An offset account linked to an eligible investment loan can reduce the balance on which interest is calculated, although you should consider account fees, interest rate differences and the tax implications of your arrangements.
Some investors may also benefit from considering interest-only repayments, where appropriate. These can reduce immediate repayments compared with principal-and-interest repayments on the same loan, but the loan balance won't reduce during the interest-only period. Repayments may increase substantially when that period ends.
Rental income is another consideration. You can review whether your rent reflects current market conditions, taking account of Victorian tenancy laws, lease terms and tenant demand. Of course, any proposed increase must comply with the applicable legal requirements.
Each option has potential costs and trade-offs, so changes should be assessed against your broader financial position.
Review your investment cash flow with AXTON Finance
Five rate rises have changed the holding costs of many Melbourne investment properties. Even investors with reliable tenants and rising rental income may now be contributing substantially more from their own pockets.
AXTON Finance can help you review your current interest rates, compare lending options across our panel of more than 30 lenders and model how your repayments and interest costs could change under different rate scenarios.
We can also assess whether your current loan structure remains appropriate, including offset arrangements and interest-only options where suitable.
This article is general information only and does not constitute financial, legal or tax advice. We recommend seeking advice from a qualified accountant and solicitor before making any decisions.
Want to review the finance on your Melbourne investment property? Contact AXTON Finance on 03 9939 7576, email getabetterrate@axtonfinance.com.au or book your free consultation.
