RBA Hikes to 3.85%: What Property Investors Must Do Now

For most of 2025, the narrative was clear. The RBA cut rates in February, then again in May, then again in August — three cuts that drove a 9% surge in national property prices, returned confidence to the market, and pushed the average Australian home to a record $1,045,000 by September.

Then February 3, 2026 arrived.

In a decision that surprised parts of the market, the Reserve Bank of Australia raised the cash rate by 25 basis points to 3.85% — ending Australia's brief but powerful rate-cutting cycle. The RBA's language was unambiguous: trimmed mean inflation had climbed back above the 2–3% target band in the second half of 2025, and the Board was not prepared to wait it out.

The commentary that followed focused almost entirely on homeowners — mortgage repayment calculators, refinancing tips, and first-home buyer affordability. That's the wrong conversation for property investors. The questions you should be asking are different, and the answers matter more for your portfolio than any repayment calculator.

The RBA Board cited two primary factors in its February 3 decision.

Trimmed mean inflation re-accelerated. After falling toward the target band through mid-2025, underlying inflation climbed back above 3% in Q3 and Q4 of 2025. The three rate cuts that ran through the year were premature — or at least, didn't get inflation fully under control before the data turned.

Labour market resilience. Unemployment remained lower than the RBA's models anticipated. A strong labour market keeps wages growth elevated, which keeps services inflation sticky. The Board concluded it needed to act.

What makes this moment different from the November 2023 hike — the last time rates reached this level — is investor psychology and positioning. In late 2023, investors and buyers had already adjusted to a high-rate environment after 13 consecutive hikes. In early 2026, investors had just re-leveraged based on the assumption that the cutting cycle would continue. The February hike is a trapdoor: it reverses the conditions that drove the 2025 property rebound before those gains have fully settled.

Understanding where we are requires knowing how we got here.

At 3.85%, we are not at the previous peak of 4.35%. But the direction of travel — not the level — is what's shifting investor confidence.

The critical historical parallel: During the 14 months the cash rate sat at 4.35% (November 2023 to February 2025), national property prices continued rising. The average Australian home reached a record $1,045,000 in the September 2025 quarter. Interest rates at multi-decade highs did not kill the property market — because the supply-side constraint was more powerful than the demand-side cost pressure. That structural dynamic hasn't changed. What has changed is the rate direction.

The March 16–17 meeting is widely expected to be a hold. Markets aren't pricing a meaningful probability of a March hike, and the RBA typically allows time for previous decisions to flow through the economy before acting again. But May is a different picture entirely.

Following the February decision — and more importantly, the January CPI data that preceded it — all four of Australia's major banks revised their forecasts:

CBA's Head of Australian Economics was direct: "Trimmed mean inflation is expected to remain above 3% through all of 2026. This is too high and will not be tolerated by the RBA."

For investors, the practical impact of a second hike in May: a $600,000 variable loan would see repayments rise by approximately $90/month on the May hike alone. Across both hikes, the total increase would be approximately $180/month. An $800,000 loan faces roughly $240/month across both hikes. Median income households lose approximately $18,000 in borrowing capacity per 25bps hike — significant for investors assessing their next purchase.

In late February 2026, US and Israeli forces struck Iranian military and energy infrastructure. Oil prices spiked 13% overnight to their highest level since January 2025. The Strait of Hormuz — through which approximately 20 million barrels per day of global oil supply flows — is at risk. Westpac's economics team modelled three scenarios for Australia's CPI:

Under those scenarios, Australian petrol prices could rise by $0.25 to $1.00 per litre — a direct cost-of-living hit that feeds into CPI quickly. Oil-driven inflation is supply-side inflation — rate hikes are a blunt tool against it. But the RBA cannot ignore headline CPI prints. If oil keeps inflation elevated through mid-2026, the Board's capacity to pause — let alone cut — is significantly constrained.

The scenario investors need to hold in mind: rates could stay higher for longer than 4.10%, not because the Australian economy is running hot, but because global oil markets are disrupted. This risk is largely absent from the mainstream coverage.

Every 25 basis point rise reduces borrowing capacity — but the effect compounds for investors, who often carry multiple loans. A couple with a $1.5 million investment portfolio and two variable rate mortgages faces a materially different cash flow picture at 4.10% than at 3.60%.

APRA's 3% serviceability buffer means lenders already assess your ability to repay at approximately 3 percentage points above the actual rate — currently implying a test rate of around 6.85%. This hasn't changed, but it does mean new lending remains tight and the refinancing market for investors is constrained.

Here's what most homeowner-focused commentary misses: for negatively geared investors, rising interest rates increase your tax deduction.

If your investment property carries a $600,000 interest-only loan at 6.35% (typical variable rate at 3.85% cash rate), your annual interest expense is approximately $38,100 per year — fully deductible against your income. At 6.60% (if the cash rate hits 4.10%), that becomes $39,600 per year.

The interest deduction goes up — but so does your cash shortfall. For investors on high marginal tax rates, the after-tax cost of higher rates is lower than the headline figure suggests. For investors already at the edge of serviceability, the cash flow pressure is real regardless of the tax treatment.

In a sustained high-rate environment, the risk profile of different property types shifts:

• Yield-focused properties (regional centres, high-rent lower price points) become relatively more attractive — positive or neutral cash flow provides a buffer against rate movements.
• Capital growth plays (inner-city, premium apartments, land-rich suburban fringe) rely on lower rates to justify the cash flow shortfall — they're more exposed in a rising rate environment.
• New builds may carry higher depreciation deductions that partially offset rising interest costs — our new build vs established guide covers this in detail.

The contrast is sharpest when you compare specific markets. Blue-chip inner-city suburbs in Sydney and Melbourne typically deliver gross rental yields of 2.5–3.5% — below the cost of debt at any rate above 5%. Regional centres like Ballarat (Vic), Toowoomba (Qld), and Launceston (Tas), by contrast, regularly yield 5–6.5%, putting investors closer to neutral or positive cash flow even in a higher-rate environment. This doesn't mean abandoning growth markets — but it does mean knowing what you're holding and why, rather than assuming location alone justifies the cash flow shortfall.

A problem unique to investors who borrowed during the 2025 cutting cycle is beginning to emerge. When cash rates sat at 3.60% and variable rates were around 6.10%, APRA's 3% buffer meant lenders tested serviceability at approximately 9.10%. Investors stretched to their limit passed — just.

Now, with variable rates rising to ~6.35% and climbing toward ~6.60%, the serviceability floor has lifted too. Investors who borrowed at maximum capacity in 2025 may find they no longer qualify to refinance — even to a lower-rate product on their existing loan value. They are what the industry calls mortgage prisoners: trapped on their current lender's rate, unable to switch because the new test rate makes them unserviceable on paper.

Through most of 2025, fixed rates looked expensive relative to variable rates because markets were pricing in cuts. That calculus has reversed. With all four major banks tipping 4.10% by May, 1–2 year fixed rates are being priced to reflect — and in some cases price in — that hiking cycle. The spread between fixed and variable rates is narrowing, and locking in a portion of your portfolio at a fixed rate for 12–24 months is a conversation worth having with your broker now, not after the next hike.

This is not a blanket recommendation — break costs, loan structure, and your specific circumstances all matter. But the rate direction has changed, and loan strategy should follow.

Every property investor should know their monthly cash flow position at three levels:

• 3.85% (current) — where you are now
• 4.10% (May 2026 consensus) — where you're likely heading
• 4.35% (previous peak / oil-shock tail risk) — the scenario you need to survive, not just model

If your portfolio is cash-flow manageable at 4.35%, you have a resilient position. If it breaks at 4.10%, you have a decision to make before May — not after.

Contact your mortgage broker before March is out. The window to lock in a competitive fixed rate or negotiate a split structure closes once the RBA's path is confirmed. Lenders price future rate expectations into fixed rates, so waiting for certainty means paying a premium for it. The key questions to work through:

• What is my current variable rate, and what does it become at 4.10%?
• Is a 1–2 year fixed rate worth considering for any portion of my portfolio?
• Are my offset accounts and redraw facilities optimised to reduce effective interest costs?

For investors with multiple properties, this conversation is worth having across each loan individually — not as a blanket decision.

The property market's response to rate hikes is always fear-driven in the short term. But the supply side of Australian housing remains structurally constrained — rental vacancies sit at approximately 1% nationally, construction costs remain elevated, and skilled labour shortages mean new supply is slow regardless of interest rates.

At the previous peak of 4.35%, property prices continued rising. The fundamental dynamic driving Australian property values — more people wanting to live here than there are homes to accommodate them — has not changed because the cash rate moved 25 basis points.

Selling a fundamentally sound investment property because of a rate move is a reaction to sentiment, not fundamentals. Know the difference. If you're unsure how to assess your position, our guide to where to buy investment property in Australia in 2026 is a useful starting point for re-evaluating your market fundamentals.