How do interest rates affect the property market?

Cartoon model house with up arrows.

Interest rates and property prices are closely related. This is because the cost of financing a home loan greatly impacts whether people can afford to buy property: more buyers, more competition, which means higher prices. While the Australian property market can be hard to predict, watching interest rates can give us a good idea of where it may be going. 

Whenever the economy is out of balance, whether it's a recession or period of high inflation, the Reserve Bank of Australia (RBA) will adjust its monetary policy by either raising or lowering the official cash rate. This simple tool creates ripple effects on interest rates for home loans, since lenders use the cash rate as a guide.

Since inflation has been much too high recently, the RBA pumped the brakes by hiking the official cash rate 400 basis points over the last year, bringing it up to 4.10%. As a result, property prices fell over 8% last year as buyer interest in the market evaporated.

While property prices have seen a miniature resurgence in the first half of 2023, this may not be sustainable. So let's fully unpack the relationship between official interest rates and property prices.

Higher interest rates usually mean lower property prices

House balanced on a seesaw against stacks of gold coins

Almost no one expected the official cash rate to fly as fast and as high as it has gone in the last year. In May 2022, the RBA began raising interest rates and has done so at an aggressive page. Now at 4.10%, the cash rate is in deeply contractionary territory, meaning high interest rates should reduce household spending and shrink growth in the economy soon – thus slowing inflation.

To give you an idea of how much rate hikes can add to the cost of a mortgage, in June 2022, variable interest rates for owner-occupier home loans sat at an average of 3.61% in Mozo's database. After a year of RBA rate hikes, the average variable mortgage is now 6.58%. According to Mozo's rate change calculator, a jump of 3% on a $500,000 loan with a 25 year term (from 5% to 8%) adds over $930 to a borrower's monthly repayments. 

Thanks to the RBA's efforts, property prices fell 8% last year while rental prices skyrocketed, mostly due to increased demand and landlords passing along mortgage hikes to tenants. A lot of the decline in home values came down to buyers no longer being able to afford the market – especially first home buyers, who often face the greatest cost barriers.

RELATED: When will interest rates come down

In recent months the housing market has seen a little upswing in prices, but this is largely due to overseas investors and cashed up renters, two groups that aren't likely to struggle with rate hikes.

However, with the peak of the cash rate still yet to come, cost pressure will mount on homeowners. Already, there are reports of 'distressed sales', or Aussies selling their properties because they can no longer afford their mortgage.

As the cash rate continues to rise, variable mortgage rates will trend higher and reduce buyers’ borrowing capacity and make serviceability tests harder to pass. This in turn will flow-on to the house prices, as demand drops and price tags follow suit.

Given property prices soared to record-shattering heights during the 2021 property boom, price drops may be a welcome relief to hopeful first-time buyers who can still service a high-interest mortgage.

However, those who already have a home may fear a loss of home equity, which could reduce their LVR and make it harder to refinance. Many more will just face regular ol' mortgage stress as repayments become harder to meet.

So what can homeowners do to help manage the increasing home loan costs?

Loan details

Rate change

Repayment change if rates go up

In an era of high interest rates, comparing home loans is key for first home buyers

Person holds piggy bank

The housing market can be unpredictable and complicated. However, interest rates can still give us an idea of property predictions for 2023, including how homeowners and homebuyers can manage costs. 

Some strategies you could use to keep costs down include:

  • Save for a bigger deposit. The size of your deposit can determine how much you pay for your home loan in the long run. Not only does it establish your loan-to-value ratio, it sets which interest rates you're eligible. The lower the LVR, the lower the interest rate. Luckily, a rise in the cash rate also makes savings accounts and term deposits more attractive, since those interest rates are pegged to the cash rate as well. Watch your spending and try to aim for at least a 20% deposit. (Anything lower, and you may have to pay Lenders Mortgage Insurance). 
  • Consolidate as much debt as possible. Not only will this get your finances in order, but a lack of debt makes home loan applications deeply attractive to lenders. Even HECS debt can come back to haunt you if you’re not careful. (Fun bonus, though: your shares can make your home loan application look divine). 
  • Refinance your existing home loan. While refinancing sounds scary, it could actually save you a ton of money long-term. Multiple lenders are currently offering cashback to refinance your home loan, so talk to a financial planner to see if refinancing could be right for you.
  • Use your home equity to your advantage. While falling prices have got many homeowners nervous about their home equity, you could actually make your equity work for you, sometimes even to nab a cheaper mortgage. Huzzah!
  • Compare and research the market. Variable rates likely still have further to go, but some lenders offer special discounts to eligible customers, like on CommBank’s new green home loan offer. It’s all about comparing what’s out there to find something that could work best for you.
  • Research other avenues into the property market. Methods like off-market purchasing can sometimes be more expensive, but they can open you up to new opportunities and skirt the stress of the auction process. Otherwise, considers these three methods for buying property if money is tight.  
  • Get government assistance. Eligible applicants in Australia could receive government help for buying a home, like cover for a deposit through the First Homeowners Grant
  • Investigate first home loans. Home loan packages for first time buyers sometimes come with special perks, such as low interest rates, no ongoing fees, and smaller first deposits.

Keen to break into the property market? Head over to our home loan comparison hub, or browse a selection of offers below.

Home loan comparisons on Mozo

Mozo may receive payment if you click the products below. We don’t compare the entire market, but you can search our database of 473 home loans.
Last updated 21 June 2024 Important disclosures and comparison rate warning*
  • Basic Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.16 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Enjoy a low rate home loan with $0 application fee and $0 ongoing fees. Flexibility to split your loan and set different repayment types. Fee free redraw from your loan using online banking. Flexible ways to repay. 40% Deposit required.

  • Unloan Variable

    • Owner Occupier
    • LVR <80%
    Interest rate
    5.99 % p.a.
    Variable
    Comparison rate
    5.90 % p.a.
    Initial monthly repayment
    $2,995
    Go to site

    Built by CommBank, the Unloan is the first home loan with an increasing discount (conditions apply) for borrowers. No application or banking fees. No monthly account keeping or early exit fees. Apply online in minutes.

  • Offset Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.39 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

  • Unloan Variable

    • Owner Occupier
    • LVR <80%
    Interest rate
    5.99 % p.a.
    Variable
    Comparison rate
    5.90 % p.a.
    Initial monthly repayment
    $2,995
    Go to site

    Built by CommBank, the Unloan is the first home loan with an increasing discount (conditions apply) for borrowers. No application or banking fees. No monthly account keeping or early exit fees. Apply online in minutes.

  • Discount Variable Home Loan

    • Owner Occupier
    • LVR<70%
    Interest rate
    5.99 % p.a.
    Variable
    Comparison rate
    6.01 % p.a.
    Initial monthly repayment
    $2,995
    Go to site

    A low rate home loan for owner-occupiers packed with great features including unlimited extra repayments, free online redraw, no application or monthly admin fees. Rate will vary depending on LVR. Winner of a Mozo Experts Choice 2024 Low Cost Home Loan Award^

  • Variable Home Loan 90

    • Principal and Interest
    • LVR <90%
    Interest rate
    6.04 % p.a.
    Variable
    Comparison rate
    6.06 % p.a.
    Initial monthly repayment
    $3,011
    Go to site

    Affordable home loan rate for buyers or refinancers. No monthly or ongoing fees. Option to add an offset for 0.10%. Access to savings with unlimited redraws available. Minimum 10% deposit required.

  • Fixed Rate Loan

    • Owner Occupier
    • Principal & Interest
    • LVR <80%
    Interest rate
    6.09 % p.a.
    Fixed 3 years
    Comparison rate
    6.15 % p.a.
    Initial monthly repayment
    $3,027

    Additional repayments of up to $10K per fixed year. Interest rate discounts available. Waiver of $499 application fee when combined with an Orange Advantage Home Loan.

  • The Better Home Loan Special Offer

    • Owner Occupier
    • Principal & Interest
    • LVR<80%
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.14 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Enjoy a variable rate home loan with a bunch of features from Police Credit Union. Make extra repayments at any time without penalty. No monthly, annual or upfront fees. Free online redraw. Minimum 20% deposit. Qualifying criteria applies. Minimum loan amount is 200K. For new customers only. Mozo Experts Choice Home Lender Credit Union of the Year 2023.

  • Basic Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.16 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Enjoy a low rate home loan with $0 application fee and $0 ongoing fees. Flexibility to split your loan and set different repayment types. Fee free redraw from your loan using online banking. Flexible ways to repay. 40% Deposit required.

  • Mortgage Simplifier

    • LVR<80%
    • Owner Occupier
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.17 % p.a.
    Initial monthly repayment
    $3,043

    Get a competitive variable rate with ING’s Mortgage Simplifier. Free extra repayments, no monthly or annual fees. Freedom to make free extra repayments or redraws.

  • Offset Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.39 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

  • Basic Home Loan

    • Fixed
    • Owner Occupier
    • Principal & Interest
    • LVR<70%
    Interest rate
    6.25 % p.a.
    Fixed 3 years
    Comparison rate
    6.20 % p.a.
    Initial monthly repayment
    $3,079
    Go to site

    No upfront or ongoing fees. Free extra repayments and redraw facility. Option to earn Qantas points. Min 30% deposit required. Borrow up to $750,000.

  • Offset Home Loan

    • Fixed
    • Owner Occupier
    • Principal & Interest
    • LVR <70%
    Interest rate
    6.25 % p.a.
    Fixed 3 years
    Comparison rate
    6.42 % p.a.
    Initial monthly repayment
    $3,079
    Go to site

  • Fixed Rate

    • Owner Occupier
    • Principal & Interest
    • <80% LVR
    Interest rate
    6.59 % p.a.
    Fixed 3 years
    Comparison rate
    7.06 % p.a.
    Initial monthly repayment
    $3,190

    Enjoy up to $3000 cashback for eligible first home buyers and $2000 cashback for refinancers on eligible home loans with the ANZ Fixed Rate Home Loan. Get the security of repayment certainty with a competitive locked in rate. No ongoing fees to pay. Offset account on 1-year fixed loans ($10/month fee applies). Interest-only payments allowed.

image of houses

Need help with refinancing?

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.