When interest rates rise, the cost of holding an investment property rises with them. Higher repayments can push your loan costs above the rent you collect, leaving a shortfall you have to cover each month. How big that gap is depends on your loan, your rent and your other holding costs, such as council rates, insurance and management fees. Tax deductions, including depreciation on the building and its fittings, reduce the tax you pay and can ease some of that pressure. This article explains how rate rises affect investment property cash flow and how depreciation can help.
How Do Interest Rates Affect the Housing Market?
Higher interest rates usually reduce how much buyers can borrow, which slows demand and price growth; lower rates do the opposite, although housing supply, jobs and population growth matter too. For the full picture, read our guide to how interest rates affect house prices.
The Role of the RBA Cash Rate
The Reserve Bank of Australia sets the cash rate to manage inflation, and banks usually pass changes on to home loan rates, though not always in full; our RBA cash rate history shows how it has moved over time.
How Interest Rates Affect Property Investors
Interest rates influence both debt costs and investment returns. Rising rates increase loan repayments, reducing cash flow if rental income does not keep pace.
Borrowing power also shrinks as lenders require affordability under higher repayments, limiting loan amounts.
Interest rates are only part of the investment picture. Investors should also consider rental income, vacancy risk, expenses, tax deductions and capital growth. Properties with strong rental demand and tax planning can perform well despite higher repayments.
Key areas to review include:
current mortgage repayments and loan purpose
rental income and rental yield
fixed-rate home loans and variable-rate options
property management fees
council rates, insurance and repairs
deductible interest expenses, including lenders mortgage insurance
depreciation deductions
after-tax cash flow
local vacancy rates
long-term growth potential
Assessing properties before and after tax gives a clearer view of true holding costs and financial goals.
Can Tax Depreciation Help During High Interest Rate Periods?
Tax depreciation helps investors improve after-tax cash flow during high-interest-rate periods. It allows deductions for wear and tear on property structures and eligible assets.
These deductions reduce taxable income, lowering tax payable and easing cash flow pressure when holding costs rise.
Depreciation categories include:
Category | Covers | Examples |
|---|---|---|
Capital works deductions | Structural elements and improvements | Walls, floors, roofing, built-in cupboards, bathroom renovations |
Plant and equipment depreciation | Removable or mechanical assets | Appliances, blinds, carpets, air conditioning units |
Example: how depreciation affects cash flow
Sam owns a rental that earns $600 a week ($31,200 a year). The loan is $600,000 at 6% interest only, so interest is $36,000 a year. Other costs (council rates, insurance, management and repairs) are $6,000 a year.
- Cash in: $31,200. Cash out: $42,000. Shortfall before tax: $10,800 a year.
- A depreciation schedule shows $8,000 of depreciation deductions for the year. Depreciation isn’t money Sam spends this year, but it is a tax deduction.
- Sam’s rental loss for tax is $10,800 + $8,000 = $18,800. At the 30% tax rate for income between $45,001 and $135,000, plus the 2% Medicare levy (32% in total), that reduces Sam’s tax by $6,016. Without depreciation, the tax saving would be $3,456.
- After tax, Sam’s yearly shortfall falls from $7,344 to $4,784: depreciation adds $2,560 a year to Sam’s cash flow.
This is a simplified example for the 2026–27 income year; your own figures and tax rate will differ. It assumes Sam can offset the rental loss against salary. A law passed in June 2026 changes this from 1 July 2027: for most established homes bought (contract signed) after 7:30 pm AEST on 12 May 2026, rental losses can only be used against residential rental income and residential capital gains, and any unused loss is carried forward to later years.
During high-rate periods, every deduction counts. Correctly claiming depreciation can improve the after-tax position and support long-term holding.
Interest Rates, Rental Demand and Housing Affordability
Interest rates affect rental and buying markets. Rising rates may delay property purchases as borrowing power falls or repayments rise, keeping more renters in the market.
Higher rental demand tightens vacancy rates, especially where supply is limited, pushing rents up. This helps investors offset higher repayments but requires careful cash flow management.
Housing affordability worsens when interest rates, rent and living costs rise together. First home buyers struggle to save deposits or meet lender serviceability. Investors face tighter lending as banks assess individual financial situations more strictly.
Rental market pressure depends on:
population growth
migration levels
local employment
vacancy rates
rental supply
investor activity
construction delays and supply constraints
household income
Investors should consider interest rates alongside these other factors. A strong rental market supports income, but total expenses, tax deductions and demand must be assessed.
What Should Property Investors Watch?
Investors must look beyond headline interest rates. The housing market responds to economic, lending and local property factors. Monitoring these helps make informed decisions before cash flow pressure grows.
Key indicators include:
RBA cash rate decisions
bank mortgage rate changes and comparison rates
fixed and variable loan offers
borrowing capacity and lender serviceability rules
auction clearance rates
property price trends
local vacancy rates
rental yield movements
rental income growth
insurance, council rates and maintenance costs
tax deductions and depreciation claims
after-tax cash flow
Investors should also review their individual personal circumstances. Properties that performed well with low rates may need reassessment when repayments rise. This does not mean poor investment but signals a need to update budgets, review deductions or seek independent advice from a qualified financial institution or accountant.
Question | Why it matters |
|---|---|
Can the property still cover its main costs? | Assesses short-term cash flow pressure |
Are all eligible tax deductions being claimed? | May improve after-tax cash flow |
Is the local target market still supported by demand? | Assesses long-term holding potential |
Tracking these factors helps avoid reacting solely to interest rate headlines and supports better investment decisions.
Interest Rates Are Only One Part of the Housing Market
Interest rates strongly influence the housing market, but are not the only factor. They affect borrowing power, mortgage repayments, buyer demand, auction clearance rates and house prices. They also impact investor cash flow and holding costs.
However, residential property markets are shaped by many factors. Housing supply, population growth, employment, rental demand, inflation and local market confidence influence property performance. This explains why some suburbs slow while others remain resilient.
For investors, the goal is not to predict every interest rate move. It is to understand how rates affect cash flow, tax position and long-term strategy. Reviewing rental income, loan repayments, deductible expenses and depreciation gives a clearer picture of property performance.
If higher interest rates pressure your investment property’s cash flow, a tax depreciation schedule may help identify deductions you can claim. Contact Duo Tax to speak with a qualified quantity surveyor and get full details.
