The RBA has started raising again: what that does to borrowing capacity

If you are partway through working out what you can borrow, the number moved on 3 February. The Reserve Bank raised the cash rate target by 0.25 percentage points to 3.85 per cent. Most people notice the repayment first, and the repayment change is small. The larger effect, and the one that decides what you can actually buy, happens inside the lender's serviceability test.

What the Reserve Bank decided, and what it said about why

At its meeting on 3 February 2026 the Monetary Policy Board increased the cash rate target by 25 basis points to 3.85 per cent. The decision was unanimous, and the new target took effect the following day.

The Board's stated reasoning was that inflation "picked up materially in the second half of 2025", that some of that increase reflects greater capacity pressures, and that inflation is therefore "likely to remain above target for some time". The same statement noted that growth in private demand had strengthened substantially more than expected, that activity and prices in the housing market were continuing to pick up, and that labour market conditions remained a little tight.

The data underneath that came a week earlier. The Australian Bureau of Statistics reported on 28 January 2026 that the Consumer Price Index rose 3.8 per cent in the twelve months to December 2025, up from 3.4 per cent in the twelve months to November. Housing was the largest single contributor, up 5.5 per cent.

Where this sits in the cycle matters more than the single decision. The cash rate peaked at 4.35 per cent in November 2023. It then fell three times in 2025, by 0.25 points each, effective 19 February, 21 May and 13 August, reaching 3.60 per cent — where it stayed for the rest of 2025. The Reserve Bank's cash rate target table records every one of those moves. February returns the cash rate to the level it held between May and August 2025.

The cash rate is not the rate you pay

This is the part that trips people up, and it is worth being precise about. The cash rate is the market interest rate on overnight loans between financial institutions. The Reserve Bank's own explainer on the transmission of monetary policy puts it plainly: monetary policy "acts as a benchmark for interest rates in the economy" but "is not the only determinant", and the spread between the cash rate and other interest rates "varies over time" with market conditions, competition and the risk attached to different kinds of lending.

The size of that gap is not small. In December 2025, with the cash rate at 3.60 per cent, the average rate on outstanding owner-occupier housing loans on variable rates was 5.51 per cent, and the average rate on new owner-occupier variable-rate loans funded that month was 5.50 per cent. Both figures are from the Reserve Bank's Statistical Table F6, Housing Lending Rates. The gap between the policy rate and the rate households were actually paying was close to 1.9 percentage points.

So a 0.25 point move in the cash rate is not automatically a 0.25 point move in your loan. Each lender decides what it passes on, when, and to which products. What follows uses full pass-through because it makes the arithmetic legible, not because it is what any particular lender did.

How a buffer turns a rate rise into a smaller loan

Here is the mechanism, and it is the reason the effect on capacity is larger than the effect on repayments.

Australian banks cannot assess you at the rate you would actually pay. Under Attachment C of Prudential Standard APS 220, and set out in APRA's practice guide APG 223 Residential Mortgage Lending, an authorised deposit-taking institution "must apply a buffer over a loan's interest rate of at least 3.0 per cent". APRA restated that setting in its System Risk Outlook of 20 November 2025, describing the three percentage point mortgage serviceability buffer as "an important contingency in the years ahead for rises in interest rates or unforeseen changes in a borrower's income or expenses".

The buffer sits on top of your product rate. It is not a fixed assessment rate that stays put while product rates move — it moves with them, point for point.

APG 223 also notes that a prudent lender uses the buffer in conjunction with an interest rate floor, so that the assessment stays adequate in a low interest rate environment. The practical consequence is that once product rates are well clear of the floor, the floor stops binding and the buffer alone sets the assessment rate. In a rising cycle, the buffer is what bites.

The arithmetic, worked through

Take a hypothetical Robina couple, whom a lender assesses as having $4,000 a month available for a 30-year principal-and-interest home loan. The figures below are an example, not a quote.

• On the December 2025 average product rate of 5.50 per cent, the assessment rate is 8.50 per cent. That surplus supports a maximum loan of about $520,200.
• If a lender passes the February increase through in full, the product rate becomes 5.75 per cent and the assessment rate 8.75 per cent. The same $4,000 a month now supports about $508,500.

That is roughly $11,800 less, or about 2.3 per cent of the maximum, from a 0.25 point move. The proportion is what to hold on to: on these settings, each quarter-point on the assessment rate takes a little over two per cent off the ceiling.

Two qualifications, because the number above is the rate effect alone. A real assessment also applies the lender's living-expense benchmark, counts your existing debts and card limits, and shades some income types. And every lender's policy differs, which is why two lenders can produce maximums a long way apart on the same file. The mechanics above are what sits behind the numbers on our home loans desk. The three point buffer is a residential mortgage rule, incidentally — commercial and business lending is assessed on different measures again.

What it does to a loan you already have

Much less, and this is the asymmetry worth understanding.

On a $600,000 loan over 30 years, principal and interest, a move from 5.50 to 5.75 per cent lifts the monthly repayment from about $3,407 to about $3,501. That is roughly $95 a month, or about $1,140 a year. ASIC's Moneysmart mortgage calculator will run the same sum on your own balance, rate and remaining term.

The three cuts in 2025 totalled 0.75 percentage points. February reversed 0.25 of them. Multiply the per-quarter-point figure by your own loan size and you have the shape of it.

If your fixed rate ends this year

A fixed rate is fixed in both directions. It did not fall when the Reserve Bank cut three times in 2025, and it does not rise now. At the end of the fixed term the loan reverts to the lender's variable rate applying at that moment — not the rate that applied when you fixed.

The step involved is smaller than it was a few years ago. In December 2025 the average rate on outstanding owner-occupier fixed-rate loans with three years or less remaining was 5.27 per cent, against 5.51 per cent for outstanding variable-rate loans. On those averages a borrower reverting was stepping up around a quarter of a percentage point, not the several points that characterised the 2023 roll-offs. Any pass-through of the February increase lands on top of that step, not instead of it.

If you borrowed at the bottom

The cash rate sat at 3.60 per cent from mid-August 2025 until 3 February 2026. If you were assessed during that window, your lender tested you at roughly three percentage points above your product rate — near 8.50 per cent on the December averages.

February used 0.25 points of that three point margin. A twelfth of it. That is the buffer doing precisely the job APRA describes: it exists so that a rate rise of this size lands on a borrower who was already shown to be able to absorb one.

What has changed is not your assessed capacity but your cash flow. The buffer was a test on paper; the repayment is real money leaving the account each month. Those are different problems, and the second one is arithmetic you can do today rather than something to wait and see about.

The other mechanical consequence is comparative. A borrower assessed at 8.75 per cent gets a lower maximum than the same borrower assessed at 8.50 per cent, on identical income. That is a statement about the assessment rate, not about either borrower. If your circumstances have moved since you were last assessed, the number on your file is stale in both directions, and that is worth a conversation with our lending team.