Understanding Property Values vs Interest Rate Changes

Property values and interest rates move in different directions, but the relationship between them is not always predictable.

When the Reserve Bank adjusts the cash rate, lenders typically follow with changes to their variable rates. Borrowing costs rise or fall accordingly, which influences how much investors can afford to pay for property and how much net rental income a property generates. Richmond has seen strong capital growth over the past decade, driven by proximity to the CBD, heritage character, and limited land supply. That growth has continued through multiple rate cycles, but the size of the movements has varied depending on investor demand, rental yields, and broader economic conditions.

Interest Rates and Borrowing Capacity

Higher rates reduce how much you can borrow because lenders assess serviceability using the product rate plus a three percentage point buffer. An investor looking to purchase in Richmond with rental income factored in will find that a one percentage point increase in the variable rate can reduce borrowing capacity by around 10 per cent, depending on income and other debts. That reduction directly affects which properties are within reach.

Consider an investor earning $120,000 annually with no other debt and a 20 per cent deposit. At current variable rates, rental income from the target property may support a loan amount that allows them to purchase a two-bedroom period terrace in Richmond. If rates rise by one percentage point before settlement, the same investor may need to adjust their search to a one-bedroom apartment or a property further from Bridge Road to stay within serviceability limits. The rental income on the revised property type will differ, as will the expected vacancy rate and long-term capital growth profile.

How Capital Growth Can Offset Higher Borrowing Costs

Capital growth does not eliminate the impact of higher interest rates, but it can offset the reduction in cash flow over time. Richmond properties tend to appreciate because the area is tightly held, close to employment hubs, and has strong rental demand from young professionals and CBD workers. Even when rates rise, properties in well-located suburbs often continue to gain value, particularly if supply remains constrained.

An investor who purchases a Richmond property at current rates and experiences a rate increase of 0.75 percentage points within the first 18 months may see their monthly repayments rise by several hundred dollars. If the property appreciates by six per cent annually, the equity gain over two years can exceed the cumulative increase in interest costs, assuming the investor holds the property and does not need to sell during a low point in the cycle. That equity can then be used to fund a deposit on a second property, supporting portfolio growth even when borrowing conditions tighten.

Fixed vs Variable Rates in a Changing Market

Fixed rates provide certainty over borrowing costs for a set period, which can be useful when rates are expected to rise. Variable rates allow you to benefit from rate cuts and offer more flexibility for additional repayments or early exits without break costs. For investment loan options, the choice depends on your cash flow needs, your view on future rate movements, and whether you plan to refinance or leverage equity within the fixed period.

Some investors use a split loan structure, fixing a portion of the loan to protect against rate rises while keeping the remainder on a variable rate to retain offset account access and repayment flexibility. A Richmond investor with strong rental income and stable employment may prefer a higher variable portion to maximise tax-deductible debt and retain access to offset funds. An investor with tighter cash flow or multiple properties may fix a larger portion to smooth repayments and reduce refinancing risk if rates move sharply.

Negative Gearing and the July 2027 Changes

Negative gearing allows investors to offset rental losses against other income, reducing taxable income in the year the loss is incurred. From 1 July 2027, rental losses on residential properties purchased after 7:30pm AEST on 12 May 2026 will be quarantined and can only be offset against residential rental income or carried forward. Properties held before that date, or purchased under contract before that time, retain access to negative gearing under current rules.

An investor purchasing a Richmond apartment in late 2026 and settling in early 2027 will be able to negatively gear the property until 30 June 2027 only. After that date, any rental loss must be carried forward or offset against other residential rental income. If the same investor also owns a positively geared property in another suburb, the Richmond loss can be offset against the positive income from the other property, but not against salary or wages. Properties classified as eligible new builds retain full negative gearing benefits, which may shift investor demand toward new developments and increase competition for those assets.

When to Prioritise Capital Growth Over Cash Flow

Investors with secure income and sufficient cash reserves can afford to hold properties that are negatively geared in the short term if they expect strong capital growth. Richmond properties often fall into this category because yields are lower than outer suburbs, but capital growth has historically been higher due to land scarcity and location. If your strategy is to build equity and leverage that equity into additional properties, Richmond remains a strong option even when interest rates rise.

Investors who rely on rental income to service multiple loans, or who have limited cash reserves, may need to prioritise properties with higher yields or consider refinancing to release equity rather than purchasing additional properties during a rising rate environment. Refinancing to release equity can provide access to funds for renovations, debt consolidation, or a deposit on a new investment without selling an existing asset.

Loan to Value Ratio and Lenders Mortgage Insurance

Lenders assess risk based on the loan to value ratio, which is the loan amount divided by the property's value. A lower LVR reduces risk and may provide access to better interest rate discounts. For investment loans, most lenders require a minimum 10 per cent deposit, though borrowing above 80 per cent LVR will typically trigger Lenders Mortgage Insurance. LMI is a one-off cost that protects the lender if you default, and it can add several thousand dollars to your upfront costs.

Richmond properties purchased with a 10 per cent deposit will require LMI unless the investor qualifies for an LMI waiver based on their profession or financial profile. Some lenders offer waivers for doctors, lawyers, and accountants, which can reduce the cost of entering the market with a smaller deposit. The trade-off is that borrowing at a higher LVR increases your interest rate and reduces your borrowing capacity due to the higher repayments and serviceability impact.

If the property appreciates after purchase, you can refinance to a lower LVR, which may provide access to a lower rate and eliminate the need for LMI on any subsequent top-up. That refinance can also release equity for further investment, provided you meet serviceability requirements at the time of the application.

Understanding how property values and interest rates interact allows you to make informed decisions about timing, loan structure, and property selection. Richmond offers strong long-term growth prospects, but the cost of entry and the impact of rate changes on your cash flow need to be weighed carefully against your broader investment strategy and risk tolerance.

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