The Pros and Cons of Rising Rates vs Falling Prices

Interest rates and property prices move in opposite directions more often than not.

When rates climb, property values tend to soften because buyers can borrow less. When rates drop, values usually rise because competition increases. For educators looking at investment loans, this creates a genuine dilemma: buy when rates are high and prices lower, or wait for cheaper borrowing when properties cost more.

Neither option is inherently better. The question is which set of trade-offs suits your deposit, income and timeline.

Higher Rates and Lower Property Prices

Buying when interest rates are elevated but property prices have dropped means your loan amount starts lower, even if your repayments feel high initially.

Consider a buyer who purchases at a time when investor rates sit around 6.5 per cent but property values in their target area have pulled back 10 to 15 per cent from the previous peak. They borrow less than they would have 18 months earlier for the same property. Once rates fall, they can refinance to a lower rate without increasing the principal. That smaller loan base also means less interest paid over the life of the loan, and a lower loan-to-value ratio (LVR) that may open the door to better rate discounts or removing Lenders Mortgage Insurance if they paid it at the start.

The downside is immediate cash flow pressure. Higher repayments on an interest-only investment loan or principal and interest structure can eat into rental income and reduce how much you can negatively gear against other income. If you are relying on rental income to service the loan, even a short vacancy can put strain on your budget. Serviceability buffers also work against you when rates are higher, which can limit how much you qualify to borrow in the first place.

Lower Rates and Higher Property Prices

Buying when rates are lower but property values have climbed means you can borrow more for the same income, but the trade-off is a larger debt.

You will have stronger cash flow from day one. Lower repayments make it easier to cover holding costs, and if the property generates rental income, you are more likely to run close to neutral or even positive cash flow depending on your deposit and the vacancy rate in the area. Serviceability is less of a hurdle, so you may also qualify for a higher loan amount or have room to expand your property portfolio sooner.

The risk is that you are paying peak prices with a large loan. If interest rates rise after you buy, your repayments will increase on a variable rate loan, and refinancing will not reduce your principal. You are also exposed to the possibility that property values stagnate or fall, leaving you with a higher LVR and fewer options if you need to sell or access equity later.

What Changed in the Tax Treatment of Investment Properties

From 1 July 2027, negative gearing rules will change for residential investment properties purchased after 7:30pm AEST on 12 May 2026.

If you buy an established dwelling after that date, you will not be able to offset rental losses against your salary or other non-residential income. Losses can only be used against other residential rental income, or carried forward to offset future rental income or capital gains from residential property. Properties purchased before that time, or already under contract at 7:30pm on 12 May 2026, are grandfathered and continue under the existing rules.

Eligible new builds, defined as dwellings constructed on previously vacant land or developments that increase the total number of dwellings, remain fully negatively gearable even if purchased after the cut-off. A knock-down rebuild that does not increase dwelling numbers does not qualify.

For educators weighing up whether to buy now or wait, this creates a clear split. If you buy an established property before 1 July 2027 and after the 12 May 2026 announcement, you can still negatively gear it under the old rules until 30 June 2027. After that, the new quarantine applies. If you are considering an investment loan refinance on a property you already own, the grandfathering protects your existing arrangements regardless of when you refinance.

Borrowing Capacity and the DTI Cap

From 1 February 2026, lenders have been limited in how many new investment loans they can write at a debt-to-income ratio of six times or more.

This cap applies separately to investor and owner-occupier lending, and sits at 20 per cent of new investor loans for each lender. In practical terms, it means that if your total debt is high relative to your income, you may find fewer lenders willing to approve your application, even if you can service the repayments under the standard 3 percentage point buffer.

For educators with stable salaries, this is less of an issue than for borrowers with variable or commission-based income. However, if you already own property and are looking to leverage equity to fund a second or third investment, your total debt can climb quickly. A borrower earning a combined household income of $180,000 who wants to borrow $1.2 million across owner-occupied and investment loans will hit a DTI of 6.67. Some lenders will still approve that application within their 20 per cent allocation, but others may decline or offer a lower amount.

Exemptions apply for new dwelling construction and purchases of newly erected dwellings, which gives another reason to consider new builds if your borrowing capacity is constrained.

Interest Only vs Principal and Interest for Investment Loans

Most investors choose interest-only repayments to maximise cash flow and tax deductions during the investment phase.

Interest on an investment loan is tax deductible to the extent the property is rented or genuinely available for rent. Principal repayments are not deductible. Paying interest only keeps your repayments lower and frees up cash to put toward your own home loan, where the interest is not deductible, or to build a deposit for another property.

The trade-off is that your loan balance does not reduce during the interest-only period, which typically runs for one to five years depending on the lender and loan product. Once the interest-only period ends, the loan reverts to principal and interest, and your repayments jump. Some lenders will allow you to extend or reapply for another interest-only term, but that is not automatic, and criteria have tightened in recent years.

If property values rise while you hold the loan on an interest-only basis, you can access that equity without having paid down any principal. If values fall or stagnate, you remain at the original LVR and may face Lenders Mortgage Insurance (LMI) or rate penalties if you need to refinance.

Refinancing After Purchase

Refinancing an investment loan makes sense when rates have dropped, when your LVR has improved, or when you want to access equity for another purchase.

If you bought when rates were high and property prices low, refinancing once rates fall will reduce your repayments without changing your loan balance. That improved cash flow can make the difference between holding the property comfortably and feeling stretched. If property values have also recovered, your LVR will have dropped further, which may qualify you for a better rate discount or remove the need for LMI on any top-up borrowing.

If you bought when rates were low and prices high, refinancing may still be worthwhile if your income has increased, your LVR has improved through principal repayments or moderate capital growth, or if you want to switch from a variable rate to a fixed rate to lock in repayments. Refinancing also lets you consolidate debt, adjust your interest-only period, or move to a lender with better investment loan features such as offset accounts or flexible redraw.

Lenders reassess your serviceability at the time of refinancing, so if rates have risen or your circumstances have changed, you may not qualify for the same loan amount you originally borrowed. That is one reason to avoid over-extending at the time of purchase, even when serviceability allows it.

Timing the Market vs Time in the Market

Trying to pick the bottom of the property cycle or the top of the rate cycle is guesswork.

In our experience, educators who wait for perfect conditions often wait years and miss opportunities that would have worked despite imperfect timing. Property values in most Australian capital cities and many regional centres have trended upward over decades, with periodic corrections that last 12 to 24 months. If you are buying for long-term portfolio growth and passive income, the entry point matters less than the quality of the property, the strength of the rental market, and your ability to hold through rate and price fluctuations.

What matters more is structuring the loan and deposit to withstand a range of scenarios. That means keeping a buffer for vacancy, maintenance and rate rises, not borrowing at the top of your serviceability, and choosing loan features that give you flexibility to adjust repayments or access equity when needed. If you are not sure how much buffer you need or which investment loan options suit your circumstances, it is worth speaking to someone who works with educators regularly and understands how your income, leave entitlements and career progression affect your borrowing.

If you are weighing up whether to buy now or wait, or if you want to understand how the recent tax changes affect your plans, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions