The Reserve Bank of Australia raised the cash rate on 3 February 2026, again on 17 March 2026, and again on 5 May 2026 — three consecutive increases that have brought the cash rate to 4.35% (RBA Media Release MR-26-12). That is a total rise of 75 basis points since January 2026, when the rate sat at 3.60%.
Most of the coverage has focused on mortgage repayments going up. That part is real and worth understanding. But the rate rises are doing something else at the same time: they are changing what gets built in your suburb, and whether the townhouse project down the road proceeds at all. Both of those things feed back into the pool of homes available to buy.
This piece explains the connection in plain terms.
What the cash rate actually is
The cash rate is the interest rate the Reserve Bank sets as its main lever for controlling inflation and economic activity. It is the overnight rate at which banks lend money to each other. The RBA enforces it by buying and selling funds in the banking system, and the actual market rate tracks the target very closely (RBA Media Release MR-26-12).
The RBA's Monetary Policy Board meets eight times a year on a fixed schedule. In 2026, the dates are: 2–3 February, 16–17 March, 4–5 May, 15–16 June, 10–11 August, 28–29 September, 2–3 November, and 7–8 December (RBA Monetary Policy Board Schedule, rba.gov.au). Decisions are announced at 2:30 pm on the second day of each meeting.
The cash rate is not your mortgage rate. It is the starting point from which your mortgage rate is priced. Understanding that chain matters for making sense of what the current cycle is actually doing to you.
How your borrowing capacity has changed
When you apply for a home loan, your bank does not just check whether you can afford repayments at today's rate. Under APRA's serviceability rules (Prudential Practice Guide CPG 223, effective October 2021 and unchanged since), lenders must test whether you could still afford the loan if your interest rate were 3 percentage points higher than the actual rate offered. This is called the serviceability buffer.
Here is what that looks like right now. Based on the RBA's February 2026 lending rate data, new owner-occupier variable loans were sitting at around 5.72%. Add the 3-percentage-point buffer, and your lender is assessing whether you can handle repayments at roughly 8.72%. For investment loans on an interest-only basis, the headline rate was 6.00% — so the assessment rate becomes approximately 9.00%.
Compare that to January 2026, before any of the three hikes. The effective assessment floor was around 7.60% (based on the equivalent loan rate of approximately 4.60% at a 3.60% cash rate). The three hikes have pushed that floor up by roughly 110 basis points in less than four months.
In dollar terms: a buyer on $120,000 gross income using a standard serviceability model (30% of gross income available for debt service, 30-year loan term) could have borrowed approximately $429,000 when the assessment rate was 7.60%. At a 9.00% assessment rate, the same income produces a maximum loan of approximately $373,000. That is a $56,000 reduction — roughly 13% — caused entirely by the rate cycle since January 2026.
For a first-home buyer with $80,000 saved and a target property around $680,000, this shift matters. Previously, $80,000 in savings plus a $429,000 loan could get you there with room to spare. At $373,000 maximum loan, you either need a bigger deposit, a co-borrower, or a lower price point. The numbers do not lie.
Why this also affects what gets built in your suburb
This part is less discussed, but it matters if you are tracking new supply in Melbourne's established suburbs.
Most medium-density development in Victoria — the four-to-thirty townhouse projects going up in middle-ring suburbs — is funded using a construction loan. These loans are not cheap: as at February 2026, they are typically priced at 300 to 400 basis points above the 90-day bank bill swap rate, which itself tracks the cash rate closely. At a 4.35% cash rate and a typical 350-basis-point margin, a developer is paying roughly 7.85% to 8.05% on their construction debt (source: RBA Statistical Tables F1 for benchmark reference; margin range consistent with published construction lending guidance).
On a $20 million construction loan, each 25-basis-point move in the cash rate adds approximately $50,000 per year in interest costs, or $100,000 over a 24-month build. The three hikes since February 2026 — 75 basis points in total — add approximately $300,000 to the holding cost of a $20 million facility. On a $15 million facility, the same 75 basis points adds approximately $225,000.
Before a developer can even draw on that loan, most Victorian lenders require a minimum level of off-the-plan sales — unconditional contracts from buyers who have agreed to purchase before the project is built, covering 60–100% of the loan amount depending on the project. Those buyers need to borrow. Which means their borrowing capacity — shaped by the exact same serviceability rules you face — determines whether the project gets enough pre-sales to proceed.
A developer running an off-the-plan sales campaign in May 2026 is selling to buyers who have roughly 13% less borrowing capacity than buyers had in January 2026. The development's price points were likely set before the rate cycle moved. The buyers available now may not be able to reach those price points. That is a supply problem, not just a developer problem.
What this looks like in a real project
To make this concrete, here is a worked example: a four-townhouse infill project in a middle-ring Melbourne suburb. The numbers are illustrative but representative of this type and scale. The base case reflects a $2.1 million construction facility drawn over 18 months.
Base case: cash rate at 3.60% (January 2026)
| Line item | Value |
|---|---|
| Gross realisation (4 townhouses × $980,000 avg) | $3,920,000 |
| Land cost | $1,050,000 |
| Construction cost (incl. contingency) | $1,680,000 |
| Soft costs (planning, design, consultants) | $165,000 |
| Holding costs — interest at ~7.10% all-in, 18-month build | $178,000 |
| Statutory costs (stamp duty on acquisition, building levies) | $58,000 |
| Sales and marketing | $78,000 |
| Total project cost | $3,209,000 |
| Developer margin | $711,000 |
| Margin on gross realisation | 18.1% |
After the March 2026 hike: cash rate at 4.10%
The all-in construction rate rises from 7.10% to 7.60%, adding approximately $15,750 in interest on the $2.1 million facility. Exit prices also come under pressure as buyers reprice: a 3% softening in the comparable townhouse market — directionally consistent with ABS Residential Property Price Indexes (attached dwellings, Melbourne) and the RBA Financial Stability Review (March 2026) commentary on rising debt servicing costs and investor demand — would reduce gross realisation by approximately $118,000.
| After March hike | Conservative (exit flat) | Stressed (exit –3%) |
|---|---|---|
| Gross realisation | $3,920,000 | $3,802,400 |
| Additional holding cost | $15,750 | $15,750 |
| Revised total project cost | $3,224,750 | $3,224,750 |
| Revised margin | $695,250 | $577,650 |
| Margin on gross realisation | 17.7% | 15.2% |
After the May 2026 hike: cash rate at 4.35%
Now 75 basis points above the January starting point. Additional holding cost on the $2.1 million facility: approximately $23,625 above the base case. Exit pricing is softer as investor buyers face a sharper yield gap between rental income and borrowing costs.
| Current position (May 2026) | Conservative (exit –3%) | Stressed (exit –5%) |
|---|---|---|
| Gross realisation | $3,802,400 | $3,724,000 |
| Additional holding cost (vs base) | $23,625 | $23,625 |
| Revised total project cost | $3,232,625 | $3,232,625 |
| Revised margin | $569,775 | $491,375 |
| Margin on gross realisation | 15.0% | 13.2% |
If the rate fell 50 basis points from current: hypothetical cut to 3.85%
The same transmission works in reverse: lower construction costs, buyers with more capacity, firmer exit prices.
| Hypothetical cut scenario | Base exit | Upside (exit +2%) |
|---|---|---|
| Gross realisation | $3,920,000 | $3,998,400 |
| Reduced holding cost (vs base) | –$15,750 | –$15,750 |
| Revised total project cost | $3,193,250 | $3,193,250 |
| Revised margin | $726,750 | $805,150 |
| Margin on gross realisation | 18.5% | 20.1% |
The combined effect of the current rate level (4.35%) relative to January 2026 is a margin compression of 3–5 percentage points on gross realisation — before any change in land or construction costs.
What this means for your property plans
The rate cycle affects you at two points. First, directly: your borrowing capacity has fallen by roughly 13% since January 2026, and your bank is stress-testing your loan at approximately 8.72% even if your actual rate is lower. Any pre-approval or estimate of what you can borrow from six months ago needs to be recalculated against current rates.
Second, indirectly: the tightening squeeze on development feasibility means some projects that were viable in January 2026 are now borderline or paused. When fewer projects proceed, there are fewer new properties to buy — which sustains price pressure on existing stock. Rate rises cool the market on one side (reducing buyer capacity) and constrain supply on the other (making development harder to justify). Both effects operate at the same time.
The RBA meets six more times in 2026 after May. Each meeting is a scheduled moment when the inputs to your affordability calculation can shift — in either direction. Keeping across the rate calendar is not just for investors. If you are planning to buy, building an up-to-date picture of what you can borrow at today's assessment rates is the starting point.
Published by Lachlan Voss. Every fact traces to a primary source. See our standards and corrections register.