RBA Raises Rates to 3.85%: What Borrowers Need to Know

The Reserve Bank of Australia has raised the cash rate by 25 basis points to 3.85% at its meeting on 3 February 2026. This is the first rate increase since November 2023. This reverses one of last year's rate cuts and signals the RBA's concern about inflation creeping back above target.

Why Did the RBA Raise Rates?

RBA Governor Michele Bullock was clear in her post-meeting statement: "The Board is uncomfortable with inflation at the level it is." Key factors driving this decision include:

Inflation above target: After falling through 2024 and early 2025, inflation picked up materially in the second half of 2025, climbing back above the RBA's 2-3% target band
Elevated service costs: Services inflation remains sticky due to strong wage growth in some sectors
Tight labour market: Unemployment remains at 4.1%, giving workers bargaining power
Revised forecasts: The RBA now expects trimmed mean inflation at 3.7% by June 2026, up from 3.2% previously

Impact on Your Mortgage Repayments

All major banks have confirmed they will pass on the full 0.25% rate increase. Here's what this means for your monthly repayments:

Loan Amount	Monthly Increase	Annual Cost
$500,000	+$76	+$912
$750,000	+$114	+$1,368
$1,000,000	+$152	+$1,824
$1,500,000	+$228	+$2,736

Based on a 30-year principal and interest loan

What This Means for First Home Buyers

If you're saving for your first home, this rate hike has several implications:

Reduced Borrowing Capacity

Higher interest rates mean banks will lend you less. A 0.25% increase typically reduces your maximum borrowing capacity by approximately 2-3%. For example, if you could previously borrow $800,000, you might now only qualify for around $776,000-$784,000.

The Silver Lining

Potentially softer property prices: Higher rates can cool buyer demand, creating opportunities
First Home Guarantee still available: The $1.5M price cap in Sydney means you can still buy with just 5% deposit
Higher savings interest: Your deposit savings will earn more while you save
Less competition: Some buyers will pull back, reducing competition at auctions

What First Home Buyers Should Do Now

Get a fresh pre-approval: Your old pre-approval may no longer reflect your true borrowing power
Review your budget: Factor in the higher repayments when calculating affordability
Consider locking in a rate: If you find a property, a fixed rate could protect you from further hikes
Don't panic: One rate rise doesn't mean you should abandon your home ownership goals

What This Means for Refinancers

If you already have a mortgage, now is a critical time to review your loan:

Are You on a Competitive Rate?

Many borrowers are paying the "loyalty tax", a higher rate than what their bank offers new customers. The difference can be 0.5% to 1.0% or more, costing you thousands each year.

Refinancing Could Still Save You Money

Despite rates rising, refinancing to a more competitive lender could offset or even exceed the rate increase. For example:

If your current rate is 6.5% and you refinance to 5.99%, you'd save money despite the RBA hike
Many lenders offer cashback incentives of $2,000-$4,000 for refinancing
Some lenders haven't fully passed on all 2025's rate cuts, so shopping around matters

What Refinancers Should Do Now

Compare your rate: Use our loan comparison tool to check what new customers are being offered by your lender and competitors
Calculate break costs: If you're on a fixed rate, factor in any exit fees
Review your loan features: Offset accounts and redraw facilities can save you money
Act before further hikes: NAB economists predict another 0.25% increase in May 2026

Will There Be More Rate Increases?

Economists are divided, but here's what the major banks are forecasting:

NAB: Predicting another 0.25% hike in May, taking the cash rate to 4.10%
CBA, Westpac, ANZ: Watching inflation data closely before committing to forecasts
RBA guidance: The Board indicated it will be data-dependent and isn't on a pre-set path

The RBA's next meeting is in March 2026. Key data to watch includes the Q4 2025 CPI figures and employment data.

Frequently Asked Questions

When will my mortgage repayments increase?

Most banks will increase variable rates within 1-2 weeks of the RBA announcement. CBA has announced changes effective 13 February 2026. Check with your lender for their specific timeline.

Should I fix my interest rate now?

Fixed rates can provide certainty, but they're already priced to factor in expected future rate movements. Consider fixing a portion of your loan (split loan) to balance certainty with flexibility. We can help you analyse whether fixing makes sense for your situation.

Will property prices fall because of this rate rise?

A single 0.25% increase is unlikely to significantly impact property prices. However, if rates continue to rise, we may see slower price growth or modest declines in some markets. Sydney and Melbourne typically see more rate sensitivity than other capitals.

I'm about to buy. Should I wait?

Trying to time the market is notoriously difficult. If you've found a property you love at a price you can afford with a buffer for higher rates, the decision shouldn't be solely based on one rate movement. Focus on your long-term plans and financial capacity.

Can I negotiate with my bank to avoid the rate increase?

Yes! Banks value good customers. If you have a strong repayment history and good equity, call your lender and ask for a rate discount. Many will offer a reduction to retain you, especially if you mention you're considering refinancing.

How does this affect my borrowing capacity?

Banks assess your ability to repay at a "serviceability buffer" rate (typically 3% above the actual rate). This 0.25% increase will reduce maximum borrowing amounts by approximately 2-3%. Get a fresh pre-approval to understand your updated borrowing power.

What Should You Do Next?

Whether you're a first home buyer adjusting your plans or a homeowner wondering if refinancing makes sense, getting professional advice is crucial in this environment.

Book a free consultation with our mortgage specialists to:

Review your current loan and compare it to the market
Calculate your updated borrowing capacity
Explore whether fixing some or all of your rate makes sense
Identify potential savings through refinancing