RBA Hikes Cash Rate to 3.85%: What It Means for Your Tax and Investments
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Primary tax-year context: Current Australian tax settings
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On 3 February 2026, the Reserve Bank of Australia raised the cash rate by 25 basis points to 3.85% — the first increase since late 2023 and a reversal of the rate cuts delivered in early 2025.
The decision was unanimous. The RBA cited persistent inflation, strong consumer spending, and financial conditions that are looser than previously assessed. CBA economists expect a second hike to 4.10% in May 2026.
This has direct consequences for anyone with a mortgage, investment property, savings account, or assets they’re thinking of selling.
Why rates went up
The RBA revised its inflation forecast significantly higher. Trimmed mean inflation is now expected to be 3.7% by June 2026 (previously 3.2%), and the Board does not expect inflation to return to the midpoint of the 2–3% target band until 2028.
The key drivers:
- Consumer spending remained strong through late 2025, boosted by the Stage 3 tax cuts, prior rate cuts, and steady job growth
- Housing prices continued rising, adding to household wealth effects and looser financial conditions
- Economic growth at 2.4% is running slightly above the economy’s sustainable capacity
- Labour market remains “a little tight,” with unemployment near historical lows
The RBA essentially concluded that its 2025 rate cuts went too far and stoked demand more than anticipated.
Impact on mortgage holders
For a $600,000 variable-rate mortgage over 30 years, a 25 basis point increase adds roughly $95 per month to repayments. If a second hike occurs in May, the total increase from the February-May cycle would be about $190 per month.
| Loan balance | Monthly increase (0.25%) | Annual impact |
|---|---|---|
| $400,000 | ~$63 | ~$756 |
| $600,000 | ~$95 | ~$1,140 |
| $800,000 | ~$127 | ~$1,524 |
| $1,000,000 | ~$158 | ~$1,896 |
For owner-occupiers, this is a pure cost increase — mortgage interest on your home is not tax-deductible.
If you want to turn that rate move into a concrete repayment plan, run the owner-occupier side in the Mortgage Repayment Calculator and compare cash-buffer strategy in the Offset Calculator.
What this means for investment property owners
For investors, the tax picture is different. Mortgage interest on a rental property is deductible. A rate increase actually increases your deductible expenses.
If you have a $500,000 investment loan and the rate goes up by 0.25%, your annual interest cost rises by about $1,250. At a 37% marginal tax rate, that’s an additional $462 in tax deductions — partially offsetting the higher repayment.
But there’s a catch: higher rates also mean:
- Higher negative gearing losses — good for tax, bad for cash flow
- Potential downward pressure on property prices — relevant if you’re considering selling
- Higher opportunity cost — your capital might earn more in a savings account
The net effect depends on your loan structure, rental yield, and how long you plan to hold the property.
Savings and term deposit income is taxable
On the flip side, savers benefit from higher rates. Banks have already started passing through increases to savings and term deposit rates.
But remember: all interest income is taxable at your marginal rate. There is no tax-free threshold or discount for interest income.
| Savings balance | Extra annual interest (0.25%) | Tax on extra interest (37% rate) | After-tax benefit |
|---|---|---|---|
| $50,000 | $125 | $46 | $79 |
| $100,000 | $250 | $93 | $157 |
| $200,000 | $500 | $185 | $315 |
If you’re earning significant interest, make sure you’re reporting it accurately. The ATO receives data directly from financial institutions and matches it against tax returns. Unreported interest income is one of the most common adjustment items.
CGT timing decisions
Higher interest rates can influence when to sell assets, through two channels:
1. Holding costs increase. If you’re holding an investment property or other asset with debt, the cost of holding goes up. This can tip the balance toward selling earlier rather than later, especially if capital growth is modest.
2. Discount rate effects. A higher cash rate makes risk-free returns more attractive. A $100,000 capital gain next year is worth less in present-value terms when rates are higher. For investors weighing the sell this year vs next year decision, the holding cost of waiting has just increased.
That said, tax considerations should not drive investment decisions alone. If you’re holding for the long term, a 25 basis point move is unlikely to change the fundamental case for an asset.
What to watch next
| Date | Event |
|---|---|
| 3 Feb 2026 | Cash rate increased to 3.85% |
| 1 Apr 2026 | Next RBA Board meeting |
| 20 May 2026 | RBA Board meeting — CBA forecasts second hike to 4.10% |
| May 2026 | Federal Budget |
| Mid-2026 | RBA to reassess whether hikes are slowing demand |
Economists are divided on whether this is a one-off adjustment or the start of a tightening cycle. CBA expects “one and done” with a second hike in May, followed by a pause. Others see rates staying elevated into 2027, with unemployment projected to rise to 4.6% by mid-2028 as tighter conditions take effect.
Key takeaways
- The RBA raised the cash rate to 3.85% on 3 February 2026, with a second hike to 4.10% expected in May
- Investment property mortgage interest remains fully deductible — higher rates mean bigger deductions
- Owner-occupier mortgage interest is not deductible — rate increases are a pure cost
- Savings interest is fully taxable at your marginal rate
- Higher holding costs may influence CGT timing decisions for investors carrying debt
- Inflation is forecast at 3.7% by June 2026, not returning to target until 2028
Model your investment property returns under higher rates
Use the Investment Property Calculator to see how rate changes affect your after-tax position, or compare hold vs sell scenarios with the CGT calculator.
If the bigger question is your owner-occupier loan structure rather than rental deductions, continue in the mortgage app: