You’ve finally locked in your dream home, but here’s something you might not have considered closely yet: your interest rate. This one figure plays a huge role in shaping how much you repay over the life of your mortgage. Whether you’re already a homeowner or planning to take the plunge, understanding how interest rates work – and how they influence your monthly repayments – is key to staying financially in control.

In this guide, we’ll explain how interest rates impact mortgage repayments, the difference between fixed and variable loans, how to protect yourself from fluctuations, and what to do if repayments ever become unmanageable.

What Is an Interest Rate?

An interest rate is essentially the cost of borrowing money from your lender. It’s expressed as a percentage of your loan amount. If your loan is $600,000 and your interest rate is 5%, you’re paying 5% of that loan annually in interest – on top of repaying the loan principal itself.

In Australia, mortgage interest rates are influenced by several factors, including:

The official cash rate set by the Reserve Bank of Australia (RBA)
Your credit score and borrowing history
The type of loan you choose
Your loan-to-value ratio (LVR)

How Interest Rates Impact Your Mortgage Repayments

Even a minor shift in interest rates can have a significant effect on your monthly repayments. For instance, if you have a $500,000 mortgage over 30 years:

At 5% interest, your monthly repayments would be approximately $2,684.
At 6%, they rise to around $2,998.

That’s a difference of $314 per month – or nearly $113,000 over the life of the loan.

In general:

Lower interest rates = lower repayments
Higher interest rates = higher repayments

This is why interest rate movements, especially in a rising rate environment, can have such a big impact on your household budget.

Fixed vs. Variable Rate Mortgages

One of the most important decisions you’ll make when choosing a home loan is whether to fix your rate or go variable.

Fixed-Rate Loans

A fixed-rate mortgage locks in your interest rate for a set term (usually 1–5 years). During that period:

Your repayments stay the same
You’re shielded from interest rate rises
You won’t benefit if rates fall
There may be restrictions on making extra repayments

Variable-Rate Loans

A variable-rate mortgage can go up or down depending on movements in the cash rate or market trends. The pros and cons:

You can usually make unlimited extra repayments
You might pay less if rates drop
But you’ll pay more if rates rise
Your monthly payments may fluctuate

Split Loans

Can’t decide? Many lenders let you split your loan – putting part on a fixed rate and part on a variable rate. This offers a blend of predictability and flexibility.

How to Budget Around Interest Rate Movements

Whether you’ve already got a mortgage or you’re planning to buy soon, it’s smart to budget with interest rate movements in mind.

Use mortgage calculators to see how different rates affect your repayments.
Stress test your budget. If you can afford your repayments at 6–7%, you’ll be more resilient if rates rise.
Keep an emergency buffer in a separate account to cover any shortfalls or rate shocks.

Being proactive helps you stay in control – and avoids financial stress if rates jump unexpectedly.

Should You Lock in Your Interest Rate?

When rates are on the rise, locking in a fixed rate can offer peace of mind. Here’s what to consider:

Fixed rates give you certainty over repayments
They may cost more upfront compared to variable rates
Break fees can apply if you end the loan early or refinance

Most lenders allow you to lock in a fixed rate for 30 to 60 days after application. Speak to your broker or lender to confirm lock-in policies and fees.

Monitoring Market Trends

Even if you’ve already got a mortgage, it’s worth keeping an eye on the market. Key influences on rates include:

RBA decisions
Inflation and employment data
Global economic shifts

Use comparison websites or lender newsletters to monitor interest rates. If rates fall significantly, it may be worth considering refinancing – which brings us to our next point.

When to Consider Refinancing

If your interest rate is significantly higher than what’s currently available in the market, refinancing might help you:

Lower your interest rate and repayments
Switch to a different loan structure (fixed/variable/split)
Access equity for renovations or debt consolidation

Before refinancing, weigh up:

Break costs (if you’re on a fixed-rate loan)
New loan application and settlement fees
The comparison rate (which includes all fees)

If the numbers add up, refinancing can be a powerful way to save over the life of your loan.

Build Flexibility Into Your Budget

Interest rates won’t stay static forever – and neither will your financial circumstances. Make sure you:

Live below your borrowing limit
Avoid maxing out your credit cards or taking on unnecessary debt
Regularly review your home loan to ensure you’re getting the best deal

A flexible budget makes it easier to absorb future changes, whether it’s a rate hike or a sudden expense.

What If You Can’t Keep Up With Repayments?

Life happens – and sometimes circumstances make it hard to meet your mortgage obligations. Whether it’s due to job loss, illness, or rising repayments, falling behind can be stressful – but there are options.

Here’s what you can do if you’re struggling to stay on top of things.

What to Do If You’re Experiencing Mortgage Hardship

1. Assess Your Finances

Start by reviewing your current situation:

What’s coming in (income)?
What’s going out (expenses)?
What debts do you have?
What assets or savings can you draw on?

Use a budgeting tool to identify non-essential expenses you can pause or cut back.

2. Contact Your Lender Early

It’s essential to contact your lender as soon as possible if you’re falling behind or expect to. Most lenders have hardship teams that can help with:

Pausing or reducing payments temporarily (forbearance)
Restructuring your loan
Offering repayment holidays

Early contact shows that you’re being proactive – and can help prevent late fees or credit damage.

3. Explore Government Support Services

In Australia, support services include:

National Debt Helpline (1800 007 007)
Financial Counselling Australia
ASIC’s Moneysmart website for tools and resources

You may also qualify for income support or housing assistance depending on your situation.

4. Consider Loan Modifications or Restructuring

Some lenders may allow you to:

Extend your loan term to lower monthly payments
Temporarily switch to interest-only repayments
Capitalise arrears (add missed payments to the loan)

Be sure to weigh the long-term costs of these options before proceeding.

5. Seek Legal and Financial Advice

If you’re facing foreclosure or legal action, don’t go it alone. Free legal and financial counselling is available through community legal centres and organisations like the Australian Financial Complaints Authority (AFCA).

6. Explore Alternatives to Selling

Selling your home is a last resort – but there are options:

A short sale (if the sale proceeds won’t cover your loan)
A refinance with a guarantor or co-borrower
Rental income if you have extra space

Speak to your lender or a financial adviser before making a decision.

Final Thoughts

Interest rates are one of the most powerful forces shaping your mortgage – and your long-term financial wellbeing. The good news? You don’t need to be at the mercy of rate movements.

By understanding how interest rates affect your repayments, choosing the right loan structure, and staying flexible with your budget, you’ll be better prepared for whatever the market throws your way.

And if times do get tough, remember: you’re not alone. With lender hardship programs, government support, and expert advice available, there are plenty of ways to stay in control and protect your home.