A hypothetical worked example shows how four 25 basis point increases, the same number the RBA delivered in 2026, can add up on a standard variable-rate home loan.

The Monetary Policy Board has raised the cash rate target four times in 2026, each by 25 basis points: on 3 February, 17 March, 5 May and 29 September. Together those moves took the cash rate from 3.60 per cent to 4.60 per cent, a rise of 1 percentage point.

Headlines about basis points can feel abstract. This article works through a simple illustration to show how quarter-point steps can translate into monthly repayments. It is not RBA data, it is not a forecast, and it does not describe any particular lender's products or any real borrower's situation.

The assumptions behind the illustration

To keep the arithmetic transparent, the example uses a deliberately simple, hypothetical loan:

  • A $400,000 variable-rate principal-and-interest loan.
  • A 30-year term with monthly repayments.
  • A hypothetical starting interest rate of 5.60 per cent.
  • The assumption that the lender passes on each 25 basis point move in full.

Real loans differ in many ways. Lenders set their own rates, borrowers have different balances and remaining terms, and many have offset or redraw arrangements that change how much interest they actually pay. Actual rates and outcomes vary by lender and borrower.

Step by step

Using the standard repayment formula for an amortising loan, the illustrative monthly repayment changes as follows:

  • 5.60 per cent: $2,296.32 a month.
  • 5.85 per cent: $2,359.76, an increase of $63.44.
  • 6.10 per cent: $2,423.98, a further $64.22.
  • 6.35 per cent: $2,488.94, a further $64.96.
  • 6.60 per cent: $2,554.64, a further $65.70.

Across all four steps, the illustrative repayment rises by about $258.32 a month, or roughly $3,100 a year. That is an increase of around 11 per cent on the starting repayment.

Two features of the arithmetic stand out. First, each quarter-point step adds slightly more than the one before, because each rise applies on top of an already higher rate. Second, the increase in the monthly repayment is smaller than the increase in first-month interest. At 5.60 per cent, the first month's interest on $400,000 is about $1,866.67; at 6.60 per cent it is $2,200.00, a difference of about $333.33. Because the repayment rises by less than that, less of each early payment goes towards reducing the balance: roughly $354.64 in the first month at 6.60 per cent, compared with about $429.65 at 5.60 per cent.

In other words, higher rates do not only raise the cost of each month. On a loan like this, they also slow how quickly the principal is paid down in the early years.

How this fits the RBA's own picture

The illustration is a mechanical exercise, but the RBA has described the real-world effects of this year's rises in its own terms.

Speaking on 13 August, when the cash rate was 4.35 per cent, Assistant Governor (Financial Markets) Christopher Kent said: "Scheduled mortgage payments have risen and are now close to their 2024 peak as a share of household disposable income." He added: "Lending and deposit rates have increased in line with the cash rate."

At her 29 September media conference, Governor Michele Bullock put mortgage payments "back up sort of around 10 per cent of" disposable income, an approximation, and said that compared with "when we had interest rates at 4.35 per cent, so they'll go up a bit further." She also acknowledged the strain on households: "I know they don't understand why we have to do this and it hurts them."

The RBA's October 2026 Financial Stability Review noted that "Scheduled mortgage payments have been the largest claim on household income". It also found the share of variable-rate owner-occupier borrowers with a cash-flow shortfall "remains relatively low at around 2 per cent", and that "the median borrower [is] able to cover over a year of scheduled mortgage payments" from offset and redraw buffers.

Bullock highlighted the role of those buffers too: "a lot of people have a mortgage, and then they have an offset account, which sits in the background." Money held in an offset account reduces the balance on which interest is charged, which is one reason the simple illustration above will not match many households' actual experience.

Why the Board raised rates anyway

The Board's reasoning is about inflation. Its 29 September statement said inflation remains elevated, recent outcomes were stronger than expected and short-term inflation expectations are high. It judged that "a further tightening of financial conditions" was warranted to return inflation to target within a reasonable period.

Headline inflation was 4.0 per cent over the year to August on the monthly CPI indicator. Underlying inflation, measured by the trimmed mean, was 3.6 per cent over the year to the June quarter, against a 2–3 per cent target with a 2.5 per cent midpoint. "Higher interest rates are needed to ensure inflation returns to target," Bullock said.

The effects of this year's rises are also still working through. Bullock said "it can take 12, perhaps even 18 months" for rate changes to be fully felt, and of the earlier three increases: "A lot of that effect is still to flow through."

As for the path ahead, the Governor said: "I'm not going to give you forward guidance." The Board has said it will increase the cash rate further if needed and remain attentive to the data. Its next decision is due at 2.30 pm on 3 November. This illustration makes no assumption about that decision.

The bottom line

On a hypothetical $400,000, 30-year variable loan starting at 5.60 per cent, four quarter-point rises passed on in full would lift the monthly repayment from $2,296.32 to $2,554.64, an increase of about $258.32 a month, or roughly $3,100 a year. Each step adds a little more than the last, and higher rates also slow early repayment of principal.

The example is an illustration only. It is not RBA analysis, and real outcomes depend on the lender, the loan, offset balances and each borrower's circumstances. What it does show is why the Governor expects repayments to "go up a bit further", and why the RBA is watching household buffers so closely as the full effect of 2026's tightening flows through.