The decision buyers are making right now
Property prices are falling in most capital cities, and buyers are moving before those discounts disappear. But the Reserve Bank hasn’t ruled out another rate rise, which would increase monthly repayments and potentially wipe out any savings from a lower purchase price. The question isn’t whether prices are down or rates might go up, both are true. The question is whether the discount you get today is worth the extra interest you could pay over 25 or 30 years.
The answer depends on three variables: how much the price has actually fallen, how much rates could rise, and how long you plan to hold the loan.
How the discount stacks up against a rate rise
Say a property that was $900,000 six months ago is now $850,000. You’ve saved $50,000 on the purchase price. With an 80% loan-to-value ratio, that’s a $40,000 smaller mortgage.
If your rate is 6.5% on a 30-year loan, that $40,000 reduction saves you around $100 a month in repayments, or $36,000 in total interest over the life of the loan.
Now assume rates rise by 0.25%. On a $680,000 loan (80% of $850,000), that adds roughly $115 a month, or $41,400 over 30 years. One quarter-point increase wipes out the interest saving from the price drop. A 0.5% rise costs you $83,000 over the loan term, double what you saved by buying at the lower price.
Those figures assume you hold the loan for 30 years and never refinance. Most borrowers don’t. If you refinance or sell within five years, the early-year savings from a lower loan balance matter more than the long-term compounding cost of a rate rise. But if rates stay higher for longer, the break-even shifts.
The catch
This calculation assumes the price drop is real and won’t reverse. If you buy at $850,000 and prices recover to $900,000 within two years, you’ve locked in both the discount and avoided the timing risk. But if prices fall further to $800,000, you’ve overpaid by $50,000 and still face higher rates. The trade-off only works if you’re buying near the bottom of the cycle, and nobody rings a bell.
What changes the equation
Three scenarios shift the math:
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Base case: Prices stabilise here, RBA holds or cuts once in the next 12 months. Your discount holds, rate risk is contained. You’re ahead.
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Upside: Prices fall another 5-10%, rates stay flat or drop. You overpaid relative to waiting six months, but if you needed to buy now (lease ending, family circumstances), the difference is manageable.
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Downside: Prices fall further and rates rise 0.5% or more. You’ve bought into a falling market with higher servicing costs. The discount you thought you had disappears, and your buffer shrinks.
The risk isn’t binary. It’s a range of outcomes, and the width of that range depends on how much you’re borrowing, how tight your serviceability is, and whether you can absorb an extra $200-$300 a month if rates move against you.
Key pressure points
Your income and employment stability matter more than the price. If your household income is secure and you have a cash buffer, a 0.25% rate rise is uncomfortable but survivable. If you’re borrowing at your serviceability limit, even a small move in rates forces hard choices, cut spending, find extra income, or sell.
Fixed-rate rollovers are the other pressure point. Borrowers who fixed at 2-3% in 2021 and are rolling onto variable rates above 6% are already dealing with payment shock. If you’re buying now and fixing for two years, you’re betting rates will be lower when you roll off. If they’re higher, your repayments jump again.
Migration, wage growth, and supply pipelines also matter. If skilled migration stays high and wage growth picks up, demand could support prices even if rates rise slightly. If migration slows or unemployment ticks up, prices keep falling regardless of rates.
Steps for buyers weighing this trade-off
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Stress-test your loan. Add 2% to your rate and check if you can still cover repayments plus bills. If not, you’re borrowing too much.
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Calculate your break-even. Use a mortgage calculator to work out how much a 0.25% and 0.5% rate rise adds to your monthly repayment, then compare that to the dollar saving from the price drop. If one quarter-point wipes out your gain, the trade-off is tight.
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Check your timeline. If you’re buying to hold for 10+ years, short-term rate moves matter less. If you’re planning to upgrade in 3-5 years, timing and serviceability matter more.
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Look at what’s driving the discount. Is the price down because the market is soft across the board, or because this property has issues (location, condition, appeal)? A market-wide drop is more likely to reverse; a property-specific discount might not.
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Don’t wait for perfect clarity. You won’t know the bottom until it’s passed. If the property works for your circumstances and you can service the loan under stress, the timing risk is lower than the risk of waiting and facing higher prices or tighter credit.
For context on recent price movements, see Melbourne house prices set to fall further despite clearance rate uptick and Sydney clearance rate drop forces Enmore vendors to cut price guides.
What to watch in the next six months
RBA statements on inflation and rates, monthly clearance rates and auction volumes, fixed-rate offerings from the major banks (if they start rising, the market expects rates to stay higher), and wage growth data from the ABS. If wages are tracking above 3.5% and unemployment stays below 4%, the RBA has less room to cut. If unemployment rises or inflation falls faster than expected, rate cuts become more likely and the case for buying now strengthens.
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General info, not financial advice.
