For Australian property investors, every cash-rate move changes the maths in two opposite directions at once. Higher rates mean higher interest deductions, which feel like a tax win at the marginal rate. They also mean higher cashflow gaps to fund out of after-tax income, which feel like a hole in the household budget. The May 2026 hike to 4.35 per cent has widened both effects. The right response is not to lean into the bigger deduction; it is to recheck whether the asset is still on track for total after-tax return.
A note: this article is general information, not tax or financial advice. Tax outcomes depend on your individual circumstances, the property's structure, and the year-end position. Speak with a registered tax agent before acting on anything below.
What does the stack look like at 4.35 per cent?
Take a typical investor: $700,000 investment loan, interest-only for the first three years, currently on a variable rate of 6.85 per cent (a representative investor rate post-May-hike). Annual interest cost: about $48,000. Property: $850,000 dwelling, leased at $620 per week, so $32,240 of gross annual rent. Property expenses (rates, insurance, management, maintenance, body corporate where applicable): $7,500 to $9,500 a year, depending on the property. Net rental income before interest: about $23,000.
Cashflow gap before tax: $48,000 (interest) minus $23,000 (net rent) equals $25,000 a year. Add depreciation of $7,500 to $9,000 from a quantity-surveyor schedule on a recent build. Tax loss for the property: about $33,000 a year. At a 37 per cent marginal tax rate, that loss returns about $12,200 of tax saved. After-tax cashflow gap: about $12,800 a year, or $1,067 a month. That is the after-tax cost of holding this property at the current rate, before any capital growth.
Holding cost is the right frame. Capital growth, when it shows up, has to outpace the holding cost compounded over the holding period to make the position economically positive.
How does another 0.50 per cent of variable-rate increase change the picture?
If wholesale rates move another 0.50 per cent in the next twelve months (broadly consistent with current bond pricing), the investor variable rate moves to about 7.35 per cent. Annual interest on $700,000: about $51,500. Cashflow gap before tax widens to $28,500. Tax loss widens to $36,500, returning about $13,500 of tax saved at 37 per cent. After-tax cashflow gap: about $15,000 a year, $1,250 a month.
The $200-a-month deterioration in after-tax cashflow is what most investors experience as the lived effect of a rate hike on a leveraged position. The interest deduction does its job; it does not eliminate the gap. The gap has to be funded out of the investor's after-tax income from other sources.
When should an investor refinance versus restructure?
Refinance the loan if a competitive lender on your LVR is pricing 0.30 per cent or more below your current rate. On $700,000, that is roughly $2,100 a year of interest saved at the same loan size. Switching costs are similar to owner-occupier refinancing, with the added complexity that some investor cashbacks have tighter eligibility (LVR caps, employment criteria).
Restructure (rather than refinance) where the issue is product, not rate. A common case is a borrower whose interest-only period has ended, who has been auto-rolled to principal-and-interest at the same lender, and is now paying $1,200 a month more than they were under IO. If the investor is otherwise on track for total return, extending IO for a further period (subject to the lender's policy) is often the right move. The deduction stays maximal, the cashflow gap stays manageable, and the principal reduction can resume later when rates have moved.
Does negative gearing still make sense at 4.35%?
Negative gearing makes sense when total after-tax return (capital growth plus rental yield, less holding cost) outpaces the alternative use of the same capital, on the same risk-adjusted basis. At 4.35 per cent, the bar is higher than it was at 3.10 per cent. The alternative use of the same capital, in a typical superannuation account, has also become more attractive on the same yield curve. The decision is not whether negative gearing as a concept still works; it is whether this specific property, on this specific loan, with this specific holding cost, still beats the alternatives.
The pieces of the answer that most investors forget to update each year are: the actual cost basis (often higher than the original purchase plus expected expenses, after a few years of repairs and CPI), the actual depreciation schedule (often less generous in years 4 and 5 than year 1), the marginal tax rate (which moves with income), and the alternative-investment yield (which has compounded for the same period). Run the recheck annually; the answer changes.
When to sell
The cleanest test is the "would I buy this property today?" question. If the answer is no, list the reasons. If the reasons are about the property and not the market, sell. If the reasons are about the market, run the holding-cost arithmetic for two more years against your honest estimate of capital growth in that period. If holding cost outpaces expected growth, the maths usually favours selling. CGT on the sale (if held more than twelve months and not a main residence) gets the 50 per cent discount; the after-tax sale proceeds become the alternative-use capital that the comparison is run against.
For most experienced investors, the May rate hike will not trigger a sale. For investors who bought close to peak, on tight cashflow, with thin buffers and rising holding costs, it may be the move that brings forward a decision they were going to have to make in the next twelve months anyway. Either path benefits from doing the maths now rather than later.