RBA Mortgage Rate in Australia: Cash Rate Rises to 3.85%, First Hike in 2 Years

Australian mortgage holders are starting 2026 with higher borrowing costs. As of writing, the Reserve Bank of Australia has lifted the cash rate by 25 basis points to 3.85%, marking its first rate increase since November 2023. 

The decision immediately shifts the outlook for variable-rate home loans, with lenders expected to pass the increase on in coming weeks. After three cuts in 2025, the sudden reversal has caught many households off guard.

Inflation Forces the Bank’s Hand

The RBA pointed directly to resurgent inflation as the driver behind the move. Recent data showed price pressures accelerating in the second half of 2025, with inflation now sitting well above the central bank’s 2–3% target range. 

Underlying inflation also exceeded the bank’s own November forecasts. REA Group executive manager of economics Angus Moore said inflation left the RBA little room to delay action, even though markets had expected easing to continue into early 2026.

What the Rate Rise Means for Mortgages

Higher repayments now loom for borrowers on variable-rate home loans. Mortgage Choice estimates that a 25-basis-point increase will lift monthly repayments across most loan sizes once lenders adjust rates. 

Mortgage Choice chief executive Anthony Waldron urged borrowers to reassess their budgets and test whether higher repayments remain manageable. He warned that ignoring the impact now could strain household finances if rates rise again later in the year.

Fixed Rates Move Ahead of the RBA

While variable borrowers feel the immediate impact, fixed-rate borrowers have already faced rising costs. More than 50 lenders have increased fixed mortgage rates in recent weeks, anticipating higher funding costs. 

Commonwealth Bank raised some fixed products by as much as 0.70%, a move equivalent to nearly three rate hikes. Reward Homes CEO Ratu Knight said early lender moves signal expectations of tighter conditions, even before official decisions land.

Borrowing Power Comes Under Pressure

The rate hike also affects buyers waiting to enter the market. Would-be purchasers sitting between pre-approval and settlement now face tighter borrowing limits. Mr Waldron warned that borrowing capacity can change quickly as rates rise. 

He advised buyers to check with brokers rather than assume previous approvals still apply. Different lenders assess risk differently, which can produce sharply different outcomes.

RBA Signals Uncertainty, Not a Clear Path

Governor Michele Bullock stressed that the board has not locked in a new tightening cycle. She said the RBA will respond to incoming data rather than commit to a preset path. However, she also warned that inflation remains too strong to ignore. 

The board acknowledged uncertainty around whether financial conditions remain restrictive, despite easier credit and steady demand growth across the economy.

Markets Reassess the 2025 Rate Cuts

The decision has reopened debate about whether the RBA cut rates too quickly last year. Inflation only sat within the target range eight times over the past 40 quarters, according to data cited during the press conference. 

Ms Bullock defended the board’s approach, noting that shocks before and after COVID-19 repeatedly pushed forecasts off course. She said the bank now prioritises returning inflation to target within a reasonable timeframe.

What Comes Next for Borrowers?

Economists now expect rates to stay higher for longer unless inflation cools meaningfully. Mr Moore said markets currently price in another hike by mid-to-late 2026, though data will dictate the outcome. 

Until clarity emerges, borrowers face a period of adjustment. Budget discipline, realistic borrowing limits, and certainty around repayments now matter more than timing the next RBA move.