The Reserve Bank has lifted the cash rate to 4.60 per cent. The pressure on builders is not only in new enquiries. It sits inside contracts signed when borrowing was a full percentage point cheaper.
The Reserve Bank lifted the cash rate to 4.60 per cent on Tuesday. It is the fourth rise of 2026, and it takes the cash rate to its highest level since 2011.
Most of the commentary will focus on buyers who have not signed yet. For builders, the more immediate question sits in the jobs already on the books. Many of those contracts were priced, financed and approved when the cash rate was 100 basis points lower.
That gap does not show up on day one. It shows up at later progress claims, at variations, and at the point a client’s finance is reassessed.
The cash rate is 100 basis points higher than it was in January
The cash rate started 2026 at 3.60 per cent. The Reserve Bank lifted it by 25 basis points in February, March, May and now September. The new rate took effect on 30 September.
In its statement on the decision, the Board said inflation remained elevated and that some of the upside risks it flagged in August were now materialising. It pointed to higher global energy prices linked to the conflict in the Middle East, continuing pressure on domestic capacity, and inflation outcomes stronger than it had expected.
The decision was unanimous. The Board said it would increase the cash rate further if needed. Its next decision is due on 3 November.
The same statement noted that housing prices have fallen in most capital cities and that new housing loans have declined noticeably. It also listed the economic effects of the downturn in the housing market as a source of uncertainty.
Lending to build kept rising through the first three increases
Construction lending did not follow the rest of the housing market earlier this year. ABS Lending Indicators show 9,975 owner occupier loan commitments for the construction of dwellings in the June quarter 2026, seasonally adjusted. That was 15.1 per cent higher than a year earlier.
As we covered in our analysis of lending to build new homes, that growth came after three rate rises had already landed.
The result is a large group of households who borrowed to build in the first half of 2026. Their loans were approved in one rate setting and are now being drawn down in another.
A construction loan feels each rise at a different point in the build
A construction loan is usually drawn in stages as progress claims are paid. Interest is charged on the amount drawn, not the full loan, so the cost to the household grows as the build moves forward.
That means a rate rise lands harder in the later stages. By lockup and fixing, the drawn balance is much larger, and every increase applies to a bigger number.
For a household, the repayment at slab and the repayment at practical completion can look very different. Four rate rises in one year widen that difference.
That gap does not show up on day one. It shows up at later progress claims, at variations, and at the point a client’s finance is reassessed.
Borrowing capacity is tested at the loan rate plus three percentage points
Banks assess whether a borrower can repay at a rate at least 3 percentage points above the loan product rate. APRA confirmed in May 2026 that the serviceability buffer remains at that level.
When the loan rate rises, the assessment rate rises with it. When APRA lifted the buffer in 2021, it estimated that a 50 basis point increase would reduce a typical borrower’s maximum borrowing capacity by around 5 per cent. This year, the cash rate has moved by twice that amount.
That matters wherever finance is not yet final. Conditional approvals, approvals that lapse before a build commences, and clients who need to increase their loan can all be assessed again at the higher rate.
What is the mortgage serviceability buffer?
The serviceability buffer is the margin a bank adds to a loan’s interest rate when testing whether a borrower can afford repayments. APRA expects banks to assess new borrowers at a rate at least 3 percentage points above the loan product rate. It does not change what the borrower pays. It changes how much they can borrow.
Variations are often where the higher rate becomes visible
A client’s loan is set against the contract price. Upgrades and variations agreed during the build are usually funded from savings or from an increase to the loan.
An increase to the loan is a new credit decision. It is assessed against current rates and the client’s current circumstances, not those that applied at the original approval.
The contract sets out how variations are priced and approved, and when they are paid. Those clauses tend to get tested when a client’s capacity to fund change is shrinking.
Falling prices can widen the gap between contract price and valuation
Lenders generally rely on a valuation of the completed home when deciding how much they will lend against a build. Where that valuation comes in below the contract price, the difference falls to the client.
The Reserve Bank has now said housing prices have fallen in most capital cities. In that setting, a valuation shortfall on a signed job becomes a more realistic prospect than it was when prices were rising.
The builder’s own borrowing runs on the same cycle
Builders carry rate exposure directly too. Overdrafts, business loans and equipment finance on variable terms move with the cash rate.
That exposure compounds when client payments slow. A progress claim paid two weeks late costs more to carry at 4.60 per cent than it did at 3.60 per cent, which is why cash flow between progress claims sits at the centre of how a building business absorbs a rate rise.
Master Builders Australia said the latest increase would stop some projects from proceeding and see others go ahead at a reduced scale. It linked that outcome to rates, rising materials prices and continuing labour shortages acting together.
The next dates to watch are 3 November and 11 November
The Reserve Bank’s next decision is announced on 3 November. The Board has left further increases on the table.
The ABS releases Lending Indicators for the September quarter on 11 November. That release covers July to September, so it will not yet capture the effect of this rise, which took effect on the last day of the quarter.
Residential construction has always been the most rate sensitive corner of the industry. The difference this year is how fast the rate setting has moved underneath work that was already signed.
THE GOOD BUILDER TAKE
The rate rise that gets the headlines is the one that stops new buyers signing. The one that tests a building business is quieter.
It arrives months after the contract, through a client’s reassessed finance, a variation that cannot be funded, or a valuation that falls short.
The cash rate has moved a full percentage point since January. Jobs signed at the start of the year are now being built in a different rate setting from the one they were priced in.
For more conversations with builders working through 2026, listen to The Good Builder Podcast and follow us for the latest industry analysis.
Frequently asked questions
The cash rate target is 4.60 per cent, effective 30 September 2026. The Reserve Bank raised it by 25 basis points on 29 September, its fourth increase of 2026, taking it to its highest level since 2011.
A construction loan is drawn in stages as progress claims are paid, and interest is charged on the amount drawn. A rate rise therefore costs more in the later stages of a build, when the drawn balance is larger.
Borrowing capacity is assessed when a loan application is made. Where an approval is conditional, lapses before the build starts, or the loan needs to increase, a new assessment uses current rates plus APRA’s 3 percentage point serviceability buffer.
The Reserve Bank’s next monetary policy decision is due at 2.30 pm AEST on 3 November 2026. The Board has said it will increase the cash rate further if needed.
Related articles
- Lending to Build a New Home Rose 17 Per Cent Through Three Rate Rises
- The RBA Has Dwelling Investment Going Backwards From Late 2027
Last updated: 30 September 2026. Cash rate and lending data current at the time of publication.
General Information Only. This article provides general information about the Australian construction industry and does not constitute legal, financial or professional advice. Readers should seek independent advice relevant to their own circumstances before making any decision.
0 Comments