Rates are at a 15-year high but commercial investors aren't flinching

At a 4.60 per cent cash rate, a typical leveraged residential investment property is losing money every week. A well-bought commercial property can absorb mortgage rates above 9 per cent before it costs its owner a dollar. That gap explains more about investing in 2026 than almost anything else.

On 29 September, the Reserve Bank lifted the cash rate to 4.60 per cent. It was the fourth hike of the year and took the cash rate to its highest level since November 2011.

On a $700,000 interest-only investment loan, that single move costs another $1,750 a year. Across all four hikes this year, it’s $7,000.

If you own a typical residential investment property, that $7,000 came out of your pocket. If you own a well-bought commercial property, it came out of your surplus.

Same rate rise. Completely different conversation at the kitchen table.

That difference isn’t luck. It’s structure.

The number most investors never calculate

Every investment property has a break-even interest rate: the rate at which the net rent exactly covers the interest. Below it, the property pays you. Above it, you pay the property.

When the cash rate was 0.10 per cent, cheap debt, negative gearing and rising values could carry properties that lost money every week.

That world is gone. So let’s run the test on today’s numbers.

Same $1 million but two very different outcomes

Take two $1 million investment properties, each bought with a $700,000 interest-only loan.

The residential property earns a 3.85 per cent gross rental yield, the national average according to Cotality. That’s $38,500 a year. After roughly $9,500 in rates, insurance, maintenance, management and land tax, net income is about $29,000.

The commercial property is leased to a business on a net lease at a 6.5 per cent net yield. That’s deliberately conservative: across the deals we facilitate at Unikorn, net yields typically sit in the 7–8 per cent range. Because the tenant pays the outgoings, the $65,000 in rent is income.

To be fair to residential, I’ve given it the cheaper loan: 6.75 per cent versus 7.25 per cent for commercial.

Read that last line again.

The residential property needs a mortgage rate of around 4.1 per cent just to break even. That’s below the RBA cash rate.

The commercial property can absorb rates climbing to roughly 9.3 per cent before it costs its owner a dollar.

Every future 0.25 per cent rise costs both investors the same $1,750 a year. One pays it from rental surplus. The other pays it from salary.

The safety net has changed

For decades, residential investors accepted weekly losses because negative gearing allowed those losses to be deducted against other income.

For established residential property bought after 7:30pm on 12 May, that’s being withdrawn. From 1 July 2027, losses on those properties can no longer be deducted against your salary, only carried forward against future residential income. The $18,250 shortfall above becomes a cost the investor carries, with no tax refund to soften it.

Commercial property was left alone. But here’s the part most commentary misses: a well-bought commercial asset doesn’t need negative gearing, because it isn’t losing money.

Super has shifted too. Since 10 August, new borrowing inside an SMSF is limited to business real property. For investors wanting to use leverage in super, commercial property now occupies a very different position.

Inflation can work in a landlord’s favour

Rates are high because inflation is high. Headline CPI reached 4.0 per cent in the year to August, while underlying inflation remained at 3.6 per cent.

For most of the economy, inflation is a cost. Commercial leases can turn part of it into income.

Many leases build rent increases into the contract: either fixed annual rises, commonly 3 to 4 per cent, or increases linked to CPI. When inflation runs at 4 per cent, a CPI-linked lease lifts the rent automatically.

Residential rents have risen strongly too, but the mechanism is different.

A residential rent rise is a negotiation. A commercial rent rise is a clause.

What about values?

Higher rates can put upward pressure on commercial yields and weigh on valuations. I’m not going to pretend otherwise.

But income is important too. ANZ’s latest commercial property update describes the sector as well positioned, with declining vacancies and rising rents across many asset types helping offset pressure on values. Knight Frank expects rental growth, rather than yield compression, to drive performance in the near term.

Capital hasn’t disappeared either. Australian commercial transaction volumes jumped to $14.3 billion in the June quarter, from $8.8 billion the quarter before.

For an income investor, higher yields create opportunity. Every quarter-point of yield you buy today is income you lock in for the life of the lease.

Selection is everything

None of this means every commercial property is a good investment.

Vacancies can take longer to fill. A high yield attached to a weak tenant and short lease can be a trap. Secondary office can be cheap for a reason.

The numbers only work if the asset is right.

That means understanding the tenant, lease length, rent reviews, outgoings and how easily the property could be re-let.

The market has called the question

In a low-rate world, residential property allowed investors to carry negative cash flow for years. Cheap money, tax treatment and capital growth could cover the gap between what a property earned and what it cost.

At a 4.60 per cent cash rate, that gap now shows up every week in your bank account.

The investors who come out of this cycle in the strongest position won’t be the ones waiting for rates to fall. They’ll be the ones who own assets capable of paying them while rates stay high.

In 2026, the most important number on any investment property isn’t its price. It’s the interest rate it can survive.