On 3 February 2026, the Reserve Bank of Australia hiked the official cash rate by 25 basis points to 3.85% – the first rate increase in over two years. If you’re an Australian expat holding investment property back home, this decision has immediate financial and strategic implications you need to understand.
This wasn’t just another routine announcement. It marked a sharp reversal from the shallow easing cycle that began in 2025, and signals that interest rates may stay elevated for longer than many expats anticipated. Within days, every major Australian bank passed the full 0.25% increase through to variable mortgage holders.
So what does this actually mean for your cashflow, your tax position, and your decision to hold or sell? Let’s cut through the noise.
The Rate Hike: What Happened and Why
The RBA’s decision was unanimous. After inflation picked up materially in the second half of 2025, the Bank determined that another rate cut wasn’t on the cards – and in fact, a hike was necessary to keep inflation expectations anchored.
Here’s the context:
- Peak rate (Nov 2023): 4.35%
- Pre-hike rate (Nov 2025): 3.60%
- Current rate (Feb 2026): 3.85%
This is the first rate hike since November 2023. It partially reverses what has been the shortest and shallowest easing cycle in recent RBA history. And crucially, it signals a shift in the Bank’s thinking: rather than preparing for further cuts, the focus is now on keeping rates higher for longer to manage persistent inflation.
Michele Bullock, RBA Governor, made it clear that the Board isn’t ruling out further hikes if inflation remains sticky. Major bank forecasts are mixed:
- CBA: One hike only, rate steady at 3.85% through end-2026
- NAB: Possibility of a second hike in May
- ANZ: Rate to “remain steady at 3.85% over the next few years”
- Westpac: Extended hold or potential cuts later in the year
The consensus? Don’t expect relief anytime soon.
How Much More Will Your Mortgage Cost?
If your Australian investment property is on a variable rate mortgage, you’ve already felt the impact.
All four major banks – CBA, NAB, ANZ, and Westpac – passed on the full 0.25% increase to variable home loan customers. The changes took effect between 13 and 20 February 2026.
The numbers:
- $600,000 mortgage with 25 years remaining: +$90 per month
- Average mortgage holder: +$100 per month
- $1 million mortgage: +$150 per month
That’s an immediate hit to your cashflow. And if you’re negatively geared – which many expat investors are – this means your property is now costing you even more each month than it was before.
Negative Gearing for Expats: The Tax Angle
Here’s where it gets interesting from a tax perspective.
Yes, you can still claim negative gearing deductions as a non-resident. The increase in your mortgage interest expense means your deductible costs have also increased.
But – and this is crucial – negative gearing losses can only offset Australian-sourced income.
How It Works in Practice
Let’s say your investment property generates $30,000 in annual rental income, and your total deductible expenses (interest, rates, insurance, repairs, depreciation) are $38,000. That’s an $8,000 loss.
If you’re a non-resident:
- The $8,000 loss offsets your rental income to zero
- Any remaining loss carries forward to future years (shown at label IT6 on your tax return)
- These carried-forward losses can offset future Australian income – capital gains when you sell, rental income in future years, or employment income if you return to Australia
This is fundamentally different to how residents use negative gearing. Residents can offset property losses against their employment income and receive a refund as a result. Non-residents accumulate the losses as a tax credit for use at some point in the future.
Legislative Basis
Interest on loans used to purchase income-producing property is deductible under section 8-1 of the Income Tax Assessment Act 1997. There is no special restriction preventing non-residents from claiming these deductions.
The limitation comes from section 6-5(3) ITAA 1997, which specifies that non-residents are only assessed on Australian-sourced income. Since your rental income is Australian-sourced and since it is assessable for income tax purposes, as your interest expense relates to earning that income, the deduction applies – but it can only offset Australian income.
Hold or Sell? The Strategic Question
The rate hike has forced many expat property investors to reassess their position. Should you hold through this period of elevated rates, or cut your losses and sell?
There’s no one-size-fits-all answer, but here are the factors to weigh:
Reasons to Hold
1. Property fundamentals appear to remain solid
- National dwelling values are forecast to rise modestly in 2026 (around 6% if rates stay at 3.85%)
- Housing supply shortages and population growth continue to underpin prices
- Rental vacancy rates remain tight, keeping rental yields supported
2. Rates may not go much higher
The RBA is unlikely to embark on an aggressive hiking cycle like 2022-23. If ANZ’s forecast is correct and rates stabilise at 3.85%, this may be as bad as it gets (we hope)!.
3. Carried-forward tax losses have value
If you’re accumulating negative gearing losses as a non-resident, those losses will reduce your tax bill (eventually) when you sell (offsetting capital gains) or if you return to Australia and resume earning Australian income (whichever is the earliest).
4. Capital gains remain the long game
If you’ve held the property for many years, selling now means crystallising a capital gains tax liability. For non-residents, that’s 30% on the gain (and remember, you won’t receive a full 50% CGT discount to reduce the taxable gain, if you acquired the property after 8 May 2012 and had a any period of non-residency after that date).
Holding longer may see further capital growth that offsets the short-term cashflow pain.
Reasons to Sell
1. Cashflow is unsustainable
If the additional $90-150/month takes you into financial stress territory – especially if you’re funding the shortfall from foreign currency income – then holding may not be viable. Currency fluctuations can compound the problem.
2. You no longer qualify for the main residence exemption
Non-residents cannot claim the CGT main residence exemption, even if the property was once your home as this was abolished for non-residents from 1st July 2020. Further, as non-residents are now ineligible for the main residence exemption, it also means that they are ineligible for the “6-year temporary absence rule” that allowed expats to claim the exemption for up to six years after moving out of their main residence (technically from the date that the property was first available for rent) whilst they remain non-resident. Thus, if you sell now whilst you’re a non-resident (usually not a good move, and not recommended), you’ll end up paying CGT on most, if not all of the gain over the entire period of ownership – you will at least however, avoid further cashflow losses.
You may also be required to declare the capital gain and pay capital gains tax (minus any foreign tax credit allowed) in the country where you reside, particularly where that country taxes resident’s on their worldwide income!
3. Property market outlook is uncertain
Sydney and Melbourne recorded small price declines in December 2025 (-0.1% each). If your property is in a softening market and you don’t expect strong capital growth in the next few years, the combination of negative cashflow and flat prices may not justify holding.
4. Opportunity cost
The cash you’re sinking into negative gearing losses each month could be earning returns elsewhere – especially if global investment opportunities are delivering better risk-adjusted returns than negatively geared Australian property.
The 15% Foreign Resident Withholding Trap
If you do decide to sell, be aware of the foreign resident CGT withholding regime.
As of 1 January 2025, all property sales by foreign residents trigger 15% withholding (by the purchaser) at settlement – regardless of the property value. What this mean is that, at settlement, the purchaser of your property is obligated to withhold 15 % of the sale price and remit that to the ATO as a prepayment of your expected capital gains tax liability. Important to note, is that whereas previously wittholding only applied to properties sold for greater than $750,000, there is now no longer any threshold – thus the 15% withholding of tax from the purchase price of the property (by the purchaser) is required whenever any property is sold in Australia.
This means the conveyancer or solicitor involved in the settlement will withhold 15% of the sale price and remit it to the ATO. It is important to understand that this withholding tax is not an additional tax over and above capital gains tax, it is a prepayment of your expected capital gains tax liability. If the wittholding tax exceeds the CGT on the sale of your property, you’ll be due a refund when you lodge your tax return for that year. If it exceeds the CGT on the sale of your property, you’ll be required to pay additional tax (equal to the difference between your actual CGT liability, and the amount withheld from settlemt that previously remitted to the ATO for you).
Potential solution: Apply for an ATO Clearance Certificate before settlement. This requires advance planning – processing times can be several weeks. Without it, 15% of your sale proceeds will be held by the ATO until your tax return is finalised.
What to Do Now
If you’re an expat with Australian investment property, here’s a practical action plan:
1. Calculate your new cashflow position
Work out exactly how much more your mortgage is costing you each month. Factor in currency exchange rates if you’re funding the shortfall from overseas income.
2. Review your negative gearing position
Calculate your carried-forward tax losses. These have value – they’ll offset future Australian income. If you’ve been accumulating losses for several years, you may have a significant tax credit waiting for you.
3. Assess your property’s capital growth trajectory
Is your property in a market that’s still growing, or has growth stalled? Check recent sales data for your suburb. If prices are flat or declining, the justification for holding weakens.
4. Model the “sell now” scenario
Calculate your potential CGT liability if you sell today. Remember:
- Non-residents pay 30% on capital gains on the first $135,000 (no tax-free threshold), with rates increasing to 37% (on gains between $135,000 to $190,000) and potentially up to 45% (for that part of the gain that exceeds $190,000),
- Either no 50% CGT discount or a reduced 50% CGT discount if you bought after 8 May 2012 and have had any period of non-residency after that date,
- 15% withholding at settlement (unless you get a Clearance Certificate, assuming that you’re eligible).
Compare that to the ongoing cost of holding. How many more years of negative cashflow would it take to erode your remaining equity?
5. Consider your return timeline
Are you planning to return to Australia in the next 2-5 years? If so, your carried-forward tax losses become immediately valuable – they can offset your employment income when you’re back on Australian wages.
That may tip the balance towards holding.
6. Get advice before you act
Every situation is different. Your residency status, the property’s location, your other Australian income, your return plans, and your risk tolerance all matter. Speak to a qualified tax adviser who understands non-resident property tax before making a decision.
Need expert advice on your expat property situation? Book a consultation with our specialist tax team.
The Bigger Picture
The RBA’s February 2026 rate hike is a reminder that Australian expats with property back home are playing a long game with moving goalposts.
Interest rates, tax rules, property markets, and currency exchange rates are all variables outside your control. What you can control is how informed you are, how proactive your planning is, and whether you’re making decisions based on your actual numbers rather than market noise.
For some expats, this rate hike will be the trigger to sell. For others, it’s a temporary squeeze worth riding out for long-term capital gains. The right answer depends on your situation – but either way, understanding the tax and cashflow implications is essential.
