Interest Rate Rise Self Employed: What It Really Means for You

Why Self-Employed Borrowers Lose More Borrowing Capacity Per Rate Rise

This is where the rate rise impact on self employed borrowers gets technical, but it matters. So let's break it down plainly.

The serviceability buffer is a stress test that requires lenders to assess your ability to repay at approximately 3% above the actual interest rate, ensuring you could still afford your loan if rates climbed further.

When rates rise, that buffer rises with them. If the actual rate moves from 6.0% to 6.25%, lenders now assess you at 9.25% instead of 9.0%. That might sound small. It isn't.

Now layer on the self-employed income discount. Where a PAYG borrower earning $120,000 gets assessed on the full amount, a self-employed borrower on the same declared income might only be assessed on around $96,000. You're starting from a lower base, and the serviceability buffer eats into a smaller number.

Here's what that looks like in practice. A PAYG borrower on $120,000 might see their borrowing capacity drop by around $30,000 after a 0.25% rate rise. A self-employed borrower on the same income could lose $50,000 or more, watching their capacity fall from $800,000 to $750,000 or below. Same income. Same rate rise. Very different outcome.

The debt-to-income ratio limits that lenders apply make this worse. When your assessed income is already discounted, your ratio looks higher even if your actual earnings are strong. It's a compounding effect that most borrowing capacity after rate rise commentary completely overlooks.

A lower borrowing capacity may also push your LVR (loan-to-value ratio) higher, potentially triggering LMI (Lenders Mortgage Insurance) costs.

There's also the documentation hurdle. The ATO typically requires lenders to verify your income using two years of tax returns, business financials, and an ABN registered for a minimum of 12 months. If you're self-employed with less than two years of trading history, your options narrow further, though they do exist.

Want to see where you actually stand? Check your borrowing capacity under current rates before you start property hunting.

Variable Rate Rises Hit Harder When Your Income Is Irregular

Most self-employed borrowers end up on variable rates, either by choice or because their fixed period has ended. That means when the RBA moves, lenders typically pass through the full cash rate change to variable borrowers within weeks.

On a $600,000 loan, a 0.25% rise adds roughly $95 per month to your repayments. That's over $1,100 a year. Stack a couple of rises together and you're looking at $300 to $500 per month in additional costs.

For a PAYG borrower with a predictable salary landing every fortnight, that's uncomfortable but manageable. For a self-employed borrower who might have a strong quarter followed by a quiet one, a self employed mortgage rate increase during a slow period creates genuine stress. The repayment doesn't care that your biggest client paid late or that seasonal demand dropped.

This is where smart cash flow management becomes your best defence. Three strategies worth considering:

1. Offset accounts. An offset account sits alongside your loan and reduces the interest you pay on the balance by the amount held in the account. During good months, park surplus cash here. You'll reduce interest costs and build a buffer you can draw on when things slow down.
2. Repayment buffer. Aim to build three to six months of repayments in reserve. This turns a quiet quarter from a crisis into a non-event.
3. Redraw facilities. If you've been making extra repayments, a redraw facility lets you pull that money back out if needed. It's a safety net, not a strategy, but it's worth understanding.

If you're navigating this challenge right now, our guide on managing a home loan with irregular income goes deeper.

The Refinancing Catch-22 for Self-Employed Borrowers

Here's the paradox. You're paying a rate that feels too high. You want to refinance to something better. But refinancing means a full reassessment of your borrowing capacity at today's higher rates, plus the 3% serviceability buffer. You might not qualify for the amount you already owe.

This is the refinancing catch-22, and it hits self-employed borrowers harder than anyone. A reassessment means updated tax returns, fresh business financials, and the income discount applied again from scratch. If your recent years were uneven, or if you took legitimate deductions that lowered your taxable income, your assessed borrowing capacity could come in below your current loan balance.

That doesn't mean refinancing is off the table. It means you need to know when it makes sense and when to stay put.

Refinancing is usually worth pursuing when your current rate is significantly above market and the interest savings outweigh the reassessment friction. If a switch saves you $3,000 or more per year, the numbers often work even with a conservative income assessment.

When you're close to the edge on serviceability, a different approach can be smarter. Call your current lender and ask for a retention offer. Lenders would rather drop your rate than lose your loan. They don't need to reassess you for a rate reduction on an existing loan, which sidesteps the whole problem.

A broker who understands how rate rises affect small business owners can model both scenarios and tell you which path saves more. With access to 40+ lenders, they can also identify which lenders offer the most competitive retention deals right now.

Thinking about refinancing? See how we help with refinancing options for self-employed borrowers without the usual headaches.

Not All Lenders Assess Self-Employed Income the Same Way

This is the part most borrowers don't realise. As we move through 2025 and into 2026, self-employed home loan rates will vary — but so will the way lenders assess whether you can afford the loan in the first place. And that assessment methodology can matter more than the rate itself.

Some lenders average your last two years of tax returns. Others weight the most recent year more heavily. Some accept add-backs like depreciation and one-off business expenses that reduced your taxable income but didn't reduce your actual cash flow. Others don't.

The difference between a lender who accepts add-backs and one who doesn't can mean the difference between a $700,000 approval and a $780,000 approval. Same borrower. Same income. Different policy.

This is where a broker who specialises in self-employed applicants adds genuine value. With access to 40+ lenders, they know which lenders are most favourable to self-employed borrowers right now, which ones have recently updated their policies, and which ones to avoid.

For borrowers who can't provide full financials, low doc home loan options exist as well. They come with trade-offs, but they're a legitimate pathway when standard documentation requirements don't fit your situation.

Full transparency matters here too. Any broker you work with should disclose exactly how they're paid by lenders, so you know their recommendation is based on your best outcome, not theirs.

What You Can Do Right Now

Rate rises are a reality. But feeling stuck isn't inevitable. Here are five concrete steps you can take today:

1. Review your current rate. Compare it to what's available in the market. If you're more than 0.3% above competitive rates, you're likely overpaying.
2. Build or top up your offset account. Even small amounts reduce your interest and create breathing room for quieter months.
3. Get your financials in order. Clean, up-to-date tax returns and business financials make every lender assessment smoother. Talk to your accountant about lodging early if you're planning to borrow.
4. Understand your borrowing capacity at today's rates. Don't guess. Check your borrowing capacity before you start looking at properties.
5. Talk to a broker who specialises in self-employed lending. Not all brokers understand the nuances of how lenders assess business income. The right one can match you with a lender whose policies work in your favour.

Rate rises are challenging, but self-employed borrowers have more options than most commentary suggests. The key is working with someone who understands the landscape and can navigate it with you.

At Stryve, we work with self-employed borrowers every day. No hidden fees, full transparency on lender commissions, and we know which lenders will give your application the best chance. We're self-employed home loan specialists because that's where we see the biggest gap between what borrowers deserve and what they're getting.

Want to know where you stand? Talk to a broker who specialises in self-employed lending. Book a free chat with the Stryve team.

Frequently Asked Questions

How do rate rises affect self-employed borrowers differently?

Self-employed borrowers are assessed on approximately 80% of their declared income, compared to 100% for PAYG employees. When rates rise, the APRA serviceability buffer (typically 3% above the actual rate) compounds this discount, meaning borrowing capacity drops faster. A 0.25% rate rise can reduce a self-employed borrower's capacity by $50,000 or more, compared to around $30,000 for a PAYG borrower on the same income.

Can I refinance my home loan if I’m self-employed?

Yes, but refinancing requires a full reassessment of your income and borrowing capacity at current rates plus the serviceability buffer. If your recent tax returns show uneven income, or if the income discount reduces your assessed capacity below your current loan balance, you may not qualify. In that case, negotiating a retention offer with your existing lender can be a smarter option. A specialist broker can model both scenarios for you.

How much borrowing capacity do I lose when rates go up?

It depends on your income, existing debts, and how your lender assesses self-employed earnings. As a guide, a self-employed borrower on $120,000 declared income could see their borrowing capacity drop from $800,000 to $750,000 or below after a single 0.25% rate rise, due to the combined effect of the serviceability buffer and the income assessment discount.

Self-employed vs PAYG: how much less can I borrow?

On the same declared income of $120,000, a PAYG borrower is assessed on the full amount while a self-employed borrower may only be assessed on around $96,000 (approximately 80%). After a 0.25% rate rise, the PAYG borrower might lose around $30,000 in borrowing capacity, while the self-employed borrower could lose $50,000 or more. Same income, same rate rise, very different outcome.