Rising interest rates usually increase monthly mortgage repayments for variable-rate loans, which can strain household budgets. For fixed-rate mortgages, the impact is delayed until the term ends. On the ASX, higher rates can boost profit margins for major banks like CBA, Westpac, ANZ, and NAB due to increased net interest margins. However, if rates rise too quickly, loan defaults may rise, affecting overall sentiment around bank stocks.

Mortgage holders with variable loans are typically hit first when the RBA raises interest rates. This can lead to reduced consumer spending. On the ASX, financials—especially the Big Four banks—often benefit in the short term from higher margins. But investor caution tends to grow if there's fear of a slowdown in the housing market or broader economy, which could offset gains in bank stock prices.

It’s a double-edged sword. Higher interest rates help banks on the ASX earn more from loans, but they also raise concerns about housing affordability and debt servicing. That can pressure mortgage holders and, over time, reduce credit demand. The result is often mixed movement in ASX financial stocks depending on how the market views economic resilience.

When property prices decline, mortgage demand can slow, and loan-to-value ratios worsen, raising concerns for lenders. On the ASX, this can lead to volatility in non-bank lenders and property-focused REITs. Investors may closely watch earnings and bad debt trends in such companies during downcycles.