Australian Mortgage Holders Face Years of High Rates, Westpac Warns of Three More Hikes
Australian homeowners with mortgages have been issued a stark warning: they may need to wait as long as two years before seeing any relief from interest rate cuts, with further increases potentially on the horizon. In a sobering forecast, banking giant Westpac has predicted three additional interest rate rises in 2026, levels not witnessed since the Global Financial Crisis of 2008.
Aggressive Rate Hike Forecast
Westpac announced on Monday that it now expects the Reserve Bank of Australia (RBA) to increase the cash rate by 0.25 percentage points in May, June, and August. This would bring the total to five hikes across as many meetings, driving the cash rate to a punishing 4.85%. More concerning for borrowers, Westpac anticipates no rate reductions until 2028, indicating years of sustained financial pressure for Australian mortgage holders.
Westpac chief economist Luci Ellis attributed this pressure to surging fuel costs linked to ongoing conflicts in the Middle East. The bank's revised forecasts assume a prolonged disruption to fuel supply, with the baseline scenario involving the Strait of Hormuz effectively closed for eight weeks and shipping traffic recovering only slowly thereafter.
'It also reflects the surprisingly rapid pass-through of higher fuel and other oil-derived product prices into other prices in Australia,' Ms Ellis stated. 'We believe the RBA will respond to this pricing behaviour by tightening monetary policy by more than would have been needed absent that pass-through.'
Financial Impact on Borrowers
Analysis from financial comparison site Canstar reveals the tangible impact of these potential hikes. If the cash rate rises by 0.25 percentage points in May, June, and August, monthly repayments on a $600,000 loan with 25 years remaining would increase by approximately $276. Including the two hikes already implemented this year, total monthly repayments could surge by $457 by August.
Canstar's data insights director, Sally Tindall, cautioned that borrowers could face a challenging period if Westpac's forecast materialises. 'While the other big banks are tipping just one more hike, Westpac is now forecasting a far more aggressive path, which would take the cash rate to levels we haven't seen since the fallout from the GFC,' she said.
'The flow-on effect of higher fuel costs has already started pushing up prices elsewhere. The RBA may feel like it has to act because once prices go up, they rarely come back down.' Ms Tindall added that while the government might attempt to mitigate the impact by halving the fuel excise, if the RBA then raises the cash rate, it could create a cycle where money is transferred from fuel pumps to banks.
Property Market Downturn
Amid this bleak outlook, there is a silver lining for prospective homebuyers. House prices in Sydney and Melbourne have begun to decline, with expectations they could fall by as much as six percent. SQM Research has downgraded its 2026 market forecast, indicating that Australia's two most prominent property markets are now officially retreating due to the impact of conflict in the Middle East.
The research forecasts Sydney homes will fall by up to six percent, while Melbourne is projected to experience declines of up to four percent. Property researcher and consultant Cameron Kusher supported these predictions, pointing to falling auction clearance rates and weak price growth in the two capitals as signs the market is already struggling ahead of further financial strain for mortgage holders.
'The market at the moment is expecting at least two further interest rate increases this year and possibly more likely than not a third,' he told news.com.au. 'Two interest rate increases takes us back to the highest rates we've had since 2011. A third one takes us back to the highest interest rates we've had since the global financial crisis was just hitting.'
Mr Kusher noted that many Australians have never experienced interest rates this high, and property prices and mortgage sizes are significantly larger than in 2008. 'I think for all of those reasons … I'm getting pretty bearish on property.' He predicted other capital cities would continue to see price increases, but at a slower rate, particularly if rates continue to rise.
'I don't think we're looking at catastrophic falls, but I think we could see prices fall four or five per cent,' he said. 'And then depending on how long interest rates remain elevated, we could see more falls into 2027 as well.'
Ms Ellis explained that the Reserve Bank would likely adopt a 'once bitten, twice shy' approach to unwinding rate rises, forecasting cuts from February 2028, though she emphasised the timing remains highly speculative. For now, Ms Tindall advised borrowers: 'For borrowers, know that this is only a forecast, not a done deal, but use it as a warning to get your finances, particularly your mortgage, in the best position possible.'
