The Rate Hike Gauntlet Is Not Over

Australian mortgage brokers barely had time to recalibrate after back-to-back RBA hikes in February and March before Westpac dropped the most aggressive rate forecast of the cycle: three more 25-basis-point increases, a peak cash rate of 4.85 per cent, and no relief until 2028.

With the cash rate already at 4.10 per cent — its highest level since early 2024 — and markets pricing a 62 per cent probability of a May hike, the question for brokers is no longer whether rates are going higher. It is how much higher, and what you do about it right now.

Where the Big Four Stand

The major banks are split on how far the RBA will go, and that divergence matters for brokers positioning client conversations.

CBA and NAB both expect a 25-basis-point hike at the May 5 meeting, taking the cash rate to 4.35 per cent. Both see this as close to the peak, with cuts potentially arriving in late 2027.

ANZ sits in a similar range, expecting the tightening cycle to top out around 4.35 to 4.60 per cent.

Westpac is the outlier — and the one brokers need to pay closest attention to. Chief economist Luci Ellis has pencilled in 25-basis-point hikes at the May, June, and August meetings, pushing the cash rate to 4.85 per cent. That would be the highest level since the global financial crisis. Westpac does not expect cuts to begin until 2028, with four reductions across that year.

The gap between CBA’s 4.35 per cent call and Westpac’s 4.85 per cent scenario is 50 basis points — enough to materially shift borrowing capacity, serviceability assessments, and client affordability on every deal a broker writes this year.

Why Westpac’s Call Is Different

Westpac’s forecast is not pessimism for the sake of it. It is driven by a specific economic trigger: the fuel shock flowing from the prolonged Middle East conflict.

The Strait of Hormuz was effectively closed for eight weeks earlier this year, and shipping traffic has been slow to recover. That disruption has pushed fuel prices higher and, critically, those increases are passing through to other prices faster than expected. Westpac sees headline CPI peaking at 5.4 per cent in the June quarter, with trimmed mean inflation — the RBA’s preferred measure — hitting around 4 per cent later this year.

The RBA’s March meeting minutes, released by CBA’s analysis, revealed the Board considered the risks to inflation as tilted “further to the upside.” That language gives the RBA room to move again quickly if the data warrants it.

For brokers, the practical takeaway is this: even if Westpac’s top-end scenario does not fully play out, the direction is clear. Rates are going higher before they come down, and the peak could sit well above where many borrowers — and some brokers — have been planning.

What This Means for Borrowing Capacity

The numbers are blunt. On a $600,000 mortgage, each 25-basis-point hike adds roughly $91 per month to repayments. If Westpac’s three-hike scenario materialises, that is an additional $272 per month — or more than $3,260 per year — on top of repayments that are already at cycle highs.

But the real impact is on the front end of the lending process: serviceability assessments. APRA’s 3 per cent serviceability buffer means lenders are already stress-testing borrowers at rates well above the current cash rate. As actual rates climb closer to the buffer ceiling, the effective borrowing capacity for new applicants shrinks. Brokers writing deals today need to be modelling scenarios where the rate environment at settlement is materially worse than at application.

Add APRA’s debt-to-income cap — limiting high-DTI lending (six times income or above) to no more than 20 per cent of new loans since February 1 — and the lending envelope for many borrowers is tightening from two directions simultaneously.

The Investor Squeeze

Investors are feeling this most acutely. HTW’s latest review confirms that many investors are pivoting from capital growth strategies to yield-focused approaches as higher rates erode cash-flow margins. With the cash rate at 4.10 per cent and potentially heading higher, the gap between rental yield and mortgage cost is widening in most metro markets.

Looming uncertainty around potential capital gains tax changes adds another layer of complexity. Any policy shift that reduces the after-tax return on residential property could dampen investor appetite at a time when rental supply is already under severe strain — national vacancy rates sat at just 1.6 per cent in March.

For brokers, this means investor conversations need to shift from “how much can you borrow?” to “what does your cash-flow position look like at 5 per cent?” Non-bank lenders, which are not subject to APRA’s DTI cap, may offer more flexibility for experienced investors — but brokers must ensure Best Interest Duty obligations are clearly documented when recommending these pathways.

Five Things Brokers Should Be Doing Right Now

1. Stress-Test Every Active File at 5 Per Cent

Do not rely on the current rate environment holding. Run every pre-approval and in-progress application through a scenario where the cash rate reaches 4.85 per cent. If a deal looks tight at that level, have the conversation with your client now — not after settlement.

2. Review Fixed-Rate Positioning

With the market pricing in further hikes, fixed rates for two- and three-year terms may still offer value for borrowers who need repayment certainty. Compare fixed-rate offers across your panel now, before lenders re-price. The window to lock in current fixed rates narrows with every hawkish data release.

3. Proactive Client Communication

Your existing loan book is your most valuable asset — and your biggest risk if clients are caught off-guard by rising repayments. Segment your book by rate type and remaining fixed-rate term. Clients rolling off fixed rates in the next six to twelve months need a call, not an email. Walk them through what their repayments will look like under current variable rates and the potential peak scenario.

4. Revisit Refinancing Conversations

Borrowers who locked in during 2021–22 at sub-2 per cent fixed rates and have already rolled onto variable are sitting on significantly higher repayments. Many will benefit from a competitive review — especially if they have built equity. With lenders competing hard for refinance business, there are genuine savings to be found, even in a rising rate environment.

5. Document Your Reasoning

In a rising rate environment, Best Interest Duty compliance is not just a box-ticking exercise — it is your protection. Document why you recommended a particular product, rate structure, and lender. If a client’s circumstances deteriorate because rates go higher than anticipated, a clear file note showing you stress-tested and discussed the risks is your best defence.

The Non-Bank Opportunity

One bright spot in this environment is the continued growth of non-bank lending. Bluestone Home Loans reported $1.2 billion in new loan applications in February alone — one of its strongest months in 25 years — with more than 90 per cent of applications from borrowers outside traditional lending criteria.

The RBA’s March Financial Stability Review noted that non-bank lenders now account for approximately 6 per cent of financial system assets and are growing. For brokers, this represents both an opportunity and a responsibility. Non-banks can solve genuine borrower needs that ADIs cannot service under APRA’s tighter framework — but only when the recommendation is clearly in the client’s best interest and properly documented.

What to Watch Next

The RBA’s next meeting on May 5 is the immediate focal point. The March quarter CPI data, due April 30, will be the critical input. If trimmed mean inflation prints above 3.8 per cent, a May hike is virtually certain. Even a softer print may not be enough to stay the RBA’s hand given the Board’s increasingly hawkish language.

Beyond May, watch for Westpac’s updated forecasts after the CPI release and any signals from APRA about further macroprudential tightening. If the DTI cap proves insufficient to cool high-risk lending, additional measures — such as a lower cap or tighter investor lending limits — are not off the table.

For brokers, the message is clear: plan for higher rates, prepare your clients, and make sure every file you write can withstand the 4.85 per cent scenario. If rates peak lower, your clients will thank you for being cautious. If they do not, you will have already done the work.

Disclaimer: This article is for general information and professional development purposes only. It does not constitute legal, compliance, or financial advice. Brokers should consult their aggregator’s compliance team and, where required, seek independent legal advice regarding their obligations under the National Consumer Credit Protection Act 2009 and ASIC’s responsible lending guidelines.