2025 interest rate forecast: What Australian borrowers need to know

A home loan holder's interest rate dictates the size of their regular mortgage repayments – which are often the largest expense in a household's budget. 

At the time of writing, interest rates in Australia are at their highest in more than a decade, squeezing many homeowners' finances. According to Roy Morgan research, more than a quarter of home loan holders were at risk of mortgage stress in October.

But there's a glimmer of hope on the horizon. Nearly all experts are forecasting 2025 will be the year interest rates begin to fall. With that, let's explore how interest rates are set in Australia, what influences them, and when borrowers might see relief.

Why are interest rates high right now?

Interest rates in Australia are largely determined by lenders and majorly influenced by the Reserve Bank of Australia (RBA). The RBA sets the cash rate and uses it to stimulate or restrict demand for goods and services in the economy.

Let's get a bit more technical for a second.

What is inflation?

The level of demand in the economy largely predicts inflation – that is, the changing value of a dollar. When inflation is high, the value of each dollar drops (ergo, you can buy less with your dollar than you used to be able to). But we do need some inflation to spur economic growth.

The RBA believes the inflation sweet spot is between 2% and 3% on an annual basis – meaning it aims to keep prices rising by between 2% and 3% each year. Inflation was higher than that band for three consecutive years until the June quarter of 2024 and isn't expected to hover sustainably within it until 2026.

How does the cash rate influence inflation?

That's why the RBA hiked the cash rate 13 times between mid-2022 and late-2023 and has kept it at its 13-year high of 4.35% ever since. The relationship between the cash rate and home loan interest rates is clear in the below chart:

When the RBA raises the cash rate, it increases the cost of doing business for banks. Those banks generally pass the cost onto consumers by increasing the interest rates they charge on mortgages and other loans.

The RBA expects consumers to then tighten their belts due to the rising cost of servicing their debts and, as consumer spending slows, demand for goods and services – and therefore inflation – should too.

Now you're across the basics of why rates are high right now and what likely needs to happen before they're dropped, let's look at when experts are forecasting the RBA to make a downwards move.

Expert predictions: Where will interest rates go in 2025?

The vast majority of experts believe the cash rate has peaked and will begin falling in the first half of 2025. Here are the forecasts offered by economists at the big four banks at the time of writing:

• CommBank is forecasting a February 2025 rate cut

"The September quarter 2024 CPI indicated that the disinflation process has continued. But not quite at the pace we anticipated on an underlying basis."
CommBank's Gareth Aird

• NAB is forecasting a May 2025 rate cut

"While we expect rates will move lower over time, because the RBA's policy stance is only modestly restrictive there is little urgency to adjust policy settings."
NAB economists

• Westpac is forecasting a May 2025 rate cut

"An earlier start in February or March is still possible, but it is no longer more likely than a May start date."
Westpac's Luci Ellis

• ANZ is forecasting a May 2025 rate cut

"[The Australian economy] certainly has proven probably a bit more resilient to higher interest rates than we would have thought, say, six months ago."
ANZ's Adam Boyton

The chart below displays each of the big banks' forecasts for the cash rate over the course of 2025. It shows CommBank and Westpac are the most optimistic at the time of writing, each expecting the cash rate to drop a full percentage point over the 12 month period.

Key drivers of interest rates in 2025?

The RBA board considers a multitude of factors when it makes its cash rate decisions, and lenders don't have to change home loan rates based on cash rate changes. Thus, the factors influencing home loan interest rates in 2025 are likely to be two-fold: Those that impact the RBA board and its outlook and those that impact lenders.

What data will the RBA be watching in 2025?

The RBA will be paying close attention to both inflation and unemployment. These two data points typically move in opposing directions. Meaning, when one falls, the other tends to rise. However, the RBA has a dual mandate to protect both jobs and purchasing power, a 'narrow path' as the balance is often referred to. Here's how the RBA believes inflation and unemployment figures will track over the next two years, as per its November Statement on Monetary Policy.

How the home loan market will impact interest rates in the new year

The other factor that will influence home loan interest rates in 2025 is the banking and lending market. Lenders make their own choices when it comes to setting interest rates, with each offering different rates on different products. One lender might choose to keep interest rates low in an effort to attract borrowers while another may bump rates up to improve its profit margins.

Different changes might also be realised over different types of home loan interest rates. For instance, the second half of 2024 saw a spate of fixed rate cuts. Many of those cuts appeared to be a reaction to changes in bond yields due to happenings in financial markets overseas – an example of how nuanced the market can be. When the cash rate is cut, chances are variable home loan rates will be too, but there might be other surprises waiting for us in the wings.

How interest rate changes could impact Australian home loans

Perhaps the most malleable factor influencing the repayments on a home loan is its interest rate. Interest rates can change regularly and borrowers seeking a lower rate can often refinance to realise one. For that reason, it's important to be aware of your home loan interest rate and stay informed of the market to ensure you're getting a good deal.

As of October, the typical interest rate on an existing variable rate home loan is around 6.3%. If you held a $500,000, 30-year home loan with an interest rate of 6.3% and realised four rate cuts worth 25 basis points each, here's how your mortgage repayments would change:

Interest Rate	6.30%	6.05%	5.80%	5.55%	5.30%
Monthly Repayments	$3,095	$3,014	$2,934	$2,855	$2,777

Wondering how a rate cut could impact your home loan repayments? Your Mortgage's mortgage repayment calculator can help!

In the market for a competitive home loan? Here are some of the lowest rate mortgage products available right now:

Important Information and Comparison Rate Warning

How can borrowers prepare for interest rate changes?

While no one knows exactly when interest rate cuts will come, borrowers who prepare for changes in the rate environment will be ready to make the most of cuts when they arrive. Here's where you might want to start:

Get across your home loan options

• Compare lenders
  Regularly review home loan rates across different lenders to ensure you're getting a competitive deal.

• Consider refinancing
  If your current home loan interest rate is higher than others available, it could be worth refinancing. Locking in a lower, fixed home loan rate may also offer stability if rate cuts take longer than expected.

• Check for fees
  Be aware of any refinancing or break fees that could offset savings from a lower rate, and make sure to always check a mortgage's comparison rate.

Consider your needs

• What do you want and need out of a home loan?
  Once you're across the market, now's the time to consider whether you could be better off with access to features your current lender doesn't offer you, such as an offset account.

• Contemplate whether you would like a fixed or variable rate
  A variable rate could see you benefiting from future rate cuts but a fixed rate offers more certainty. If you're unsure about which option is right for you, you might consider splitting your rate to get the best of both worlds.

Stay informed

• Follow market updates
  Keep an eye on announcements from the RBA, economic forecasts, and Your Mortgage's weekly wrap of home loan rate changes to stay on top of all that's going on the market.

• Consult with experts
  If you're unsure or unconfident, consider speaking with a mortgage broker or financial adviser.

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