Interest rates: when will rates in Australia peak?

The average mortgage holder could be paying almost 6.5 per cent interest by the new year if the Reserve Bank continues to hike the official cash rate in line with expectations.

On Tuesday the RBA brought the cash rate to 2.6 per cent, marking the sixth consecutive month of rate rises in which mortgage holders have been stung with hundreds more in loan costs every month.

Economists remain divided on exactly how high interest rates will go before the RBA stops its current tightening cycle, with three of the big four banks suggesting the cash rate will go higher than 3 per cent by the end of the year.

Westpac has forecast the cash rate to peak at 3.6 per cent by February, potentially bringing the average variable rate up 50 per cent over the course of 10 months to 6.48 per cent.

It comes as more than one quarter of Australians struggle to pay their mortgage with repayments on a $500,000 loan close to $9,000 more a year in interest compared to six months ago.

Finder head of consumer research Graham Cooke said this latest rate rise could push some borrowers to the limit.

“Australians with a $500,000 mortgage will be forking out $735 more per month compared to what they were paying in April,” said Mr Cooke.

“That’s a whopping amount of extra money to pay every month – especially when everyday items like groceries and petrol are skyrocketing in price.”

Should the cash rate peak at Westpac’s forecast of 3.6 per cent and push the average variable rate to 6.48 per cent, Canstar analysis shows monthly repayments on a $500,000 variable rate loan over 30 years would soar to $3,154.

This equals about $1,000 more per month in mortgage costs in the space of 10 months.

But Canstar finance expert Steve Mickenbecker said the RBA may choose a “conservative pause” despite inflation remaining high.

“Recession is rearing its ugly head overseas, and with wage inflation way below price inflation and interest rate hikes, recent borrowers in particular are going to be under extreme stress,” he said.

According to Ray White chief economist Nerida Conisbee, the question of how high interest rates will go before they peak depends on what week you ask.

While market expectations have been fairly accurate in predicting each monthly increase so far, they have been variable at best when it comes to forecasting exactly how high rates will go before normalising.

Recent sky high inflation in the UK and preliminary figures from the ABS suggest high inflation remains a risk – meaning there is still cause to suggest the RBA will continue to push rates higher.

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