Interest Rates in Australia: Predictions for 2025 and How to Stay Mortgage-Ready

The Australian financial landscape has been anything but predictable lately. With interest rates remaining high and inflationary pressures lingering, it’s no wonder many homeowners and prospective borrowers are feeling uncertain. Common questions include: “How will this affect my mortgage?” or “What can I do to stay ahead?“

In this guide, Unconditional Finance will break down the current state of interest rates, what the Reserve Bank of Australia (RBA) and major banks are forecasting, and practical steps to protect your financial well-being. 

Current Interest Rate Predictions

As of November 2024, the RBA has kept the cash rate at 4.35%. This decision highlights the RBA’s careful stance as discussions continue about the direction of interest rates and economic forecasts in Australia. While headline inflation has decreased to 2.8% over the year to the September quarter, underlying inflation, which excludes volatile items, remains at 3.5% above the RBA’s 2–3% target range.

Major Banks’ Predictions on Rate Cuts: A Closer Look

The question on everyone’s mind: when will interest rates begin to drop? Australia’s “Big Four” banks, NAB, CBA, Westpac, and ANZ, have offered their interest rates Australia prediction timelines, each varying slightly in expectations.

NAB: A Cautious Approach

NAB revised its forecast, delaying the first rate cut to May 2025. The bank anticipates a steady rate-cut trajectory, approximately one per quarter, bringing the cash rate to 3.10% by mid-2026. This cautious outlook reflects concerns about persistent inflation and a strong labour market. NAB economists emphasise the need for clear and sustained signs of economic cooling before rate reductions.

CBA: Optimism Meets Reality

CBA maintains a February 2025 prediction for the first-rate cut. However, this forecast relies on faster-than-expected inflation reductions, which appear increasingly unlikely. Governor Michele Bullock recently stated, “Inflation is declining, but it remains too high,” underscoring the ongoing challenges.

Westpac and ANZ: Aligning with May 2025

Westpac and ANZ both predict a May 2025 timeline for the first rate cut, citing expectations of easing inflation pressures by early 2025. However, they also emphasise the RBA’s cautious approach to balancing inflation control with economic growth.

Four Economic Factors Influencing Rate Cuts

The Reserve Bank of Australia’s (RBA) monetary policy decisions are shaped by several economic factors. These influence both the timing of rate cuts and the broader financial landscape.

1. Inflation Trends: A Persistent Challenge

Inflation remains the RBA’s primary concern. Although headline inflation has eased to 2.8%, underlying inflation (excluding volatile items like fuel and fresh food) remains at 3.5%, above the RBA’s 2–3% target range.

Why does this matter? High inflation reduces purchasing power, making basic necessities like groceries, energy bills, and housing harder to afford. The RBA has emphasised that no rate cuts will occur until inflation consistently falls within the target range. Persistent inflation could also entrench expectations of higher prices, delaying cuts further and prolonging financial pressure for borrowers.

2. Labour Market Conditions: A Resilient Workforce 

Australia’s labour market remains tight, with unemployment stabilising at 4.1%. High participation rates and steady hours worked indicate a robust workforce. However, the RBA predicts a slight rise in unemployment to 4.3% by December 2024, reflecting a gradual cooling of the job market.

Interestingly, much of the recent growth in employment has been driven by the public sector. This raises questions about the sustainability of job market resilience. Additionally, the RBA warns of weak productivity growth, which could limit wage gains and exacerbate inflationary pressures.

This dynamic poses both opportunities and challenges. While it supports household spending, it also complicates the RBA’s ability to justify rate cuts without risking prolonged inflation.

3. Consumer Spending and Sentiment: A Fragile Balance

Persistent inflation and high interest rates have reduced household spending and consumer confidence. Many families are focusing on mortgage repayments and essentials, cutting back on discretionary expenses.

The RBA has warned that expectations of sustained high prices can further distort financial decisions. For instance, some households may rush to make major purchases, fearing future cost increases, while others hold off entirely. Property prices are also declining in many areas, reflecting shifts in consumer behaviour. These trends will significantly influence the RBA’s decision-making on rate cuts.

4. Global Economic Developments: The Unpredictable Ripple Effect

International factors significantly influence Australia’s economy. China’s economic slowdown, geopolitical tensions, and fluctuating commodity prices pose risks. While China’s recent stimulus measures have improved its GDP outlook, the RBA remains cautious about the potential domestic impact.

On the flip side, Australia’s export-driven economy benefits from strong demand for resources like iron ore and coal. However, global volatility could quickly alter these dynamics, affecting trade and economic growth.

What Does This Mean for Borrowers?

With rate cuts unlikely before mid-to-late 2025, borrowers face an extended period of high repayments. Here are four practical steps to stay ahead:

1. Review Your Budget

When interest rates and inflation remain high, your budget becomes your best friend. Start by taking an honest look at your income and expenses. Ask yourself: What are the essentials I need to prioritise? Groceries, utilities, and mortgage repayments usually take top billing, but where can you trim back? Maybe extra streaming subscriptions or frequent takeout dinners can be swapped for more budget-friendly alternatives.

Example: Let’s say your monthly expenses include $200 for dining out and $150 for entertainment subscriptions. Cutting back by even half could free up $175 each month, money that can go directly toward your mortgage or a savings buffer. Over a year, that’s over $2,000 in savings!

2. Explore Refinancing Options

If your mortgage repayments are stretching your budget thin, now might be the perfect time to revisit your home loan terms. With the competitive nature of the lending market, some borrowers are finding better deals through refinancing. This could mean securing a lower interest rate, extending your loan term to reduce your monthly repayments, or even consolidating other debts into your mortgage for a streamlined approach.

Why consider it? Refinancing offers financial relief by lowering repayments or extending loan terms. A Sydney mortgage broker can help compare lenders and find the best option for your needs.

Example: Refinancing from a 6% to 5.5% variable rate could save thousands over the loan term. Even small reductions can significantly impact your finances.

3. Stay Informed

Knowledge is power, especially when it comes to your finances. Inflation rates, unemployment figures, and economic forecasts are key indicators that will signal when rate cuts might begin. You don’t need to be an economist to stay informed; simply tracking key indicators like inflation and employment data can guide your financial decisions.

How Can You Do This?

• Follow trusted sources like the RBA’s updates or major banks’ economic outlooks.
• Set alerts for financial news relevant to Australia.
• Ask your broker or advisor to break down what these trends mean for your situation.

4. Seek Professional Advice

You don’t have to figure this out on your own—this is where financial experts, like mortgage brokers and advisors, can make a huge difference. They’re not just there to crunch numbers; they’re there to understand your unique situation and guide you toward the best solutions.

What Can They Do?

• Assess your current mortgage and identify cost-saving opportunities.
• Help you understand complex refinancing options.
• Offer personalised advice for creating a financial plan that fits your goals.

Example: A borrower struggling with a $2,500 monthly mortgage repayment consulted their broker, who found a new loan product that reduced the repayment by $250 a month. That’s $3,000 in annual savings, which can be redirected to other priorities, such as building an emergency fund.

The Bottom Line

Yes, the high interest rates may stick around for longer than we’d like, but the key is to focus on what you can control. Reviewing your budget, exploring refinancing, staying informed, and seeking expert advice are proactive steps that can help you understand this challenging period with confidence.

Remember, you’re not alone in this. Whether it’s adjusting your financial plan or finding ways to reduce your mortgage stress, there are tools and professionals ready to help. Think of it as an opportunity to take charge of your finances and position yourself for a brighter financial future.

Got questions or need personalised advice? Reach out to a mortgage broker today. They’re here to guide you every step of the way.