Westpac tips August rate rise as mortgage stress hits two-year high

Westpac stands alone among the big four in forecasting August and September cash rate hikes, as mortgage stress reaches its highest level in two years.

If you've been keeping an eye on the Reserve Bank of Australia's next move, August's cash rate decision is shaping up to be one of the most watched in years — and the big four banks are not reading from the same script.

Westpac is the only major bank in Australia currently forecasting not one, but two more cash rate rises before the end of 2026. And with mortgage stress now at its highest level in two years, the stakes for Australian households have rarely been higher.

Westpac Holds Its Line While the Other Big Four Disagree

MPA Australia reports that Westpac has reaffirmed its call for a Reserve Bank cash rate rise in August, and potentially a second in September, after new internal economic modelling found the economy is holding up better than anticipated despite months of tightening.

Senior economist Pat Bustamante said Westpac's internal nowcast model supports the bank's existing rate view, given the absence of a deeper or more protracted economic downturn. He said this leaves the Reserve Bank free to concentrate on inflation risk rather than downside risk to activity.

"The economy is weathering the combined impact of external shocks and monetary policy tightening relatively well," Bustamante said, "with few signs of a sharper downturn taking hold."

Westpac's nowcast model — which draws on more than 60 high-frequency economic and financial variables — puts June quarter GDP growth at 0.2%, with a 70% confidence interval running from -0.19% to 0.39%. That compares with a 0.3% outcome for the March quarter. The bank's central case has growth picking up to around 0.6% per quarter in Q3 and Q4 2026, though those later projections rely on modelled rather than realised data.

Critically, CBA, NAB and ANZ have all held to the view that the cash rate has already peaked at 4.35%, with each expecting the RBA to begin cutting rates in 2027 rather than raising them further this year. Even Westpac's own economists have flagged that "zero or one hike from here is much more likely than three hikes" — a signal that the bank acknowledges its two-hike scenario sits at the hawkish end of expectations.

The probability of a negative quarter in Q2 2026 sits at around 30% under Westpac's modelling. The chance of two consecutive negative quarters over the remainder of 2026 sits at between 5% and 7%, which is why Westpac continues to hold the view that the economy can absorb further tightening.

Mortgage Stress Is at a Two-Year High — and Still Climbing

The backdrop to this rate debate is a mortgage market already under significant strain. Roy Morgan data shows 30.3% of owner-occupied mortgage holders — 1.6 million Australians — were classified as being at risk of mortgage stress in the three months to June, marking the fourth consecutive monthly rise and the highest level in two years.

The RBA has already raised the cash rate three times in 2026 to 4.35%, responding to the global energy shock tied to the conflict involving Iran. Westpac's own modelling suggests a rise to 4.6% in August would push the at-risk share to 31.2%, affecting approximately 1.65 million owner-occupiers. A further move to 4.85% in September would lift that to 31.4% — or 1.67 million people — a level not recorded since December 2008.

Brokers modelling repayment sensitivity have been working from an estimate of approximately $91 per month in additional repayments on a $600,000 loan for each 0.25 percentage point rise. A two-hike scenario would add roughly $182 per month for a borrower on that loan size — and a three-rise scenario would add approximately $272 per month in total.

APRA confirmed in late May that it would leave the mortgage serviceability buffer unchanged at three percentage points, alongside unchanged settings on the countercyclical capital buffer and high debt-to-income lending limits. The regulator said strong financial buffers leave most households well placed to manage current pressures — but it means any further rate rise will be stress-tested against a fixed margin rather than one recalibrated to the current environment.

What Borrowers Should Do Before the August Decision

With the August RBA meeting approaching and a genuine split among major lenders, now is the time to review your position — not after the decision is announced.

If you're on a variable rate and already feeling stretched, model what another 0.25 or 0.50 percentage points would do to your monthly repayments. Use our repayment calculator to run those numbers and get a clear picture of your exposure.

If you're thinking about fixing your rate, be aware that fixed rates currently reflect the market's consensus expectation — that cuts are more likely than hikes over the medium term. Locking in at the wrong point in the cycle can be costly. Compare what's on offer with our cheapest home loans guide to see where variable and fixed rates currently sit.

For borrowers looking to reduce their monthly repayments regardless of the RBA's decision, refinancing remains one of the most effective tools available. Lenders are still competing for quality borrowers, and a better rate can make a meaningful difference to monthly cashflow. Find out what you could save with our refinance savings calculator.

Westpac's next nowcast update is scheduled for 21 August 2026, drawing on the July Labour Force Survey data — a near-complete read on Q2 economic activity that arrives just ahead of the RBA's August meeting. Whatever the RBA decides, planning now puts you in a far better position than reacting after your next statement arrives.

*Source: MPA Australia — Westpac stands alone on August rate rise call*