Westpac is raising variable home loan rates to 5.38 per cent for owner-occupier properties, and 5.93 per cent for investment properties.
Westpac will raise variable home loan rates by 14 basis points, effective from September 19, due to an increase in its wholesale funding costs.
Australia's central bank has kept the official cash rate at a record low 1.50 per cent since 2016 and signalled a steady path for some time.
Westpac on Wednesday said it's variable mortgage rate for owner-occupier properties will increase to 5.38 per cent per annum for customers with principal and interest repayments, while the rate for residential investment properties will go up to 5.93 per cent.
The move knocked the Australian dollar lower on speculation that other lenders will follow Westpac and that might ultimately force the Reserve Bank of Australia to take an easing stances on interest rates to offset the rate rises in the market.
The Australian dollar was at 73.03 US cents at 1700 AEST, down from 73.45 US cents on Tuesday.
"This is a tough decision," George Frazis, Westpac's head of consumer bank, said in a statement.
The Bank Bill Swap Rate, a key wholesale funding rate used to price mortgages and other products, jumped about 25 basis points between February and March and has since remained elevated, Frazis said.
The spike in the funding costs had prompted several analysts to predict mortgage rate hikes by banks earlier this year. But faced with public anger over a series of malpractices, the country's major banks had refrained from passing on the cost.
"We initially hoped that this increase would be temporary, and therefore we have incurred these costs over the last six months," Frazis said.
"The rate changes announced today will not recover these costs."
The 14 basis-point increase will add A$35 ($25.6) to the monthly interest cost of an average mortgage of A$300,000, Westpac said while noting about 68 percent of its home loan customers were ahead of their repayments.
Westpac-owned St George has also increased its mortgage rates.
Last week, Westpac reported a steep drop in its net interest margins, the difference between interest paid and earned, at 2.06 per cent for the quarter ended June, compared with 2.17 per cent at the end of March.
Westpac's move sparked an immediate rise in the the banking sector on the ASX on Wednesday.