Highlights

  • The RBA has kept the cash rate at 4.35%, while leaving open the possibility of further tightening if Inflation remains elevated.
  • Mortgage-rate expectations jumped 7.3% in September as borrowers increasingly anticipated higher borrowing costs.
  • Consumer sentiment fell 5.2% to 84.4, while perceptions of household finances deteriorated sharply.
  • Elevated repayments, falling home values and persistent living costs are reinforcing caution among Australian households.

Australia's Mortgage holders are shouldering a disproportionate share of the economy's strain, and the September confidence figures show just how heavily it weighs. With the cash rate anchored at 4.35% and the Reserve Bank refusing to rule out a further rise, borrowers are bracing for more pain rather than relief.

The clearest evidence sits in the Westpac-Melbourne Institute survey, where the measure of consumers' mortgage rate expectations surged 7.3% in September to 170.4. In plain terms, more Australians now expect borrowing costs to rise rather than fall.

That expectation, whether or not it is borne out, shapes behaviour today. Households that fear higher rates spend less, save more and put big decisions on hold, and the ripple runs straight through the wider economy.

A rate held high, with a warning attached

The backdrop is a Central Bank that has chosen caution over cuts. At its August meeting, the Reserve Bank held the cash rate at 4.35% and kept the door open to future increases if inflation does not cool sufficiently.

Governor Michele Bullock indicated that the Board remains focused on incoming data and retains the option to tighten policy further if inflation does not return toward target.

For borrowers, this is a very different message from the one many hoped to hear in 2026. Rather than a clear path down, they face a rate that is holding at a restrictive level with a genuine risk of moving higher.

The RBA does not expect inflation to return to the 2.5% midpoint of its target band until early 2028, underlining how long pressure could persist.

Why underlying inflation keeps the pressure on

The reason borrowers cannot yet count on relief lies in the inflation data. Headline inflation eased to 3.5% over the year to July, down from 3.8% in June, which is encouraging.

But the underlying trimmed-mean measure, which the RBA watches closely, held at 3.6%, unchanged from June and still above the 2%–3% target band.

Sticky underlying inflation is precisely what keeps the central bank cautious. A single softer headline reading is unlikely to prompt easing while the core measure remains elevated.

For a mortgage holder, the arithmetic is unforgiving. Until underlying inflation moves decisively lower, the case for rate relief remains limited, and the possibility of another increase remains live.

The squeeze on repayments and budgets

The effect on household budgets is direct. A cash rate held at 4.35% flows through to variable mortgage rates, keeping monthly repayments elevated compared with the low-rate years.

Those repayments are competing with rising essentials.

Housing costs rose 5.0% over the year to July, food and non-alcoholic beverages climbed 3.2%, and automotive fuel jumped 7.5% in July after three months of decline.

A mortgage holder is therefore paying more to service the Loan while also facing higher costs across essential household expenses.

Wages offer limited cushion. The Wage Price index rose 3.2% over the year to the June quarter, but with trimmed-mean inflation at 3.6%, real wages remain broadly flat to slightly negative.

Borrowers are not getting materially ahead; they are largely holding their ground while repayments remain elevated.

Confidence buckles under the weight

The strain is visible in sentiment. The headline Westpac-Melbourne Institute index fell 5.2% in September to 84.4, deep in pessimistic territory, where a reading below 100 means pessimists outnumber optimists.

The finance-related components tell the borrower's story most clearly.

The gauge of family finances compared with a year ago dropped 9.2% to 72.6, while expectations for family finances over the next 12 months eased 3.8% to 94.5.

Households feel worse off now and see limited near-term improvement.

Falling home values compound the anxiety. National dwelling values slipped 0.9% in August, a fifth consecutive monthly fall that left prices 3.6% below their March peak.

For a recent buyer carrying a large loan, watching the value of the asset decline while repayments stay high is a particularly uncomfortable combination.

The behavioural response

Faced with these pressures, mortgage holders are behaving cautiously, and the national accounts capture it.

The household saving ratio rose to 6.5% in the June quarter from 6.4%, while household consumption grew just 0.4%.

That restraint has consequences beyond individual households. Because household spending is a major component of the economy, caution among borrowers helps explain why growth managed only 0.4% in the June quarter and why sentiment remains subdued.

What to watch next

The decisive variable is inflation.

If the underlying trimmed-mean measure begins to fall convincingly toward the target band, the case for rate relief strengthens and pressure on borrowers could ease.

If it does not, the RBA's warning about further increases will continue to hang over mortgaged households.

The 28–29 September meeting is the immediate signpost. Beyond that, borrowers will be watching inflation, the labour market, where Unemployment edged up to 4.5% in July, and any change in guidance on the direction of the cash rate.

Australia has not entered recession; the economy grew 0.4% in the June quarter. But for mortgage holders, the pressure is clear: repayments remain high, further tightening has not been ruled out, and confidence is weakening under the combined weight of borrowing costs and broader living expenses.