Australian mortgage holders may be paying substantially higher interest rates than can be explained by banks' underlying funding costs, according to new research from the University of Melbourne.
The paper, On Bank Pricing of Single-family Residential Home Loans: Are Australian Households Paying Too Much? examines mortgage pricing in Australia between 1998 and 2025 and identifies a persistent gap between actual mortgage rates and a benchmark rate derived from capital market funding costs.
The current average home loan size for owner occupiers, by calculating original ABS quarterly data, is $731,000. The researchers estimate that a borrower with a loan this size could be paying about $6000 more than expected every year. Led by Professor Piyush Tiwari, from the University of Melbourne, and co-authored by Professor James D. Shilling, from DePaul University in Chicago, the study developed a benchmark to estimate what mortgage rates would be if they more closely reflected financial market conditions.
"The results reveal a large and persistent gap between actual mortgage rates and what capital-market fundamentals would suggest," said Professor Tiwari.
"On average, Australian mortgage rates exceeded our benchmark and during periods of elevated credit risk the gap widening more. These differences have real consequences for households because they directly affect borrowing costs and access to home ownership."
Professor Tiwari applied the calculations to the average Australian home loan of $731,000.
"At that level of borrowing, factoring in the anomalies we've discovered, repayments are likely to be $6000 above what is expected annually."
The study, published in International Review of Finance, found that while part of the difference reflects legitimate risk-based pricing, a significant portion appears to stem from incomplete and delayed pass-through changes in funding costs. Mortgage rates were found to adjust slowly when capital market conditions changed, consistent with pricing behaviour in a highly concentrated banking sector.
Co-author Professor Shilling said the findings pointed to an often-overlooked contributor to housing affordability pressures.
"Much of the public debate focuses on housing supply, planning controls and construction costs," Professor Shilling said.
"Our research shows that mortgage pricing also matters. Even relatively small differences in interest rates can materially increase the income households need to qualify for a mortgage, particularly in a housing market where household debt levels are already high."
The researchers estimate that mortgage pricing frictions reduce housing affordability by around 14 per cent compared with a scenario in which mortgage rates more closely track capital-market-implied funding costs.
The findings suggest that while increasing housing supply remains important, policymakers should also consider how competition, funding structures and mortgage pricing mechanisms influence access to home ownership.
"Improving housing affordability requires attention not only to the supply of housing, but also to the way housing finance is priced," Professor Tiwari said. "Mortgage market frictions can have a meaningful impact on the ability of households to enter the housing market."
