When refinancing meets monetary tightening: heterogeneous impacts on spending and debt via mortgage modifications

This study examines how UK mortgagors adjusted their spending and saving habits in response to the post-2021 monetary tightening, highlighting the interplay between collateral‑driven borrowing and the cash-flow channel of monetary policy. Unlike in markets with long-term fixed-rate mortgages, UK mortgagors face heightened exposure to interes rate shifts due to periodic refinancing requirements. By combining transaction-level data from a financial app with loan-level records, we create a detailed and representative view of UK mortgagors’ monthly balance sheets from 2021 to 2023. This allows us to explore how mortgage modifications – particularly equity extraction and term extensions – shapes household responses to rising borrowing costs. Our findings reveal stark heterogeneity: households leveraging equity extraction, enabled by nominal house price appreciation, offset higher mortgage payments and maintain or increase discretionary spending while reducing unsecured debts. Conversely, households unable or unwilling to adjust loans face significant spending cuts in response to higher rates. These results suggest that collateral-driven debt, amplified by rising property values and mortgage term extensions, can partially compensate for the cash-flow channel in driving consumption and financial behaviour during tightening cycles. This highlights the dual role of loan modifications: while mitigating immediate consumption declines, they may affect monetary policy transmission for some groups and contribute to more persistent borrowing.