The Mortgage Debt Channel of Monetary Policy When Mortgages Are Liquid
When the Reserve Bank of Australia raised interest rates by 4.25 percentage points in 2022–2023, many anticipated a sharp drop in household spending. Australians, holding some of the world’s highest mortgage debt levels—mostly at variable rates that respond quickly to rate changes—were expected to cut back.
However, spending remained largely stable, and the predicted "mortgage cliff" never materialized. The e61 Institute’s working paper analyzes aggregated, consented, and deidentified bank transaction data, comparing households with variable- and fixed-rate mortgages throughout the 2022–2023 policy tightening period.
Despite repayments rising by roughly $14,000 over 18 months, borrowers with variable rates did not reduce spending compared to fixed-rate borrowers. About 70 percent of the extra repayment burden was financed through savings accumulated during the pandemic, held in offset and redraw accounts. These savings buffers significantly softened the usual cash-flow pressures of monetary policy adjustments.
“Australia’s flexible mortgage system – with its redraw and offset accounts – is unique internationally, and these hidden shock absorbers can reshape how and when monetary policy affects the economy.”
The research suggests that while these buffers cushioned borrowers from past rate hikes, they may also lessen the stimulative effects of future rate cuts. The study was authored by Pelin Akyol, Rose Khattar, and Ali Vergili.
e61 Institute acknowledges the Traditional Custodians of the land on which it meets and works.
Author Summary
Australia’s adaptable mortgage system shielded households from higher rates but may now temper the benefits of easing monetary policy.