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 2022–23, many anticipated a significant drop in household spending. Australians have some of the highest mortgage debt levels globally, mostly borrowing at variable rates that adjust quickly with policy changes. However, spending remained steady—the predicted "mortgage cliff" never appeared.
Study Overview
This e61 working paper analyzes aggregated, consented, and deidentified bank transaction data to compare households with variable-rate mortgages to those with fixed-rate mortgages during the 2022-23 monetary tightening cycle. Although variable-rate borrowers faced repayment increases of about $14,000 over 18 months, they did not reduce spending compared to fixed-rate borrowers.
Role of Savings Buffers
Approximately 70% of the higher repayments were covered by drawing down on pandemic-era savings held in offset and redraw accounts. These financial buffers softened the typical impact of monetary policy on cash flow.
Implications for Monetary Policy
The resilience that protected borrowers from rising rates may also lessen the stimulus effect of rate cuts. Australia's mortgage system, unique for its flexibility with redraw and offset accounts, contains these "hidden shock absorbers" that influence the timing and strength of monetary policy effects on the economy.
e61 Institute acknowledges the Traditional Custodians of the land on which we meet and work.
Authors: Pelin Akyol, Rose Khattar, and Ali Vergili
Summary: Australia's flexible mortgage features have softened the impact of rising rates on household spending, altering how monetary policy influences the economy.