The Mortgage Debt Channel of Monetary Policy When Mortgages Are Liquid
When the Reserve Bank of Australia increased interest rates by 4.25 percentage points in 2022–23, many anticipated a sharp decline in household spending. Australians have some of the highest mortgage debts worldwide, with most borrowing on variable rates that adjust almost immediately with policy changes. However, spending remained largely steady—contrary to fears of a "mortgage cliff."
Study Overview
This e61 working paper analyzes aggregated, consented, and deidentified bank transactions data to compare households with variable-rate and fixed-rate mortgages during the 2022–23 monetary tightening cycle. Despite facing much higher repayments—around $14,000 more over 18 months—variable-rate borrowers did not reduce their spending compared to those with fixed-rate loans.
Role of Savings Buffers
About 70% of the increased repayments were covered by using savings accumulated during the pandemic in offset and redraw accounts. These financial buffers mitigated the typical cash flow impact of monetary policy changes.
Australia's flexible mortgage system, featuring redraw and offset accounts, is unique internationally and serves as ‘hidden shock absorbers’ that can significantly modify the timing and effects of monetary policy.
Implications
The resilience that protected borrowers from rising interest rates may also reduce the stimulative effects when rates are later cut.
Authors and Acknowledgment
Authors: Pelin Akyol, Rose Khattar, and Ali Vergili.
e61 Institute acknowledges the Traditional Custodians of the land on which we meet and work.
Summary: Australia's unique mortgage system with redraw and offset accounts cushioned households during rate hikes, altering the typical effects and timing of monetary policy on spending.