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, analysts expected household spending to drop sharply. Australians carry some of the world’s highest mortgage debts, most of which are on variable rates that change almost instantly with policy adjustments. Yet household spending remained steady — the anticipated “mortgage cliff” did not occur.
An e61 Institute working paper examined anonymized and aggregated bank transaction data to compare households with variable-rate and fixed-rate mortgages during this period of monetary tightening. Even though variable-rate borrowers faced roughly $14,000 in extra repayments over 18 months, they did not reduce spending compared to those with fixed-rate loans.
The study found that about 70 percent of the additional repayments were funded by drawing on savings accumulated during the pandemic in offset or redraw accounts. These financial cushions reduced the usual cash flow impact of rising interest rates.
“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.”
This same resilience, which softened the blow of higher interest rates, might now also weaken the effects of future rate cuts.
Authors
- Pelin Akyol
- Rose Khattar
- Ali Vergili
e61 Institute acknowledges the Traditional Custodians of the land on which we meet and work.
Author’s Summary
The study reveals how Australia’s flexible mortgage systems and pandemic savings helped households maintain spending despite sharp rate hikes, altering the transmission of monetary policy.