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 sharp decline in household spending. Australians carry some of the world's highest mortgage debts, with most borrowing on variable rates that adjust almost immediately to policy changes. However, household spending barely changed — the predicted “mortgage cliff” did not materialize.
Study Using Bank Transactions Data
This e61 working paper analyzes aggregated, consented, and deidentified bank transactions to compare households with variable-rate and fixed-rate mortgages during the 2022-23 tightening cycle. Despite significantly higher repayments—about $14,000 more over 18 months—variable-rate borrowers did not reduce spending relative to fixed-rate borrowers.
Role of Pandemic-Era Savings
Approximately 70% of the repayment increase was covered by using pandemic-era savings held in offset and redraw accounts. These financial buffers have softened the typical cash flow impact of monetary policy changes.
"The resilience that cushioned borrowers from rate hikes may now also dull the boost from rate cuts."
Australia’s flexible mortgage system, characterized by its redraw and offset accounts, is unique worldwide. These "hidden shock absorbers" may significantly alter the timing and effect of monetary policy on the economy.
Authors
- Pelin Akyol
- Rose Khattar
- Ali Vergili
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