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 between 2022 and 2023, many expected household spending to decline sharply. Australians carry some of the world’s highest levels of mortgage debt, and most loans adjust quickly with policy rate changes.
However, spending barely changed — the anticipated “mortgage cliff” never came. Data analyzed in this e61 Institute working paper, based on aggregated and anonymized bank transactions, compared households with fixed-rate and variable-rate mortgages during the tightening cycle.
Despite higher repayments of about $14,000 over 18 months, variable-rate borrowers did not reduce spending compared with fixed-rate households.
Roughly 70 percent of the increase in mortgage payments was covered by drawing down on pandemic-era savings stored in offset and redraw accounts. This financial cushioning softened the usual cash flow impact of rate changes. While these buffers protected borrowers from rate hikes, they may also reduce the stimulus expected from future rate cuts.
Australia’s flexible mortgage system — featuring offset and redraw accounts — remains distinctive globally. These hidden stabilizers can significantly influence the timing and strength of monetary policy effects on the wider economy.
Authors
- Pelin Akyol
- Rose Khattar
- Ali Vergili
The e61 Institute acknowledges the Traditional Custodians of the land on which it meets and works.
Author’s Summary
The study reveals that Australia’s unique mortgage structure, supported by savings buffers, helped households sustain spending amid rising rates, reshaping monetary policy transmission.