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 2022–2023, many analysts expected a sharp decline in household spending. Australia, known for its high levels of mortgage debt and prevalence of variable-rate loans that react quickly to policy changes, seemed poised for a slowdown. However, spending remained stable, and the anticipated “mortgage cliff” never arrived.
This e61 Institute working paper draws on aggregated, consented, and deidentified bank transaction data to compare households with variable-rate and fixed-rate mortgages during the monetary tightening cycle of 2022–2023. Despite much higher repayments—averaging about $14,000 over eighteen months—variable-rate borrowers did not reduce their spending compared to those with fixed-rate loans.
About 70% of the increase in repayments was financed by withdrawing pandemic-era savings stored in offset and redraw accounts. These financial buffers softened the typical cash flow impacts of monetary policy adjustments, demonstrating a level of resilience that shielded borrowers from the rate hikes.
This same resilience that protected households during monetary tightening might now also reduce the effectiveness of future rate cuts. Australia’s mortgage system—with its distinct redraw and offset mechanisms—plays a pivotal role in moderating how policy changes ripple through the economy.
“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.”
Authors: Pelin Akyol, Rose Khattar, and Ali Vergili
e61 Institute acknowledges the Traditional Custodians of the land on which we meet and work.
Author’s Summary
The study reveals that Australia’s unique mortgage structure, supported by savings buffers, sustained household spending through interest rate hikes and may temper future policy effects.