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, economists expected a strong drop in household consumption. Australia has among the highest mortgage debt levels globally, and most borrowers have variable-rate loans that adjust quickly when policy rates shift.
However, the anticipated “mortgage cliff” did not occur. Spending levels stayed largely stable. The e61 Institute’s working paper analyses aggregated, consented, and anonymized bank transaction data to compare households with variable-rate and fixed-rate mortgages through the 2022–23 tightening cycle.
Despite facing much higher repayments—averaging about $14,000 over 18 months—variable-rate borrowers maintained spending levels similar to those with fixed-rate loans. Roughly 70 percent of the increased repayments were financed by withdrawing from pandemic-era savings held in offset and redraw accounts.
These financial buffers softened the usual cash flow impact of monetary policy. Yet the same resilience that protected households from rate hikes could also limit the positive effects of future rate cuts.
“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 influences 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 Summary
The study shows that Australian households used pandemic savings to cushion rate increases, highlighting how flexible mortgages reshape the impact of monetary policy.