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 hold some of the world's highest mortgage debt levels, mostly on variable rates that adjust quickly with policy changes. However, spending remained stable, and the feared “mortgage cliff” did not occur.
Study Findings from e61 Working Paper
This study analyzed aggregated, consented, and deidentified bank transaction data to compare households with variable-rate and fixed-rate mortgages during the 2022–23 monetary policy tightening.
- Variable-rate borrowers faced repayments approximately $14,000 higher over 18 months.
- Despite this, their spending did not decrease relative to fixed-rate borrowers.
- About 70% of the increased repayments were covered by using savings accumulated during the pandemic in offset and redraw accounts.
These savings buffers lessened the usual cash flow impact of monetary policy changes.
“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.”
Implications of Mortgage System Flexibility
The resilience provided by these savings may also reduce the effectiveness of future rate cuts in stimulating spending. Australia's mortgage structure, featuring redraw and offset accounts, provides a cushion that alters the timing and magnitude of monetary policy impacts.
Authors
Pelin Akyol, Rose Khattar, and Ali Vergili
“e61 Institute acknowledges the Traditional Custodians of the land on which we meet and work.”
Summary
Australia's unique mortgage system with flexible repayment buffers has softened the impact of rate hikes on spending, influencing how monetary policy affects household consumption.