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 observers expected a major pullback in household consumption. Australian households hold some of the world's highest mortgage debt levels, and most loans are on variable rates that change quickly when policy rates rise. However, spending showed little decline, and the anticipated “mortgage cliff” never occurred.
Findings from the e61 Working Paper
The e61 Institute’s research draws on aggregated, consented, and anonymized bank transaction data to compare behavior between households with variable- and fixed-rate mortgages during the 2022–23 rate tightening cycle. The study found that even though variable-rate borrowers faced far higher repayments—about 14,000 Australian dollars over 18 months—they maintained similar spending patterns to those with fixed-rate loans.
Savings and Financial Buffers
Approximately 70 percent of the increase in repayments was financed through a reduction in savings built up during the pandemic, particularly held in offset and redraw accounts. These savings acted as buffers, softening the expected cash flow shock from higher interest rates.
Implications for Monetary Policy
This resilience, which protected borrowers from rate hikes, may also reduce the effect of future rate cuts on stimulating spending. Australia’s flexible mortgage structure—with its unique redraw and offset features—serves as an international exception and shows how policy transmission can depend on domestic financial design.
Authors
- Pelin Akyol
- Rose Khattar
- 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 flexible mortgage system, supported by pandemic-era savings, muted the expected spending decline during aggressive rate hikes, reshaping how monetary policy affects the economy.