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, a significant decline in household spending was widely anticipated. Australians carry some of the world’s highest mortgage debt levels, with most borrowing on variable rates that adjust almost immediately to policy rate changes. Surprisingly, household spending remained largely stable, and the predicted "mortgage cliff" did not materialize.
Study Using Bank Transactions Data
This e61 working paper analyzes aggregated, consented, and deidentified bank transaction data, comparing households with variable-rate mortgages to those with fixed-rate mortgages during the 2022–23 monetary tightening cycle. Despite facing much higher repayments—approximately $14,000 more over 18 months—variable-rate borrowers did not reduce their spending compared to fixed-rate borrowers.
Role of Pandemic-Era Savings Buffers
The study finds that around 70% of the increase in mortgage repayments was covered by drawing down savings accumulated during the pandemic, held in offset and redraw accounts. These financial buffers absorbed much of the cash flow impact typically expected from monetary policy adjustments.
Australia's flexible mortgage system — featuring redraw and offset accounts — is unique internationally, and these "hidden shock absorbers" can reshape how and when monetary policy affects the economy.
While these buffers have cushioned borrowers from rising rates, they may also reduce the stimulative impact when rates are cut.
Author's summary: Australia’s unique mortgage structures, including pandemic savings buffers, have softened the impact of rate hikes and may alter the effects of future monetary policy changes.