The Mortgage Debt Channel of Monetary Policy When Mortgages Are Liquid
Overview
In 2022–23, the Reserve Bank of Australia increased interest rates by 4.25 percentage points. Despite expectations of a sharp decline in household consumption, spending levels remained stable. Australian households carry some of the highest mortgage debt globally, mostly at variable rates that quickly react to policy changes.
Research Findings
An e61 Institute working paper analyzed deidentified, consented bank transaction data, contrasting households with variable-rate and fixed-rate mortgages during the monetary tightening phase. Although variable-rate borrowers faced significantly higher repayments—around $14,000 over 18 months—their spending did not fall compared to those with fixed-rate loans.
Financial Behavior and Savings
Roughly 70 percent of the increase in repayments was funded through withdrawals from pandemic-era savings stored in offset and redraw accounts. These savings acted as cushions, dampening the usual negative effects of rising interest rates on disposable income.
Implications for Monetary Policy
“The resilience that cushioned borrowers from rate hikes may now also dull the boost from rate cuts.”
This suggests that Australia’s flexible mortgage system—with features like redraw and offset accounts—modifies how interest rate changes influence the broader economy. Such built-in buffers might delay or mute both the tightening and easing effects of monetary policy.
Authors
- Pelin Akyol
- Rose Khattar
- Ali Vergili
- e61 Institute
Acknowledgment
e61 Institute acknowledges the Traditional Custodians of the land on which it meets and works.
Author’s summary: The study shows that Australia’s unique mortgage system, supported by savings buffers, softened the impact of rate hikes and now influences how policy adjustments affect spending patterns.