The mortgage debt channel of monetary policy when mortgages are liquid

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 during 2022–23, many anticipated a sharp decline in household spending. Australians carry some of the world's highest mortgage debt levels, with most borrowing on variable rates that adjust quickly as policy rates change. However, spending barely declined—the predicted “mortgage cliff” did not materialize.

Analysis Using Bank Transaction Data

This e61 working paper examines aggregated, consented, and anonymized bank transaction data to compare households with variable-rate and fixed-rate mortgages throughout the 2022–23 monetary tightening cycle. Despite facing significantly higher repayments—about $14,000 more over 18 months—variable-rate borrowers did not reduce their spending compared to fixed-rate borrowers.

Role of Pandemic-Era Savings

Approximately 70% of the increased repayments were funded by drawing down savings accumulated during the pandemic, held in offset and redraw accounts. These financial buffers softened the usual cash flow impact of rising interest rates.

Implications for Monetary Policy

The resilience that protected borrowers from rate hikes may also lessen the effects of future rate cuts. Australia's flexible mortgage system, featuring redraw and offset accounts, is internationally unique. These “hidden shock absorbers” could significantly alter the timing and strength of monetary policy's impact on the economy.

“The resilience that cushioned borrowers from rate hikes may now also dull the boost from rate cuts.”

“Around 70 per cent of the increase in repayments was met by drawing down on pandemic-era savings in offset and redraw accounts.”

Authors and Acknowledgment

This work was authored by Pelin Akyol, Rose Khattar, and Ali Vergili. The e61 Institute acknowledges the Traditional Custodians of the land on which we meet and work.

Author's summary: Australia's unique mortgage system with flexible savings buffers has mitigated the impact of recent rate hikes, reshaping how monetary policy influences household spending.

e61 INSTITUTE — 2025-11-05