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 in 2022–23, many anticipated a sharp decline in household spending. Australians carry some of the world’s highest mortgage debt levels, with most borrowing at variable rates that adjust almost immediately when policy rates change. However, household spending barely shifted—contrary to fears, the “mortgage cliff” did not materialize.

Study Overview

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 policy tightening.

Key Findings

Variable-rate borrowers faced significantly higher repayments—about $14,000 more over 18 months—but did not reduce their spending compared to fixed-rate borrowers.
Approximately 70% of the increased repayments were covered by drawing down pandemic-era savings held in offset and redraw accounts.
These financial buffers have softened the usual cash flow impact of monetary policy changes on borrowers.

Implications

The resilience borrowers showed against rising rates might also lessen the positive effects expected from future rate cuts. Australia’s mortgage system, with its unique redraw and offset accounts, acts as a “hidden shock absorber,” altering the timing and effectiveness of monetary policy on the economy.

e61 Institute acknowledges the Traditional Custodians of the land on which we meet and work.

Authors: Pelin Akyol, Rose Khattar, and Ali Vergili

Author summary: Australia's distinctive flexible mortgage system, supported by savings buffers, reduces the immediate cash flow impact of interest rate changes, reshaping monetary policy effects.

e61 INSTITUTE — 2025-11-05