Locked-In Mortgages: Effects on Consumer Spending

US consumers have benefitted considerably from low-interest, fixed-rate mortgages, receiving an additional $600 billion in income since 2022, according to the Swiss Re Institute. This financial boost has softened the impact of the Federal Reserve’s interest rate hikes, representing nearly 2% of all personal consumption spending, according to economists Mahir Rasheed and James Finucane at Swiss Re.

The influx of spending money from locked-in low-rate mortgages has mitigated the effects of monetary policy, leading to sustained consumer demand despite the Fed’s rate increases. This effect may influence the effectiveness of future rate cuts by the Fed, potentially making it more difficult to stimulate consumer demand if the economy slows.

Potential Future Effects on Monetary Policy

The Swiss Re analysts suggest that the limited relief from lower borrowing costs could lead to a more aggressive easing cycle by the Fed than previously expected. During the recent Fed tightening cycle, the market rates for US mortgages were as much as 3.2 percentage points higher than the average rate paid on existing mortgages. This difference has meant that a significant portion of household debt remained shielded from monetary policy changes, resulting in the Fed potentially raising rates higher than necessary, thus negatively affecting renters.

Looking ahead, a similar effect might occur if the Fed decides to reduce rates more aggressively. With the median home price having increased approximately 60% since early 2020 and credit card delinquencies exceeding pre-pandemic levels, household debt burdens are substantial. Lower borrowing costs may offer only limited relief to consumers facing these financial pressures.