This reduction in borrowers’ free cash flows will place pressure on their budgets – in addition to that associated with the burden of high inflation – and require an adjustment of their spending and/or saving behaviour. That’s not quite the end of the story though. We need to think about the timing of those cash flow effects on the spending of those borrowers.
One issue is the extent to which fixed-rate borrowers make adjustments in anticipation of rolling over to a higher rate mortgage to better smooth their spending. ﻿[ 6] If all fixed-rate borrowers did this to a significant degree, it would mean that the timing of the cash flow channel would be largely invariant to the share of fixed-rate borrowers. But that seems unlikely.