Home owners have put up to 90 per cent of the windfall from the past two years of interest rate cuts towards paying off mortgage debt ahead of schedule, the Reserve Bank says.
With retail spending remaining soft despite official interest rates hovering at 60-year lows, new research highlights why many retailers are finding conditions so tough despite the central bank's attempts to stimulate the economy.
When interest rates are cut, most borrowers are given the option of cutting their monthly repayment to free up cash or keeping repayments constant and paying back the bank more quickly.
Research from the Reserve Bank, published on Thursday, suggests most people are doing the latter.
Between 50 and 90 per cent of the savings of 2.25 percentage points of official rate cuts since late 2011 have been used for mortgage prepayments, it says, and this has been a significant drag on credit growth.
Previously the bank has said half of all borrowers are ahead of their mortgages, but has not measured just how much of the succession of rate cuts were being spent or saved.
The analysis provides an insight into why sectors such as retail have failed to see the bounce from low rates: because people have been using much of the savings to build up "mortgage buffers" instead of lifting their spending.
It also highlights the slower growth environment for the banks created by very cheap credit.
The amount of total housing credit would have grown by roughly an extra $10 billion in the year to July if not for people paying off their debts more quickly.
"In an environment where lending rates are falling, higher partial prepayments on mortgages reduce the rate of housing credit growth below what it otherwise would be," economists Marc-Oliver Thurner and Alexandra Dwyer wrote.
Estimates in the paper suggest the pace of housing credit growth in the year to June, at 4.6 per cent, was 0.8 percentage points lower than it would have been without the prepayment trend.