Mortgage offset account costs threaten to outweigh benefits

Households with mortgages could be wasting $250 a month by sticking with popular offset accounts amid an overhaul of home loan offerings.

Mortgage offset accounts have been are a popular way for Australians to repay home loans faster but their benefits are being eroded by banks charging higher interest rates.

As borrowers brace for Tuesday’s surprise Reserve Bank rate rise to hit their home loan repayments, a new analysis by research group Canstar has found that many lenders – including three of the big four banks – are charging more than necessary for offset accounts.

Banks have been overhauling their home loan options, with ANZ and NAB removing package loans with offset in recent months, and Canstar says customers could be wasting hundreds of dollars a month.

Its research found three of the major banks – the Commonwealth Bank does not charge extra for offset – were the worst offenders.

Canstar’s Steve Mickenbecker says paying higher offset account interest is often “not logical”.

Canstar group executive financial services Steve Mickenbecker said offering offset accounts did cost lenders money, “but they are charging you extra and more than covering their cost on average”.

Mr Mickenbecker said three of the big four banks charged an average 1.1 per cent extra interest for their offset accounts, costing a typical borrower $351 more a month. However, the saving from an average offset account was just $101 a month so “so you are paying $250 more”, he said.

“Why would someone pay $351 a month to get a benefit of $101? It’s not logical.

“It’s not worth paying a premium interest rate for the product.”

It has been estimated that more than $200 billion in sitting in offset accounts, where wages and other income sit until spent – offsetting people’s loan balances and reducing interest costs.

Recent research by the Commonwealth Bank found their use grew 10 per cent in 2021-22.

Canstar’s analysis shows a household would need an “abnormally high level of income” - $909,000 annually for those with a $500,000 home loan - for monthly offset account savings to match the higher interest charged by some lenders.

Mr Mickenbecker urged borrowers to check their offset account. “Compare your offset loan with the bank’s best variable rate loan, which in a lot of cases doesn’t have offset,” he said.

In many cases people can get similar benefits from having a redraw facility on their mortgage. “Loans with redraw are the new black,” he said.

Oracle Lending Solutions managing director Angelo Benedetti said borrowers and brokers could still negotiate good interest rates for offset accounts.

“A lot of our clients have offsets because that’s where they park their savings, and a lot of them get better rates,” he said.

“There are some really good rates out there with offset, some better than those without offset.

“A lot of financial planners encourage people to have an offset account because they can manage their cash better, but whether the money is in offset or redraw it is the same benefit.”

Mr Benedetti said this week’s RBA rate rise was “hopefully the last one” and would result in more people refinancing and changing their spending habits.

Originally published as Mortgage offset account costs threaten to outweigh benefits