What Your Offset Account Saves You After Interest Rates Rise

On 29 September the Reserve Bank lifted the cash rate by 0.25 percentage points to 4.60%, the highest level since November 2011. Commonwealth Bank, NAB, Westpac and ANZ have all said they will pass the full increase on to variable home loans from 9 October, and Macquarie follows from 15 October.

If you have an offset account, this is the week to understand what it’s now worth to you.

The quick answer

Your offset account saves you interest at your loan’s rate. When the rate goes up, every dollar sitting in the offset becomes more valuable, because it’s now cancelling out a more expensive debt. A rise of 0.25 points won’t offset the extra repayment, but it does soften it.

What the rise does to a typical loan

Take a $600,000 loan with 30 years remaining. If your variable rate moves from 6.90% to 7.15%, your minimum monthly repayment rises by about $100, from roughly $3,952 to $4,052.

Now add an offset balance. These figures show the interest each balance saves you at 7.15%, compared with 6.90% before the change:

Offset balance	Interest saved per year at 6.90%	Interest saved per year at 7.15%	Extra saved per year
$20,000	$1,380	$1,430	$50
$50,000	$3,450	$3,575	$125
$100,000	$6,900	$7,150	$250

With $100,000 in offset, you’d be offsetting about $596 a month of interest. That covers the entire repayment increase several times over. With $20,000, it covers roughly a fifth of the extra $100 a month. These are illustrations only. Your rate, balance and loan term will differ, so use the offset calculator with your own numbers.

Why the saving is bigger than it looks

Interest saved through an offset isn’t taxed, because you’re reducing an expense rather than earning income. At 7.15%, a savings account would need to pay well over 10% before tax to match an offset for someone on a mid-range marginal rate. We cover the maths in offset account vs high-interest savings account.

Check your offset is actually working

The Australian Securities and Investments Commission (ASIC) reported in July that eight major lenders had paid more than $55 million in compensation after offset accounts failed to work as promised. The most common problem, at 55% of cases, was an offset account that had been opened but never linked to the loan. Another 22% of cases involved an account that was never opened at all.

A rate rise makes these errors more expensive, because each month of lost savings now costs more. Two minutes is enough to check:

1. Log in to your online banking and open your loan details. Look for the offset account listed against the loan, or a line showing the offset balance being applied.
2. Compare the interest charged on your latest loan statement with the interest on your loan balance minus your offset balance. If they don’t roughly match, ask your lender why.
3. If you opened the offset when you took out the loan, confirm the date it was linked. Any gap between opening and linking is worth querying.

If you find a problem, contact your lender and ask for the interest to be recalculated. If you’re not satisfied with the answer, you can complain to the Australian Financial Complaints Authority (AFCA), which is free.

What to do before 9 October

• Move spare cash into the offset. Anything in a transaction or low-rate savings account is doing less for you than it would offset against a 7%-plus loan.
• Run your numbers. Put your current balance and your new rate into the offset calculator to see the saving.
• Check your new rate. Lenders must give notice before a rate change takes effect. Confirm the figure and compare it to what other lenders are offering, since you may be able to negotiate or refinance.

Common questions

Will my offset balance reduce my minimum repayment? Usually not. The offset reduces the interest charged, so more of each repayment goes to principal, but the minimum repayment amount normally stays the same. You pay the loan off sooner rather than paying less each month.

Does the rate rise affect fixed-rate loans? Not until your fixed term ends. Many fixed loans also limit or exclude offset facilities, so check your loan terms.

Does the offset still make sense if I have only a small balance? Yes. Even a small balance saves interest at your full loan rate with no tax on the benefit, and there’s no lock-in. You can use the money whenever you need it.