Why your offset account matters more when interest rates are high

Mortgage rates in Australia have currently been sitting near decade highs, with the Reserve Bank of Australia lifting the cash rate more than once this year and several major banks forecasting further increases. For anyone with a home loan, that’s an unwelcome trend. But if you have money sitting in an offset account, higher rates actually make that offset balance much more valuable.

The higher the rate, the harder your offset works

An offset account doesn’t pay you interest directly. Instead, it reduces the “net balance” your bank charges interest on. That means the return you get from money in your offset is effectively equal to your home loan’s interest rate, and it’s realised as interest you never had to pay, not as taxable income. As your mortgage rate climbs, so does the effective return on every dollar you keep in offset.

Compare that to a standard high-interest savings account, where the interest you earn is added to your taxable income. At current owner-occupier rates, most savings accounts can’t match what an offset account effectively returns once tax is taken into account, particularly for anyone on a middle or higher marginal tax rate.

A worked example

Say you have a $400,000 loan and $50,000 sitting in your offset account, with an interest rate of 6.15% p.a. Your bank should only be charging you interest on the net balance of $350,000, working out to roughly $59 a day, or around $1,770 over a 30-day month. Without the offset, you’d be charged interest on the full $400,000, closer to $2,020 over the same month. That’s an extra $250 a month, or roughly $3,000 a year, purely from having that $50,000 sitting in the right place.

Push the interest rate up half a percentage point and that gap widens further, since the offset balance is now saving you interest at a higher rate too. This is exactly why it matters more when rates are high: the cost of an offset account not working properly scales with your interest rate.

What to do about it

Log in to your home loan account and confirm your offset account is linked correctly. Then run your own numbers using the offset interest calculator to see roughly what you should be charged this month, and compare it to your actual statement. In a higher-rate environment like the one borrowers are in now, an unlinked or misconfigured offset account costs considerably more each month, often without showing up anywhere obvious on your statement. See the guide on how to check your offset account is actually working for the full breakdown, including what a recent ASIC review found and how to escalate a complaint to AFCA if the numbers don’t line up.

Want to check your own numbers? Use the offset interest calculator →