Mortgage offset accounts are a fixture of the housing market, allowing homeowners to pay less interest on their deposit while maintaining easy-access savings, but new research has found the system doesn't always benefit everyone.
Analysis published this week in the journal Economic Record has found Australia's mortgage offset system largely benefits wealthier households while leaving lower-income households worse off.
James Graham, the lead researcher on the study and a senior lecturer at the University of Sydney's School of Economics, said his model, the first academic analysis of mortgage offset accounts in Australia, revealed the current system could be deepening inequality.
Graham told SBS News he took on the research project because while "everyone" around him was discussing purchasing a house and getting a mortgage offset account, he wanted to understand whether they were "valuable" products.
"I think a lot of people just take it because it's the default option that a lot of banks offer," he said.
"And then there's people who want to think about it a little bit harder and ask whether they would actually make use of the product."
Graham said his research aimed to find out "who was using mortgage offset accounts, who was benefiting from using them, and to what extent".
What is a mortgage offset account and how is it supposed to work?
A mortgage offset account is a savings bank account that is linked to your home loan.
It's a common service offered by banks for homeowners and presents an opportunity to reduce interest on their mortgage — and about 40 per cent of Australian mortgageholders use them, according to a 2021 Reserve Bank of Australia analysis.
A portion of your home loan is placed in a savings account, which is free to use as a regular savings account.
If you had a home loan of $500,000 and chose a $50,000 mortgage offset account, you would only pay interest on $450,000 of your home loan.
"The benefit of an offset is that the money in the account is just immediately available to you," Graham said.
"If you had an emergency tomorrow, you can pull that money out right away and start spending it, and then you're reducing your interest costs to the mortgage too."
Some plans involve a one-time fee, while others have no upfront cost, but charge extra interest to your savings account.
It was this distinction that Graham wanted to investigate.
He said some banks might charge a yearly fee, while others may not but instead charge slightly higher mortgage rate.
"Others will do weird packages, which is really hard to figure out what the actual cost of this thing is," he said.
He said some people might not totally understand what they're signing up to and may not be putting enough money in their offset account to get the interest-saving benefit.
"It could be quite hard to figure it out sometimes, what you're actually paying for these things," he said.
Denise Boyd, head of policy and campaigns at Mortgage Stress Victoria, said mortgage offset accounts could be "quite complex" and the onus was on banks to provide "clear, factual information" for consumers.
But, she said, it was also on the consumer to "keep asking the questions".
"You need to make sure that you've got the right instructions at the outset. If you haven't got the right instructions in place, then you lose the interest benefit. People need to know that."
What does the research say about mortgage offsets?
During his research, Graham looked at how different mortgage offset accounts impacted different kinds of loans, and found "different pricing benefits and harms different people".
He said people with the largest mortgages who had a good ability to save were the group that benefited most from offset accounts with an upfront, yearly fee.
"This benefits the wealthiest people because you have to have a large mortgage in the first place to make it worthwhile," he said.
There are other plans, that add a slight increase to the mortgage interest rate rather than an upfront fee.
"Those schemes actually tend to favour lower mortgage people a little bit more," he said.
"Because then if you've got a small mortgage, then you're paying less in dollars for the product. It tilts the playing field in favour of smaller mortgages, relative to large mortgages."
In general, Graham's research found that the most pertinent issue was a lack of education around how to actually benefit from a mortgage offset account.
"Many households are potentially signing up for these products without fully understanding how they work, and in some cases they may actually be worse off," he said.
Graham said it was very easy for low-income households to lose money over time because of a lack of information about how mortgage offset accounts work, and because bank accounts were "sticky" — once people open them, they're very unlikely to close them, even after they have ceased to be beneficial.
Sally Tindall, data insights director at financial comparison website Canstar, said uptake of offset accounts appeared to be on the rise.
"It's a very popular product and can be beneficial because the bank reviews the amount of interest for these accounts on a daily basis, so despite the fact your savings can go up and down, it does make a difference over time."
She said previously, offset accounts would come with higher fees and higher interest rates compared to a redraw account, which similarly allows mortgage holders to withdraw certain sums from their mortgage.
Tindall said it appeared banks had recently caught on to the fact that consumers were interested in offset accounts with low interest rates.
"Now, some banks don't try higher interest rates," she said.
"Previously, they might have, but there's more competition now, so it comes down to fees for whether you're getting bang for your buck, and they can vary between the banks."
Boyd said if people were unclear whether their offset was right for them, they should ask their bank.
Tindall said she would advise anyone with a mortgage offset account to check their rate at least once a year to ensure they were getting the best deal for their needs.
Justine Davies, a financial expert at Moneysmart, the government's online financial advice tool, said it was "so important" to shop around for a mortgage that works for you.
"Don’t be shy about reviewing your mortgage regularly and asking your financial institution to offer you a better deal," she told SBS News.
"Check the home loan key facts sheet for any loan you’re considering — it’ll show you your repayments and the total interest over the life of the loan, as well as the fees you’ll pay.
"There is a red flag — some financial institutions charge an extra fee or a higher fee for having an offset account.
"If that’s the case, you need to be confident that the amount of money you keep in your offset account is saving you more in interest than you’re paying in higher costs or rates.
"Otherwise, you could be going backwards."
She also recommended comparing multiple loans before choosing one, and using the government tools like Moneysmart's mortgage calculator to work out the likely cost of your home loan over the long term.
"It’s likely to be the biggest debt you’ll ever have and one of your biggest expenses. Differences in the interest rate you’re charged can make thousands or even tens of thousands of dollars difference over the life of your loan," she said.
The information in this article is general in nature and is not intended as financial advice. You should consult with a licensed professional to make the decisions that are right for you.
