Mortgage borrowers 'may be worse off' with offset accounts: Research

Offset accounts remain a popular feature in the Australian mortgage market, but new research warns they may be reinforcing wealth inequality. 

Homeowners most likely to benefit are typically middle-aged, higher earners with larger mortgages, while many others may see little or no benefit, and some could even end up in the red.

"Offset accounts can be a powerful tool for reducing mortgage interest but they're not a one-size-fits-all solution", University of Sydney senior lecturer and research author James Graham said.

"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."

The study by the University of Sydney, published in the Economic Record journal, marks the first academic analysis of the impact of offset accounts in the Australian mortgage market.

Call for more education on offset account mechanics

Around two in five mortgage holders use or have access to an offset account, with Australians keeping more than $300 billion in these deposit facilities as of June 2025 – nearly 70% more than they did five years prior, according to APRA data.

But after accounting for associated costs, many borrowers mightn't realise a net benefit from using an offset account.

Offset accounts are designed to reduce the portion of a mortgage's balance that interest is charged on.

For example, a borrower with a $500,000 home loan and $100,000 in an offset account would only pay interest on $400,000.

Assuming a 5% p.a. interest rate, that could save a borrower around $5,000 a year.

However, lenders usually charge annual or monthly fees or offer slightly higher interest rates to those wanting access to an offset.

"Borrowers may not realise that the effectiveness of an offset account depends on their ability to maintain a healthy savings balance," Dr Graham said.

"Without that, the interest savings may not outweigh the fees."

The research also found that borrowers with smaller mortgages and lower rates often benefit less than those with larger loans or higher rates.

And even in positive scenarios, benefits typically take time to materialise.

Contrary to common misunderstanding, offset accounts don't reduce a borrower's monthly repayments, instead they accelerate repayment of a loan's principal balance.

While this reduces a borrower's total interest costs, resulting savings generally aren't realised until a home loan is completely repaid and fees are charged upfront.

"Many households find offsets less valuable under full information, because the costs of offset use are front-loaded, while the benefits are heavily back-loaded," Dr Graham's research reads.

Changes to offset fees could improve equality among mortgage holders

The expert argues that the way offset accounts are priced into home loan products can be confusing to borrowers seeking information on whether the feature is right for them.

While some lenders charge a flat fee, others increase interest rates for borrowers selecting an offset account, and plenty only provide offsets as part of bundled loan packages that can cost hundreds of dollars a year.

It's also common for lenders to provide offset accounts free of charge to eligible home loan applicants.

Dr Graham also argues that flat fees typically charged for offset account access disproportionately advantage wealthier households.

Wealthier households are generally able to keep larger sums in their offset accounts and often have higher mortgage balances, therefore they generally have more to gain from minimising interest costs, even if it means paying a fee.

Alternative pricing structures, like charging fees based on a borrower's mortgage size or house value, could maintain bank profitability while delivering fairer outcomes for households, the research finds.

"Mortgage providers and financial market regulators could further investigate offset pricing policies to improve access and reduce the lifetime costs of mortgage finance for a larger number of households, possibly improving social welfare in the process," Dr Graham said.

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