Carried out by Dr James Graham, senior lecturer in the School of Economics, the research published in the Economic Record^[1] journal is the first academic analysis of mortgage offset accounts in Australia, despite their popularity among borrowers.  

“Around 40 percent of Australian mortgage holders use mortgage offset accounts, which allow savings held in linked accounts to reduce the interest paid on home loans – for example, a $1 million mortgage with a $100,000 balance held in the offset account would result in interest paid on just $900,000,” Dr Graham said. 

“But until now, little was known about who uses mortgage offset accounts, how they’re used, and who actually benefits.” 

Offset accounts favour wealthier households 

Dr Graham’s study uses a macroeconomic model based on household life–cycle decisions and using Australian data to explore how offset accounts are used across different income levels, mortgage sizes, and property values.  

The findings show that households with higher incomes, larger mortgages, and more expensive homes are significantly more likely to benefit from offset accounts, while many others may be paying fees without gaining meaningful savings. 

“Offset accounts can be a powerful tool for reducing mortgage interest, but they’re not a one-size-fits-all solution,” said Dr Graham. “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. This confusion is perhaps not surprising given that some lenders provide offset accounts for free, some charge annual fees, while others charge higher interest on the underlying mortgage.” 

Alternative mortgage pricing could improve equity 

Dr Graham’s modelling suggests that alternative pricing structures could improve equity in the mortgage market, allowing more households to access the advantages of offset accounts without being penalised by high fees. 

“The economic disparities in the data suggest the possibility that alternative mortgage pricing could improve access and more evenly distribute the benefits of mortgage offset account use,” he said.

“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.” 

 The study also raises further questions about the complexity of pricing structures for mortgage offset products across banks. While some smaller institutions offer fee-free offset accounts, many larger banks charge annual fees of several hundred dollars.  

These fees, combined with varying interest rates and hidden costs, may make it difficult for consumers to assess whether an offset account is right for them. 

“There’s a lack of transparency in how these products are priced,” Dr Graham said. “If banks offered clearer and more flexible pricing options, we could see broader access to the benefits offset accounts can provide.” 

Call for greater education on mortgage products 

The research also points to a broader need for consumer education about mortgage products, including offset accounts. 

“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. 

“Lenders or mortgage brokers could provide more information and better educate households to help make informed decisions about mortgage offset accounts. This is necessary to ensure that offset account users are getting the interest savings they expect from these products.”

Dr Graham’s data-driven research offers timely insight for future policy development in the mortgage industry, contributing to a more transparent and equitable mortgage landscape. 

“Further research is needed into how mortgage offset accounts are designed and marketed, and how policy can improve financial outcomes for Australian households by making mortgage products more accessible, efficient, and fair for all homeowners,” Dr Graham said. 

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Notes:
[1] A Structural Model of Mortgage Offset Accounts in the Australian Housing Market