The $271.7 billion in offset account balances is up 2.4% from December 2023, when the total was $265.4 billion.

More than 10.7% of the total credit limit of Aussie borrowers, which includes redrawable funds, is now in offset accounts, which is also the highest on record.

It was the third successive quarter of a fresh peak for offset balances, an encouraging sign that borrowers are adjusting their priorities in response to high interest rates.

Since March 2022, just before the cash rate hikes began, the total offset account balance has risen more than 19%.

This is despite the household savings ratio (the difference between disposable income and consumption) plummeting, reaching an all time low of 0.2% in September 2023 compared to 10.8% in March 2022.

The data suggests Aussies are increasingly choosing to put their disposable income to make overpayments on their home loans, reducing their interest bill and potentially paying the loan off sooner.

How households are absorbing rate hikes

Despite the cash rate increasing 4.25 percentage points in less than two years, there has not been the huge spike in default rates that many feared would be inevitable.

Last month, NAB economist Tapas Strickland said that the slowly rising number of borrowers behind on their mortgage is merely a "normalisation".

"Residential mortgage arrears have risen slowly and are now close to pre-pandemic levels," Mr Strickland said.

He said the balances in offset accounts were helping borrowers absorb rate rises.

"Households continue to add to offset/redraw accounts, with those rolling off fixed rates adding the most to these accounts," he explained.

Last year, there was plenty of concern about the 'fixed rate cliff' facing borrowers on expiring fixed rates that would see their mortgage repayments shoot up once they reverted to variable rates, but Mr Strickland says this has not materialised, in part due to offset accounts.

"It seems fixed rate borrowers overall had been preparing for a higher rate and so far, the mortgage cliff has been a non-event...the peak has now passed."

When addressing parliament last year, RBA Governor Michelle Bullock said this is one of the reasons she and the board can afford to be so bullish on interest rates.

"Savings aren't exhausted in Australia, in fact most of the savings that people built up during the pandemic are still there," she said.

"[It] is important to remember...that a lot of the block of savings that is sitting there is sitting in mortgage offsets and redraw accounts.

"As interest rates rise, there's much more incentive for people to offset."

From June 2020 to March 2022, the household savings ratio was above 10%; at the peak of the pandemic, from March to September 2020, the household savings ratio was above 20%, peaking at 24% at the end of the June '20 quarter.

Put money in an offset account or deposit?

If you have an outstanding home loan, putting money into your offset account could leave you better off than instead using deposit products.

If your home loan interest rate is higher than the rate on the deposit product you are considering, putting money into your offset account would mean you save more off your repayments than you would earn from the savings account or term deposit.

Savings interest is also classed as income, and taxed accordingly.

However offset accounts often also attract a monthly fee, or a higher interest rate on the mortgage, often around an extra 0.10% (10 basis points) per year. 

To find out which one works better for you, you would need to calculate how much your net interest earnings would be on your savings account, and compare them to any interest saved through an offset account, minus any fees applicable.

See Also: Offset Account Calculator

Picture by Scott Graham on Unsplash

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