Homeowners across Australia are almost four years ahead on their home loan repayments on average, thanks to low interest rates and forced-savings habits from COVID-19.
New research from the Australian Prudential Regulation Authority (APRA), released to The Australian, shows that mortgage holders are on average 45 months ahead on their repayments. This is up from 32 months recorded prior to the pandemic.
The latest APRA data reported that $222 billion was sitting in mortgage offset accounts at the end of September 2021, up from $174 billion at the start of the pandemic in March 2020.
Offset account balances also increased by 10% in the September 2021 quarter alone to almost $20 billion. The average balance sitting in offset accounts is now around $100,000.
How much can an offset account save homeowners?
An offset account is a transaction account linked to your home loan. The funds in your offset account work to ‘offset’, or reduce, the amount you pay in interest.
RateCity research shows that a homeowner with a $750,000 mortgage with this average amount of $100,000 in their offset account may save over $16,000 in interest over five years.
Interest savings with an offset account
|Amount in offset account||Interest saved in 5 years|
Source: RateCity.com.au Note: Assumes $750K, 25-year, on the average RBA existing variable customer rate of 3.00%. Assumes interest rate does not change. Interest savings would increase if rates rose.
It’s worth noting that these figures are based on a home loan with an interest rate of 3%. However, these savings would increase significantly if, and when, interest rates rise.
As interest rates rise, so too will mortgage repayments. So, if a homeowner is considering taking advantage of their offset account, this may help to reduce the financial impact on household budgets when their interest rates rise.
Another alternative homeowners may want to consider is making extra repayments, particularly if the mortgage provider does not offer an offset account.
According to RateCity research, simply paying an extra $50 into the same $750,000 home loan could save a borrower almost $29,000 in interest over the life of the loan, and allow them to pay the loan off two years earlier.
|Loan size||Extra repayment||Interest saved over life of loan|
|$750,000||$50 per week||$28,817
(will pay off loan 2 years early)
Source: RateCity.com.au Note: Assumes $750,000, 25-year loan term, on the average RBA existing variable customer rate of 3.00%.
Why have our offset account balances grown?
There are a few reasons for this increase in offset account balances. One of the most significant has been the influence of how interest rates have fallen over the last few years, with the Reserve Bank of Australia’s (RBA) cash rate sitting at a record low of 0.10%.
Homeowners who’ve seen their rates plummet may now be saving hundreds of dollars a month in interest charges, which they may be putting back into their offset accounts. Further, many homeowners may have taken advantage of the record low-rate environment and refinanced to a lower rate loan.
Additionally, the COVID-19 restrictions and lockdowns experienced nationally for the last two years means that many Aussie homeowners can’t spend how they used to.
Whether it’s cutting down on big, expensive holidays with the family, not taking public transport to work or not going out to restaurants and bars as much, our spending habits have changed dramatically.
In turn, Aussie households have been pocketing these savings. RBA Governor Philip Lowe recently reported that household savings since the pandemic has amounted to more than $200 billion.
It’s worth noting that the pandemic has also been incredibly difficult financially for many households. Whether due to reduced contact hours for employees in impact industries, like hospitality or tourism, or forced closures to small businesses – particularly due to the Omicron strain.
Although there is some government assistance available, it is not as widespread as when JobKeeper was on offer. So, if you have been financially impacted by COVID-19 and are struggling to repay your home loan, reach out to your lender before you miss a repayment. Home loan lenders will have hardship assistance available for situations such as this.