The smart way home borrowers are dealing with higher interest rates

Home loan borrowers have been factoring in rising interest rates and cost-of-living pressures, pouring record amounts into offset accounts and making excess mortgage payments at the highest level since 2021.

Mortgage holders were on Tuesday reacting to the Reserve Bank raising rates to 4.10 per cent, which will add about a $100 a month to minimum repayments on a $600,000 mortgage.

Total offset account balances hit more than $340 billion in the December 2025 quarter, a record, APRA data shows.

Offset accounts are transactions or savings accounts linked to a home loan in which the balance is deducted from the total loan amount when calculating interest.

RBA data shows home owners paid $15 billion in excess mortgage payments in the December quarter, the highest rate since September 2021.

Sally Tindall, data insights director at Canstar, said the 13 rate rises across 2022 and 2023 and the shellshock of COVID-19 had rattled many Australians into ensuring their finances were resilient for rate rises and events such as the Iran war.

“A lot of households can’t, but where they can, home owners continue building up those buffers in as extra repayments in the mortgage or in offset accounts or in savings accounts,” she said.

Data from the Commonwealth Bank and the NAB, which don’t automatically reduce borrowers’ monthly repayments, show most of their home loan borrowers kept their repayments the same when rates dipped last year.

It meant many borrowers wouldn’t see a change to their monthly repayments, Tindall said.

While the Iran war has dominated discussion about the increase, she said a rate rise had been already potentially on the cards.

“Inflation is too high. It’s sitting at 3.8 per cent, and it hasn’t budged,” Tindall said. “This is not a good set of figures for the RBA. It really needs to act more decisively when it comes to reining in inflation.”

Ben Williams, 31, and his partner bought their two-bedroom apartment in Sydney’s Gladesville during COVID and were the beneficiaries of ultra-low rates.

Since then, their fixed-rate mortgage has rolled off and living costs have jumped, so they recently refinanced their loan. This has freed up money for the soon-to-be-married couple, as they look to renovate their kitchen and laundry and buy a car.

“We knew that rates were going up, so we wanted to find something competitive just to … save wherever we could with our repayments,” Williams, who works in commercial sales for an alcohol brand, said.

Williams said that a few years ago, he and his partner would have saved “considerably more” in addition to paying their mortgage. The couple were able to put a little more into their offset account and were ahead on their home loan.

Since refinancing, they no longer have an offset account, and watch how they spend their money.

“We don’t live beyond our means … just everything is more expensive,” Williams said. “We go out to dinner significantly less. We’re constantly looking at options to save money.”

Williams said Tuesday’s rate rise was a “punch in the guts, but it’s, unfortunately, not unexpected”.

“We just roll with the punches,” he said, adding the couple would keep an “extra close eye” on expenses.

In Melbourne, Thomas Pozzer, 28, said the increase was somewhat expected, “but not news anyone wants to hear”.

He owns an apartment in Preston, in Melbourne’s north-east, where he lives. He also owns three investment properties, which he started buying at 19, while still living at home with his parents.

“I guess for me, it’s about controlling the things I can control,” the paramedic said.

While he already puts additional money into an offset account when he can, the increase means he will look to pay more into it, cut down on household spending and take any potential overtime he can to ease the pressure.

He feels he has built in buffers and structures that should mostly insulate him from further rate rises, but he worries more about friends trying to get into the market.

“It’s no secret that life is very expensive at the moment ... so small changes definitely can be stressful,” he said.

Beau Arfi, chief executive at wealth management firm Maple Investment Group, thinks home owners and investors are probably cautious, but not panicked.

“Borrowers should assume rates may stay restrictive for some time and plan accordingly,” he said.

Loan Market Richmond broker Beau Cook said he was pricing in one to two percentage points in rate rises with clients.

“Every 0.25 per cent increase impacts borrowing power for new borrowers,” he said. “So that is an impact we have to manage for ... those who haven’t bought properties yet.”

A short-term reprieve for borrowers is that it can take some time for any rate rise to flow through to repayments.

“The messaging hits home pretty quickly, but the actual extra money doesn’t come out for two to three months,” Tindall said.

So small rises might not have the impact the RBA was hoping, she said.

“It could mean that we need more rate hikes because they’re just not packing the punch that they used to,” she said, while noting other cost-of-living expenses continued to bite.

“There’s the hike in petrol prices, private health insurance premiums are set to rise, the end of the electricity rebates, the cost of groceries ... It’s not just one hike in isolation,” she said.