Banks behaving badly: Hidden mortgage offset failures cost borrowers $55m in extra interest

Tens of thousands of homeowners have unwittingly spent too much on their mortgage after some of the country’s biggest banks failed to properly link their offset accounts.

The true damage could be far greater because some banks could not establish how many borrowers had been short-changed, the corporate watchdog warned. The lenders have repaid more than $55 million in extra interest after failing to notice three-quarters of the reported failures.

The Australian Securities and Investments Commission reviewed eight banks — AMP, ANZ, Commonwealth Bank, Credit Union Australia, HSBC, ING, Macquarie and Westpac. Together, they account for more than 70 per cent of Australia’s $2.5 trillion home loan market.

Almost 3.3 million Australian households have a mortgage, with $349.1 billion held in offset accounts as of March, up 28 per cent in two years. The linked transaction accounts reduce the loan balance on which interest is charged.

But when an offset is not created or linked properly, borrowers can keep making the same repayments while more goes to interest and less pays down their debt.

ASIC chair Sarah Court said customers had been “doubly hit”.

“They are not only losing promised interest savings but also the opportunity to use that money elsewhere,” she said.

In one case, a borrower was charged more than $3500 in extra interest in just over a month after a bank error severed the link between their offset account and mortgage.

Two other customers each paid more than $17,000 than they had to after their bank failed to tell mortgage brokers the offset needed to be relinked after refinancing.

Only then did two lenders uncover systemic problems affecting hundreds of customers.

ASIC said one bank already knew of serious gaps in the way it set up and managed offsets, but did not start identifying and compensating affected borrowers until the regulator stepped in.

It has since identified more than $1.4 million in customer losses and is reviewing loans dating back to 2019.

At another bank, the main report used to detect broken offsets sat unchecked for almost five years, leaving failures unidentified and customers out of pocket.

A separate lender told ASIC it would need more than 20 employees working for four weeks to determine when customers had requested offsets because the forms had never been digitised.

ASIC reviewed 204,000 home loans settled over six months last year, but the banks’ poor records left it unable to determine how many borrowers had lost money or the full cost.

The regulator found failures across almost every step, from recording a customer’s request and linking the account to reconnecting it after a refinance or product change.

One bank knew its process could leave offsets unlinked for up to 21 days, but took about two years to properly fix it.

Staff mistakes caused 86 per cent of the failures reported to ASIC, including misread instructions, incorrect data entry and missed tasks.

Ms Court said some lenders were “not getting the basics right”.

“Customers should not have to discover their offset account has not been working as promised,” she said.

“When offset accounts don’t operate correctly, the harm can be hidden.”

Banks also fell short when it came to compensating customers. One lender told ASIC it did not routinely pay borrowers for unlinked offsets unless they complained.

Five of the eight banks launched or completed offset remediation programs during or after the review, with compensation continuing for failures reported after September 2025.

ASIC acknowledged some banks had improved their offset practices before or during the review, while others had committed to further changes.

Australian Banking Association chief executive Simon Birmingham said offsets were managed correctly in the vast majority of cases.

“Offset accounts can be an effective way for mortgage holders to save on interest and in more than 99 per cent of cases banks were found to manage them correctly,” he said.

“As the report states, banks have already taken action to compensate the small number of customers where those banks identified errors, often manual errors.”

Mr Birmingham said the lenders involved were strengthening their systems and had already begun compensating affected customers.

Ms Court said: “We expect all banks to identify and address offset account failures and ensure affected customers are appropriately compensated.”

ASIC said it would keep monitoring the sector and could take further action against lenders that failed to fix the problems.

What is a mortgage offset account?

A mortgage offset is an everyday bank account tied to your home loan.

According to Moneysmart, the money sitting in the account is knocked off the loan balance before the bank calculates interest each day.

So, if you owe $500,000 and have $20,000 in your offset, the bank charges interest on $480,000.

The cash does not earn interest like a standard savings account. Rather, its job is to shrink your mortgage interest bill. That means more of each repayment can go towards paying down the loan rather than paying the bank.

You can still use the account for your salary, bills, direct debits and debit-card spending, just like a normal transaction account.

The payoff depends on how much money you keep there and for how long.

But offsets can come with higher rates or package fees, so borrowers need to make sure the savings outweigh the extra cost.

How to check your offset is working

ASIC says borrowers should check that their offset account has been set up, is linked to the correct home loan and is actually cutting the interest charged.

The regulator recommends starting with your bank’s app or online banking. Look for the linked loan and, where available, the interest savings generated by the offset.

That information may not always be easy to find. ASIC found some customers could not readily confirm whether their offset existed, was linked to the right mortgage or was delivering any benefit. Half the banks reviewed did not show customers how much interest their offset had saved.

Borrowers who cannot find the details should contact their bank. ASIC also warns that refinancing or switching loan products may break the link, meaning customers may need to ask for the offset to be reconnected.