If you’ve got a bit of extra money each month and a mortgage to go with it, you’ve probably asked yourself this at some point.
Do I throw it at the loan, or do I keep it in savings?
It sounds like it should be a simple decision; it isn’t. But there is a right approach for your situation, and once you understand how it works, it becomes a lot clearer.
Why this question matters more right now
With the RBA cash rate sitting at 4.10% after two consecutive hikes in 2026, your mortgage rate has almost certainly moved up.
Variable rates are now commonly sitting somewhere in the mid 5% to low 6% range, depending on the lender and loan structure.
That matters because the “return” you get from putting extra money into your mortgage is effectively your interest rate.
So if your loan rate is 6%, every extra dollar you put in is saving you 6% in interest. It’s consistent, it’s risk-free, and it’s not taxed.
Let’s compare that to savings accounts.
Yes, savings rates have improved, with some high-interest accounts sitting above 5%, but the part that often gets missed is tax.
Interest earned in a savings account is taxable. Interest saved on your mortgage isn’t.
So if you’re on a marginal tax rate of around 34.5%, a 5.25% savings rate is closer to about 3.4% after tax.
When you look at it like that, the mortgage usually comes out ahead.
The offset account changes the conversation
Before you decide between extra repayments or savings, the first thing to check is whether your loan has an offset account.
Because if it does, the strategy shifts.
An offset account is linked directly to your home loan, and every dollar sitting in it reduces the balance on which your interest is calculated.
So if you’ve got a $500,000 loan and $50,000 sitting in your offset, you’re only paying interest on $450,000.
But the key advantage is flexibility.
Unlike extra repayments, the money in your offset is still accessible. You can use it if you need to, which gives you a safety net without losing the interest benefit.
You’re effectively getting a return equal to your mortgage rate while still keeping control of your cash.
When extra repayments make sense
There are still situations where putting extra money directly into the loan is the better move.
If you’re on a fixed rate without an offset, extra repayments are usually the most effective way to reduce your interest. Just make sure you check your loan terms first, as many fixed loans have limits on how much extra you can contribute each year.
We also see this work well for clients who prefer structure.
If the money is sitting in an account, it’s easy to spend. If it’s gone onto the loan, it’s out of reach and working for you.
Extra repayments also have the biggest impact early in your loan.
In the first few years, a larger portion of your repayments is going toward interest rather than principal. So reducing your balance earlier can make a noticeable difference over time.
When building savings makes more sense
On the flip side, there are times when holding onto your cash is the smarter move.
The biggest one is your emergency buffer.
Most financial guidance suggests having at least three months of living expenses available. If you don’t have that in place yet, it should be the priority.
We’ve seen plenty of situations where unexpected costs come up, and having access to cash makes all the difference.
It’s also relevant if you’re saving toward something in the near future.
Renovations, a car, school fees, or even an investment opportunity all require liquidity. Locking everything into your mortgage only to redraw it later can be clunky and sometimes restrictive, depending on your loan.
This is where your broader strategy matters.
Your mortgage doesn’t sit in isolation. It needs to work alongside your savings, your goals, and your long-term plans.
A simple way to decide
If you want a straightforward way to think about it, this is how we typically frame it.
- First, make sure you’ve got a solid emergency buffer in place.
- Second, if you’ve got an offset account, use it.
- Third, if you don’t have an offset, compare your mortgage rate to your after-tax savings return. Right now, the mortgage is usually the better performer.
- Fourth, if you’re on a fixed rate, check your extra repayment limits before making any additional contributions.
It doesn’t need to be more complicated than that.
There isn’t a one-size-fits-all answer here, but it’s a decision that can make a meaningful difference over time.
Even relatively small extra contributions can have a big impact. For example, putting an extra $200 a fortnight onto a $400,000 loan at around 5.5% can save tens of thousands in interest and reduce your loan term by several years.
The right approach depends on your loan structure, your rate, your tax position, and what you’re trying to achieve.
This blog is intended for general informational purposes only. For personalised advice tailored to your unique financial situation, please contact NMC Finance.
