The RBA says most borrowers have a mortgage buffer. How much do you need?

The Reserve Bank of Australia (RBA) says the median borrower could cover more than a year of scheduled mortgage repayments using money held in offset and redraw accounts.

But that doesn't mean you need a year's worth of mortgage repayments sitting in the bank.

Your buffer needs to reflect your household expenses, income and financial commitments. With interest rates higher, it is also worth looking at how much cash you have available, where it is held and whether you can build that buffer further.

The RBA's mortgage buffer measure looks at how many scheduled mortgage repayments a borrower could cover using their offset and redraw balances.

You can calculate your own number:

Months of mortgage cover = (accessible offset + accessible redraw) / monthly mortgage repayment

For example, if you have $30,000 in an offset, $5,000 of accessible redraw and a $5,000 monthly repayment:

$35,000 / $5,000 = 7 months

This means you have enough accessible money to cover seven scheduled mortgage repayments.

It doesn't mean you have seven months of living expenses covered. Your household would still need to pay for food, utilities, insurance and other costs.

It also doesn't mean seven months is enough or 12 months is better. Your mortgage buffer is simply a way to see how much accessible money you have relative to your current repayment.

Your mortgage buffer and emergency fund are related, but they aren't the same thing.

An emergency fund is money you keep available for unexpected expenses or a drop in income. Your mortgage buffer measures how much of your mortgage repayment could be covered by accessible funds.

If your emergency savings are in an eligible offset, that same money can potentially serve both purposes. It remains available when you need it while reducing the portion of your mortgage on which interest is charged.

Knowing your buffer is useful. The next step is working out whether you can make it bigger.

You don't necessarily need to make major lifestyle changes. Start with your regular cash flow and look for money that could be redirected towards your buffer each month.

Review your recurring expenses.

Look at subscriptions you no longer use, insurance premiums, phone and internet plans, banking fees and other regular payments that may have increased or continued without you noticing.

The question isn't simply, “What can I cut?”

Ask:

“What am I paying for that I no longer need or value?”

Finding $150 a month in unnecessary recurring costs would give you another $1,800 a year to put towards your offset or other financial goals.

You don't need to give up every small treat to improve your cash flow. Start with expenses that are easiest to remove or renegotiate.

Your home loan should be part of this review.

If you haven't checked your mortgage rate for some time, you could be paying more interest than necessary simply because your loan has never been reviewed. Run a Bheja Health Check to see where your current rate stands.

Suppose your repayment increased from $4,500 to $4,800 when rates rose.

If rates later fall and your required repayment drops to $4,600, you could continue paying $4,800 if your budget allows.

The extra $200 could go towards reducing your loan faster or into your offset, depending on how your loan is structured.

You have already adjusted your budget to the higher repayment. Keeping the higher payment after a rate cut means the saving can strengthen your financial position rather than simply becoming additional spending money.

Your mortgage buffer is only part of the picture.

You could have a substantial amount sitting in your offset and still be paying more interest than necessary if your mortgage rate isn't competitive.

A lower rate could reduce your interest costs and, depending on your loan, potentially reduce your repayment. That could leave more money in your monthly budget to build your buffer.

There are three separate things you can check.

Bheja's Health Check can show you where your current mortgage rate sits.

This gives you a starting point for deciding whether your loan needs attention.

Having an offset account isn't enough if it isn't connected properly to your loan.

Bheja has a separate offset check to help you confirm whether your offset is connected properly.

You don't have to keep checking mortgage rates yourself.

Connect your loan to Bheja and it can monitor your mortgage. If a better rate becomes available, we'll alert you.