For many people looking to repay their mortgage sooner, the idea of paying for everything on a credit card may sound like a strange one, but it can in fact help the process.
The theory behind this strategy is that you maximise the amount of money in your mortgage offset account by making all purchases on a credit card. To make the strategy work you will need to have the right type of products and the discipline to make it work.
What you’ll need
Your mortgage will need to have a 100% offset account attached. Most offset accounts do offer 100% offset now, but it’s worth checking first before you embark on this strategy. An account with anything less than 100% offset may not be sufficient to make the strategy work.
Your credit card will need to be one with interest free days. Commonly these types of cards have 55 days interest free, which is the period from the start of your billing cycle through to the due date. The strategy will not work at all unless your card has interest free days.
The final thing you will need is discipline! For the strategy to work you must repay your credit card balance in full by the due date each month. If you do not clear the full balance you will be charged interest on your card, which negates any benefit from the strategy and will actually put you in a worse position.
How it works
All home loans have their interest calculated daily, and if you have a 100% offset account, this will be taken into account when calculating your daily interest. If for example you had a mortgage balance of $200,000 and an offset account balance of $3,000, you would only be charged interest on $197,000 for that day.
Your daily interest rate is simply your annual rate divided by the number of days in the year. For example an annual rate of 8.00% would equate to a daily rate of 0.022% assuming a standard year of 365 days.
As we can see above, the more money you have in your offset account every day, the less you will be charged in interest.
To maximise the amount of money in your offset account at all times we take advantage of the interest free days on your credit card. Purchases made at the start of your billing cycle can sit on your credit card for up 55 days without being charged a cent of interest. That money can instead sit in your offset account before it is transferred to your credit card on the due date.
The strategy in action
Let’s say your monthly household expenses resulted in an average credit card balance of $3,000. The balance will be lower at the start of the month and higher at the end of the month, but for this example we will go with an average of $3,000 across the billing cycle.
At a daily interest rate of 0.022% as per the previous example, by having that $3,000 average sitting in your offset account you will be saving around $20 per month in interest.
$20 per month may sound like a drop in ocean compared with your loan balance, but thanks to the power of compounding interest this can add up to hundreds per year in saved interest, which can shave years off the life of your loan.