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How to pay less interest with an offset mortgage account and credit card

This next-level strategy can help you save on interest charges and pay off your mortgage faster.

The key benefit of an offset account is that the money you put into it will reduce the amount of interest you pay on your mortgage. For many people, that means putting a lump sum into the account and never touching it.

This strategy is more hands-on but it gives you a way to maximise the savings by putting your salary into the offset account – and leaving it for a month. You can do that by using a credit card with interest-free days to pay for all your expenses.

Then, at the end of each month, you use the money in the offset account to pay your mortgage and credit card balance. Interested in seeing if this offset account hack will work for you? Let's take a look at what's involved.

How do offset mortgage accounts work?

The balance of an offset account is weighed against the amount of money owed on your home loan and reduces the interest that you pay.

For example, if you had a $700,000 home loan and an offset account with a $50,000 balance, you would only be charged interest on $650,000 of your home loan. If the interest rate was 2.80% p.a., this could save you around $60,720 over the life of a 30-year loan. It could also cut 1 year and 9 months off the life of the loan.

While the terms and conditions do vary, this type of account can help you save both time and money on your mortgage.

A step-by-step guide to using a credit card and an offset account

1. Get a home loan with an offset account

If you're in the market for a new home loan, you can compare ones that come with an offset account. If you already have a home loan, ask your provider if it's possible to add an offset account, or consider refinancing to a loan that gives you this option.

2. Deposit a lump sum into the offset account

This lump sum becomes the baseline for saving money on your home loan through this account. In general, it's ideal to deposit a large lump sum so that you can start seeing savings on your home loan straight away, but the priority should be to put in an amount that you can afford to keep there long-term (i.e. savings).

3. Have your salary deposited into the offset account

This step saves you time on manually transferring your income after each payday, and it means that you can maximise the savings you get from having your income deposited into the offset account.

To do this, you will need to provide your employer and/or payroll team with the following details:

  • Your offset account number
  • The institution's BSB
  • The name on the offset account

Usually, you can update these details by filling out a short form (either printed or online), but it's worth checking with your employer on the preferred process.

4. Work out how much you spend each month

Go through your everyday bank statement or use a free budget planner to estimate your monthly spending. This includes supermarket shopping, transport and utilities, as well as non-essentials such as streaming subscriptions, gym memberships and dining out.

With this strategy, the goal is to keep your salary in the offset account for as long as possible, so aim to be as detailed as possible when you work out your monthly spending. However, do not include your mortgage payments in the budget, as these will come directly from the offset account (more on that in step 6).

5. Use a credit card to pay for your monthly expenses

The key to making this strategy work is to get a credit card with interest-free days and then pay off the entire outstanding balance by the due date on each statement. This allows you to use the card for everyday spending without being charged interest on the balance.

What about the credit limit?

Ideally, you should get a credit card with a limit that lets you pay for all your monthly expenses without tempting you to overspend. For example, if you typically spend between $1,000 and $2,000 per month, requesting a credit limit of around the same amount will give you enough funds to cover your everyday spending.

6. Transfer your mortgage payment from the offset account

When your mortgage payment is due, pay it directly from the offset account. Note that your repayment amounts should stay the same when you use this strategy, but you will be charged less interest based on the daily balance of your offset account.

This means that using this strategy can save you money on interest charges each month, even when your repayments reduce the offset account balance until your next payday.

7. Pay your credit card balance before the due date

Use the salary that you deposit into the offset account to pay your credit card statement's balance. For this strategy to be effective, you need to pay the total amount that is listed on your statement before the due date. Otherwise, interest charges on your credit card could undo the benefits you get from having money in your offset account.

It's also a good idea to make this payment several days before the due date on your statement, just in case it takes a few days for the transfer to be processed.

Example: How much could this strategy help you save?

To put this plan into perspective financially, let's say you have a home loan of $300,000 over 30 years and an interest rate of 2.80%. You also have $20,000 as an initial deposit for your offset account. This means that interest on your loan principal would be calculated on $280,000 instead of the full $300,000 borrowed.

In this scenario, you earn $1,000 a week after tax and have this money deposited directly into your offset account. This means that your loan principal would be offset by another $1,000 every week.

Offset account balanceBalance your mortgage interest is calculated on
Week 1$21,000$279,000
Week 2$22,000$278,000
Week 3$23,000$277,000
Week 4$24,000$276,000

At the end of each month, you would take money from your offset account to cover your monthly mortgage repayments.

You would also take money from the account to pay your credit card balance in full. Depending on your card and the number of interest-free days available, this could be around the same time you make your mortgage payment, or 1-2 weeks later.

When you make these payments, the offset account balance will drop back down towards the original $20,000 balance before being built back up as more pay is deposited into the account.

If you're interested in how much value you could potentially get by using this strategy, you can also use the mortgage offset calculator below to get an idea of the potential savings based on different offset account balances.

What type of credit card can I use for this strategy?

You can use almost any type of credit card for this plan. But there are three major factors to consider before you choose one:

1. Does the card offer interest-free days on purchases?

This is essential, as interest charges could cancel out or even outweigh the potential savings you could make by using this strategy.

2. What credit limit can you get?

Credit card providers can only offer a credit limit that you could afford to pay off over a three-year period. This calculation is based on factors including your income, debt and other financial circumstances.

Considering this strategy requires a credit limit that fits with your monthly spending, in most cases, the limit you require will fit within these guidelines. But you may want to request a specific limit based on your budget to help you stick to it – and to reduce the risk of credit card debt.

As an added bonus, if the limit is lower than your regular income and expenses, it could help you gradually build up more savings in the offset account.

3. Will you be able to use the card to pay your other bills?

Some cards won't allow BPAY payments and some treat these kinds of transactions in the same way as cash advances. But you can sometimes avoid these issues by paying your bills through direct debit, PayPal or an online platform such as CommBank BPoint.

Check with your credit card provider and look at the payment options available for your regular monthly bills to see what will work. If you can't use your credit card without being charged interest, you will need to pay from your offset account and factor that into your monthly budget.

What to watch out for with this strategy

  • Be vigilant with payments. Using a credit card to boost the savings you get from an offset account is only worth it if you consistently make all your home loan and credit card payments on time. That means factoring in payment due dates and processing times. So to be on the safe side, you may want to set up auto-payments, or set calendar reminders to make the repayments several days before the due dates.
  • Factor in annual fees. Many credit cards charge an annual fee for the account, which could range from $30 up to $450 or more. While you may be able to offset this cost through perks such as rewards or airport lounge passes, you do still need to factor this cost into your overall budget. It may also be worth doing a yearly review of your costs vs savings to see if the card you have chosen is cost-effective when you use it for this strategy.
  • Check offset mortgage terms and conditions. As every home loan has different terms and conditions, it's important to read through the fine print before getting started with this hands-on strategy. Key details to consider include whether you can add an offset account, what types of transactions you'll be able to make from the account, what fees apply and the repayment frequency.
  • Make sure you get an actual offset account and not a redraw account. Both offset accounts and redraw facilities can help you pay less interest on your mortgage. But this strategy will only work with an actual offset account, as redraw facilities are not designed to be used for regular transactions. It's worth comparing these two home loan features in detail to decide which option you prefer.

Finder survey: Would Australians of different ages package a home loan with a credit card?

Response75+ yrs65-74 yrs55-64 yrs45-54 yrs35-44 yrs25-34 yrs18-24 yrs
No44.19%45.96%40.35%42.03%34.65%42.23%42.86%
Unsure39.53%30.43%25.15%18.36%16.14%17.96%25.71%
Yes16.28%23.6%34.5%39.61%49.21%39.81%31.43%
Source: Finder survey by Pure Profile of 1112 Australians, December 2023

What if you have a joint mortgage with someone?

To clearly explain this strategy, we have focused on how it works for an individual. If you're repaying a mortgage with someone else – and you both earn an income – you could consider the following options:

  • Depositing both your wages into the offset account. In this case, you could both put all your income into the offset account and share a credit card account for your monthly spending. With this approach, you would need to factor both of your expenses into the credit limit. You could choose to get separate cards, but would still need to be clear on your spending budgets to make sure you get the most out of the offset account balance.
  • Splitting up your wages. Instead of using a credit card for your everyday spending, with this option you could have one person put their entire salary into the offset account and use the other person's salary to pay for everything. You would still need to keep track of your spending, but it would cancel out the need for a credit card and could make it easier to track the savings you get from the offset account.

Ultimately, the way you use this strategy with a partner will depend on both of your circumstances and goals. Discussing your options in detail before taking any action will ensure that you and your partner are both on the same page in terms of the benefits and ongoing commitment involved in this repayment strategy.

Can I pay my mortgage with a credit card instead?

Your mortgage repayments should always be made using cash, not credit. But in theory, you could pay your mortgage by using a credit card to withdraw cash for the repayment. The problem with this option is that it would attract a cash advance fee and cash advance interest charges that are usually above 19% p.a., which is a lot higher than mortgage interest rates.

If you're dealing with mortgage stress and need help with your mortgage payments, talk to your lender about relief options. You can also speak to a financial counsellor for free by calling the National Debt Helpline on 1800 007 007.

What's next?

Your next step will depend on your current situation, so here are a few examples of what you could do to get started with this strategy.

  • If you already have a credit card. Check with your credit card provider whether you're currently eligible for interest-free days and request a credit limit that fits with this strategy. If you don't like your current card, compare your other options instead.
  • If you don't have a credit card. Or if you don't like your current card, compare credit cards and apply for one that fits with your goals, keeping in mind that having interest-free days and not carrying a balance are essential.
  • If you have a mortgage without an offset account. Ask your provider if you can add an offset account. If that's not possible, you could look at refinancing to a home loan with an offset account option.
  • If you don't yet have a mortgage. Compare options that offer you an offset account. It's also a good idea to spend some time getting your finances ready by paying off debts, increasing your savings and reducing spending on non-essentials. This guide for first home buyers offers some helpful tips on what to consider before you apply.
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4 Responses

    Default Gravatar
    KellyAugust 21, 2023

    We have an offset account on our mortgage but they have only provided a debit card? I thought they would have the credit card set up for us to use and repay each month as recommended? Do we just use an existing credit card and if so how do we make sure the facility is being used correctly?

      AvatarFinder
      AmyAugust 21, 2023Finder

      Hi Kelly, an offset account offers a benefit regardless of whether or not you have a credit card. The more funds you have in the offset account, the more it can reduce the amount of interest you pay on your home loan.

      This particular strategy is very hands-on. But you can use an existing credit card, as long as it offers interest-free days on purchases (most credit cards in Australia do). You would need to repay the entire balance by the due date on each statement and follow the other steps in this guide.

      Finder’s guide to offset accounts has more details on how this type of facility works. You can also contact your lender or mortgage broker if you have any specific questions about your current offset account. I hope this helps.

    Default Gravatar
    LilyOctober 26, 2022

    Can you please show the calculation of if it is better to pay a credit card fee (say 1.5%) on purchases so the money can remain in offset, or pay out of your offset straight away and not pay the fee? We always pay down the card in full each month. Thanks

      AvatarFinder
      AmyMarch 3, 2023Finder

      Hi Lily,

      This calculation would vary because it depends on lots of factors, including the value of the credit card purchase/s, the cost of the fee, how long the money remained in the offset account, the amount owing on the home loan and its interest rate. Even credit card rewards could affect the value in this scenario.

      But it’s worth keeping in mind that mortgage interest is calculated daily, and the daily amount in your offset account affects that calculation. So taking money out would have some impact, but it still depends on timing (e.g. when in the mortgage payment cycle this happens).

      In this scenario, it probably comes down to what will make life easier for you.

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