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.
Key takeaways
- A $25,000 offset can save over $8,400 in interest and shorten a loan by five months.
- Paying your credit card balance in full by its due date is essential to avoid high interest.
- Choose a credit card with interest-free days and a credit limit that matches your monthly expenses.
The strategy we walk you through on this page is pretty hands-on, and it gives you a way to put your salary into your offset account, leave it there for a month, and benefit from all the offsetting – while paying for your life on a credit card.
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.
First – how do offset mortgage accounts work?
The balance of an offset account is 'offset' against the amount of money owed on your home loan and reduces the interest that you pay.
For example, if you have a $700,000 home loan and an offset account with a $50,000 balance from year 3, you would only be charged interest on $650,000 of your home loan. If the interest rate was 6% p.a., this could save you around $170,500 over the life of a 30-year loan. It would also cut 3 years off the life of the loan, so you'll own your home sooner!
Expert insight
"If you have a package loan at your bank you will likely have an offset account – this can be linked to a debit card for you to easily 'tap and go' to access your cash. Offset and redraw have different functions which can get quite technical – the differences are critically important, particularly around investment loans – but they offer a similar benefit."
Your guide to using a credit card and an offset account
1. Get a home loan with an offset account – If you already have a home loan and it doesn't have an offset, ask your bank if they can set you up with one, or refinance to a new loan with offset.
2. Deposit a lump sum into the offset account – This could be as low $1,000 - you just need an amount to get started.
3. Have your salary deposited into the offset account.
4. Work out how much you spend each month – Use a free budget planner to estimate your monthly spending, including supermarket shopping, transport and utilities, as well as non-essentials such as streaming subscriptions, gym memberships and dining out.
5. Use a credit card to pay for your monthly expenses – 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.
6. Transfer your mortgage payment from the offset account – When your mortgage payment is due, set up an auto-pay so it's paid directly from the offset account. Your repayment amounts are likely to stay the same when you use this strategy, but you will be charged less interest (based on the daily balance of your offset account).
7. Pay your credit card balance before the due date – This is important! Use the salary that you have deposited into your offset account to pay your credit card statement balance in full, at least 2 days before the due date. For this strategy to be effective, you need to pay the total amount that is listed on your statement before the due date. Otherwise, sky-high interest charges on your credit card will undo the benefits you get from having money in your offset account.
Example: How much money could you save with this strategy?
To put this plan into perspective financially, let's say you have a home loan of $500,000 over 30 years and an interest rate of 6%. You also have $25,000 as an initial deposit for your offset account.
This means that interest on your loan principal would be calculated on $475,000 instead of the full $500,000 borrowed.
In this scenario, you earn $1,500 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 $1,500 every week.
| Offset account balance | Balance your mortgage interest is calculated on | |
|---|---|---|
| Week 1 | $26,500 | $473,500 |
| Week 2 | $28,000 | $472,000 |
| Week 3 | $29,500 | $470,500 |
| Week 4 | $31,000 | $469,000 |
At the end of each month, you take money from your offset account to cover your monthly mortgage repayments.
You also take money from the account to pay your credit card balance in full.
When you make these payments, the offset account balance will drop back down towards the original $25,000 balance before being built back up as more if your 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 3 major factors to consider before you choose one:
1. Does the card offer interest-free days on purchases?
This is essential, as interest charges on your credit card would be more expensive than potential savings you could make by using this strategy.
2. What credit limit can you get?
Make sure it's high enough to cover your monthly expenses, but not so high you end up over-spending.
3. What are the annual fees?
Some cards, especially those that earn rewards or frequent flyer points, can be $300-400 or more, which could erode the savings you make when using this strategy.
Finder survey: Would Australians of different ages package a home loan with a credit card?
| Response | 75+ yrs | 65-74 yrs | 55-64 yrs | 45-54 yrs | 35-44 yrs | 25-34 yrs | 18-24 yrs |
|---|---|---|---|---|---|---|---|
| No | 44.19% | 45.96% | 40.35% | 42.03% | 34.65% | 42.23% | 42.86% |
| Unsure | 39.53% | 30.43% | 25.15% | 18.36% | 16.14% | 17.96% | 25.71% |
| Yes | 16.28% | 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:
- Depositing both your wages into the offset account. 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.
Did you know?
Our latest State of Women's Wealth Report reveals a clear gap: women are finding it tougher than men to pay off their mortgages. While 46% of women say they're less advanced in their journey to home ownership, only 33% of men say the same.
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 use a credit card to pay off my mortgage?
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 20% 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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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?
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.
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
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.