How can credit cards boost an offset mortgage account?

With demand increasing, the size of our home loans is also going up. This means we’re spending more and taking more time to work towards owning debt-free property.

Whether it’s a home or a rental property you’re paying off, there are a number of different ways you can save both time and money on a mortgage, and one useful tool is an offset account. To further boost the benefits of this type of account, many people use a credit card with an interest free period.

Here, we take a look at how using plastic as a resource can be a fantastic way to save money on mortgage payments alongside an offset account. Before we get into exactly how a credit card helps, it’s important to go over the details of offset accounts.

How offset accounts work

An offset account is a type of transaction account that is linked to a variable or fixed mortgage. The balance of this account is weighed against the amount of money owed on your home loan, reducing the interest that you pay on the amount borrowed for your property.

For example, if you had a $300,000 home loan and an offset account with a $50,000 balance, interest would only be charged on $250,000 of your home loan. If the loan had an interest rate of 5.5% p.a., you could potentially save more than $140,000 through the offset account over the course of a 30-year loan – so they can make a huge difference to the total you pay.

If you also increase the size of your repayments, or change from a monthly to a fortnightly or weekly schedule, there’s scope to reduce the time you pay off your mortgage. However, this also depends on the specific loan’s terms and conditions.

How using a credit card can boost your offset account balance

The more money you have in an offset account, the less interest you will have to pay on your home loan. For some people, that means putting a lump sum into the account and never touching it – such as the $50,000 in the example above.

But every single dollar that goes into an offset account makes a difference to your home loan balance. Interest on home loans is calculated daily (even though it’s charged monthly), so regularly adding money to an offset account will have an ongoing impact on your mortgage.

Now imagine how much of a difference you could make to your home loan if you had your salary going into that offset account. It could be huge – particularly if you were able to keep that money there for a month or more.

That’s where credit cards come into the picture: by using a credit card to pay for expenses each month, your whole salary can be used to offset the balance of your home loan for that same amount of time. Then, at the end of each month, you’d be able to use the money in the account to pay off your credit card balance, but still get the benefit of reduced interest on your home loan.

A step-by-step guide to this strategy

Here’s how this option works in practice:

1. Get a home loan with an offset account, or add an offset account to a current home loan if your provider offers this service.
2. Deposit a lump sum into the account (whatever you can afford). This is your baseline for savings on your home loan.
3. Have your salary deposited directly into the offset account.
4. Use a credit card with a long interest-free period for day-to-day expenses throughout the month.
5. At the end of the month, make your usual mortgage payment, pay off the credit card balance and start again.

With this plan, your offset account balance increases every time you get paid, and only decreases once every month when you make your loan and credit card payments. That means the interest calculations will be significantly reduced throughout the month, so you are able to get as much benefit as possible from using an offset account.

To put this into perspective financially, let’s say you have the same $300,000 loan from the example above, a lump sum of $50,000 in your offset amount, and earn $1,000 a week after tax.

Once again, it’s important to remember that interest on your mortgage is calculated daily and charged monthly, so the changes from week to week will have an impact on that rate accordingly. That’s why the lump sum in the offset account is still important – it guarantees you huge savings, while your salary payments gradually increase the savings throughout the month.

Finding the right credit card

If you want to start using an offset account to reduce your home loan interest in this way, the next step is to make sure you have a good credit card for your everyday transactions. In theory, the card you choose could be any number of options on the market.

But since the focus of using an offset account is to save money, it’s important to consider features that help keep your costs down, such as the number of interest free days available on the card. Even though you’ll be paying off the balance each month, a greater number of interest free days means that you can keep money in your offset account for as long as possible before paying off your credit card. As a result, you’ll save more interest on your mortgage.

Interest free days also give you a buffer against interest charges when you are relying so heavily on a credit card. So the more interest free days you have available, the greater your potential savings for both your credit card and your mortgage.

On the other hand, you might decide you want to take advantage of a credit card with a rewards program – especially as you’ll be using it for all or most of your monthly transactions. The points that you earn could quickly add up and be redeemed for a wide range of rewards, such as airfares, gift cards or cashback, giving you even more benefits.

Whatever type of credit card you choose, it’s important to make sure you start this plan with a clean slate in terms of credit card debt. That way you will not be charged interest on your credit card balance throughout the month, and really can take advantage of convenient features like interest-free days.

Choosing your credit limit

Your credit card’s credit limit is one of the most important parts of using a credit card to help boost your offset account balance because it can stop you from getting into further debt. To really make the most of this plan, you should request a credit card limit that is equal to or less than your monthly salary (minus your mortgage payment).

For example, if you earn $4,000 a month after tax and pay $1,500 off your mortgage each month, you would have $2,500 for your other expenses. So if you made your credit limit $2,500, you would always be able to use your salary to pay off the balance without dipping into the lump sum in your offset account. It’s basically a very easy way to have a budget without putting too much thought into it.

This credit limit can be adjusted based on how much you earn, and on your other goals. If you earn enough to also be saving some money each month, for example, you might want to request a slightly lower credit limit and budget accordingly. The money you don’t spend would then become savings in your offset account.

When you have figured out the credit limit that will work best for your budget and circumstances, you can request it when you apply for a new credit card. If you want to use a card you already have, you can ask your credit card issuer to reduce your credit limit to the desired amount so that you can stick to your new budget.

Other things to remember

If you’re considering using a credit card in conjunction with an offset account to help save money and/or pay off your mortgage faster, there are a few other things to consider, starting with your individual circumstances. Here are a few of the most common and important factors to look at before going ahead with this plan.

1. Credit card annual fees

A high credit card annual fee could outweigh the savings you get from your offset account – especially if you have a small offset account balance. Using the previous $300,000 home loan example, if you had a balance of $5,000 in your offset account, your average yearly interest savings would be approximately $282. To benefit from this strategy, you would have to choose a credit card with an annual fee lower than this amount.

You can calculate the cost of your credit card’s annual fee versus the savings from your offset account by using an offset mortgage calculator. Just type in your loan and offset account details and divide the total savings by the loan term. The amount remaining shows your average yearly savings and you can then choose a credit card that has an annual fee lower than this amount. Alternatively, you may want to consider a credit card that has no annual fee.

2. When you’re in a partnership

The guide above is focused on how one person can use a credit card to increase the balance of their offset account over a month, and save money on their home loan as a result. If you’re in a partnership, however, the dynamics could change.

For example, you might be able to deposit one whole wage into the offset account and get by on the other wage without much need for a credit card at all. Or you could put both wages into the offset account and use a credit card for all your monthly payments.

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 make sure you and your partner are both on the same page in terms of the benefits and ongoing commitment involved in this repayment strategy.

3. If you have existing debt

If you’re currently paying off a debt, you will need to consider the financial commitment involved before you start making any changes to the way you manage your money.

While it is great to be able to reduce mortgage costs, it’s more important to know you will be able to manage all your financial commitments as they stand. In some cases, it may be fine to clear current debts while using the strategy we’ve looked at here, but in other cases it may be better to pay off the debts you currently have before making more financial changes.

4. If you want a fixed rate home loan

Offset accounts are more common with variable rate home loans, but there are still a number of fixed rate options that also provide offset accounts. For example, the CUA Premium Fixed Rate home loan for owner-occupiers provides a free offset account and has fixed rates for one year, three years or five years. Similarly, ANZ has fixed rate home loans for owner-occupiers that also offer a free offset account and have fixed rate options of 1-10 years.

As fixed rate home loans with offset accounts are less common, you may have to narrow your search and comparison to a few products. It’s also important to consider the other features of fixed rate home loans, and the conditions around the locked-in rates. Compare a number of fixed rate and offset account home loan options so you can choose one that works for you.

5. Mortgage terms and conditions

Every mortgage has different terms and conditions that need to be considered – ideally before you apply for the loan. Offset accounts make up one part of the fine print, and if you are thinking of taking advantage of them then you will need to take time to look at all the details.

Some offset accounts, for example, might not factor in all of the balance of the account (known as a 100% offset option). Others may have hefty fees for any transactions that you make.

The other thing to remember is that using a credit card is not the only way to make use of an offset account – you could also just deposit a lump sum into the account and leave it at that. Or you could use the account as a place to store your savings (although you won’t earn any interest on your savings if you go down that path). Thinking about these options, and considering a range of home loan products and features, is the best way to optimise your home loan for your lifestyle.

Really, the bottom line is this: using a credit card for cash flow can be a great way to boost the balance of your offset account from month to month while also sticking to a budget, but this is just one of many ways to save money on your home loan.

Considering this option, along with others, will help you make a smarter decision for your circumstances so that you can save money on your home loan and manage your money in a way that works for you.