For most people with a mortgage and offset account, the goal is to maximise cash in the offset in order to reduce the interest they pay on their home loan.
A strategy some swear by, to achieve this, is using a credit card to pay all their regular expenses.
The idea is that when you use a credit card, the money you would spend immediately, if you were using a debit card, stays in your offset account for longer — until you pay the credit card off.
So, as long as you pay off the credit card before its interest-free period ends, it can save you interest and therefore money overall.
Does it work?
Mortgage interest is usually calculated daily then charged monthly.
Each day the lender works out how much interest to charge based on how much you owe. If you have an offset account, that "what you owe" figure is the difference between your loan balance and offset account balance.
The lender multiplies how much you owe by your interest rate then divides by 365 days.
At the end of each month, they tally up these daily interest calculations. That total is what appears on your mortgage as the interest charged for the month and gets added to your loan balance.
So, more money in your offset does mean less daily interest.
How much can it save you?
The amount you can save depends on your loan terms and your monthly spending.
Here's an example to illustrate. Your loan and income/spend will be different but this is just to help you get the idea.
For this example we're assuming:
- $600,000 loan at 6.24 per cent interest for a 30-year term, making minimum monthly repayments
- Starting offset account balance of $50,000
- $8,000 a month income (into offset or debit account) on top of the mortgage repayment of $3,690
- Credit card offering 55 days interest free
If you keep the $8,000 per month spending money in a debit account so it doesn't offset any mortgage interest, you owe $600,000 minus $50,000. The daily interest works out at $94.03 for the first 30 days, then $93.88 for the next 25, for a total of $5,074 interest charged.
If you put $8,000 in the offset account on day one and day 31 then use a credit card to cover those costs, you owe $600,000 minus $58,000 for the first 30 days with a daily interest calculation of $92.66. The next 25 days, you owe $600,000 minus $66,000 with a daily interest calculation of $91.14. You'll be charged a total of $4,967 interest.
Overall, you're charged $107 less mortgage interest in the credit card's interest-free period.
But it only saves you that comparatively big whack of interest once, the first time you take advantage of the credit card (because of the $8,000 you put in on day one and day 31, before you have to pay the credit card off).
Once you start paying off the credit card with the cash you've kept in the offset, you're back to similar monthly money in — money out flows, which drops the difference in daily interest charged lower than the few dollars you save on days 31 to 55. It depends on how many days elapse between your cash hitting the offset and the credit card payment being due.
Still, every dollar you reduce your interest by early in your loan is exponentially less you pay back in the long run due to compounding, so it could be worth it if you can avoid the potential pitfalls.
The pitfalls
It doesn't take much for the maths to swing against this strategy thanks to credit card annual fees and interest rates.
For example, if the credit card costs $120 a year just for the joy of having it, you'd have to save that much interest every year simply to break even.
Missing a payment and being charged interest could also eat up those savings. At 18 per cent rates — moderate for a credit card — you'd be charged around $120 interest in the first month for a -$8,000 balance.
If you mistakenly withdraw cash on your credit card (called a cash advance) get ready to be slugged with daily compounding interest immediately.
Then there's the risk of spending more due to using a credit card.
If you know that you've got poor impulse-spending control, you might not be suited to having a credit card regardless of the potential positives because you're likely to overspend.
Even if you consider yourself fairly frugal, from merchant fees to lifestyle creep, you may find your monthly costs inflate when you change your payment method. If you end up spending more overall, it may not be worth the interest saved on your mortgage.
Some credit card fans say rewards such as points or flight credits can ameliorate these risks. But using rewards often requires additional planning so you'd need to be confident it's worth the extra time and effort involved.
How to make the most of this strategy
If you're eager to give it a go, you can reduce your risks by:
- Looking for a low or no-fee credit card
- Paying it off each month automatically so you're never charged interest
- Keeping the available credit limit low to reduce temptation to overspend
- Using any penalty fees for exceeding that limit as an incentive to monitor spending
- Checking whether you have spent more, for example by comparing your annual spend before and after getting the credit card.
You could also hunt for deals with longer interest-free periods, which are often promoted for balance transfers, i.e. moving your total credit card debt from one lender to another. Some lenders offer up to two years interest free. Just be sure to check the terms and fees before transferring.
As with any money strategy, it needs to work for you — not just someone else.
If you try it and the strategy doesn't pay off, cancel the credit card and revert to your previous approach. Don't stick with something that isn't working for you.
Lacey Filipich is a financial educator and the author of Money School.
This article contains general information only. You should consider obtaining independent professional advice in relation to your particular circumstances.
