The credit card technique that helps clear a mortgage years early

Points: they’re sweet. But do you know what’s sweeter? Points while paying off your mortgage cheaper and quicker… for free. That’s what the ‘credit card technique’ – or what I call the offset-account-on-steroids strategy – can do for you.

This is the so-called ‘insider’ strategy you see spruiked extensively – and expensively – on social media and online everywhere. But combining a credit card and offset account is a simple and effective strategy to clear your mortgage years early.

How to combine a credit card and offset account to clear a mortgage earlier

There are two basic steps to the offset-account-on-steroids strategy.

Step 1: Get (or activate) offset accounts alongside your mortgage

An offset account is a savings account that is hooked to your mortgage. Any amount you hold in it ‘offsets’ your loan balance, so you pay no interest on that amount.

For example, if you have a $100,000 mortgage and $10,000 sitting in an offset account beside it, you’ll only pay interest on $90,000. It’s an identical saving to putting money directly into your mortgage, but you retain the flexibility of full access.

(There’s no guarantee that you will be allowed to pull out/redraw any extra money you pay into a home loan. Lenders can lock it up, particularly if you get into financial trouble.)

The more money you hold in an offset account, the more you will bring forward your mortgage-freedom date (but we will get to exactly how much you can slash shortly). And this is where step two, the credit card part of the play, comes in.

Step 2: Open a credit card with interest-free days

What you want is a credit card with the maximum number of interest-free days – say, 55 days. Of course, make this a card that attracts points as the cherry on top of what is even more valuable: early mortgage freedom. And any rewards hacker knows to try and get a tasty sign-up points bonus as well.

Getting back to your bid to maximise the money in an offset account though, what you can do is pay all your monthly expenses with your credit card. You may do this for points anyway!

But by doing so, you can also sit your salary in your offset account for that month, until your credit card bill is due. The idea is to leave it there the whole time, until your next pay drops. And as such, you might be able to keep a steady balance in your offset account… pretty much always.

That’s what a credit card, used really cleverly, can do for you. Only on the very last day (or close to it) should you pay. At this point, the funds stop sitting against your mortgage and are used to clear your card bill instead.

How to make the credit card strategy work to repay your mortgage years early

The entire point of the credit card or offset-account-on-speed strategy is to never pay a cent in credit card interest. If you do, you will quickly negate any savings. Credit card interest rates are high, after all.

True mortgage mastery instead involves using the bank’s money – or more accurately, the credit card provider’s money – for no extra cost beyond the annual fee.

And all along it will save you a mortgage interest rate probably upwards of 6 percent (as I type). We’ll put dollar figures on that shortly. But you must be incredibly disciplined to make this approach work to get out of a home loan early.

Firstly, it’s vital that you don’t spend more than you absolutely have to every month. Remember, you need to be able to clear your card in full. But secondly, it should also be possible to flush virtually every bill in your life through a credit card, such that you maximise both your points and the money you can sit in your offset account throughout the month.

The preference is to not use your cash for anything until you need to clear your card.

So how much could you save?

We’ve established that the credit-card mortgage repayment strategy – executed correctly – costs you zero dollars. And, remember, you are not putting one single cent extra on your mortgage. You are just adeptly deploying two banking products – your mortgage with an offset account and your long interest-free period credit card – in clever concert.

Let’s say you have a $300,000 home loan. Let’s also assume that you have a salary of $10,000 each month. If you sit $10,000 against a 30-year home loan at the current 6.3% average interest rate, at all times, you will save $50,560 in loan interest and shave more than two years off your time in debt.

It’s not bad for nothing more than a bit of clever financial structuring.

Of course, you also need to factor in the annual credit card fee. But interest savings like those on offer should make that well worth it, particularly if your card is letting you fly for almost nothing as well.

The credit card or offset-account-on-steroids strategy is free and brilliantly effective for clearing a mortgage faster, easier and cheaper. And you certainly don’t need to pay thousands to someone from the internet to bank the savings.

Editor’s note: most rewards credit cards in Australia have up to 44 days interest-free, but some non-rewards credit cards may still offer up to 55 days interest-free.

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