In the nineties and noughties, it was popular for lenders and personal finance commentators to promote a strategy of combining a credit card with a mortgage offset account to repay your mortgage faster.
Whilst other strategies have become trendier to discuss in the media, I have found that many people do still have a penchant for this strategy.
How the strategy works
First, you direct all your income into the offset account, which saves you mortgage interest by reducing the loan balance on which interest is calculated.
Next, you use your credit card for all expenses with the added bonus of earning reward points.
Finally, you repay your credit card balance in full from your offset account and by the due date, so you don’t incur any credit card interest.
How your mortgage is repaid sooner
If you spend less than you earn, your monthly savings will automatically accrue in your offset account, saving you increasing amounts of interest and reducing your loan term.
Even if you spend everything you earn you save some interest by having an offset balance approximately equivalent to one month’s income.
Is it a good idea?
The success of the strategy relies on discipline.
- Discipline to have a thorough budget of what is affordable in each category
- Discipline to check the budget before spending on planned items
- Discipline to resist impulse spending
The problem is that willpower is naturally fickle and unreliable. Our brains are not yet wired for that level of discipline in the face of abundant temptation, especially when feeling stressed.
Plus most people don’t have thorough enough budgets that provision for predictable future expenses and life events.
If you end up overspending and unable to repay the credit card balance in full, then the credit card interest typically outweighs the interest saved on your mortgage and any rewards earned.
So, in theory, the strategy works for perfect, rational humans that exist in Economics 101 textbooks.
In practice, the strategy is a bad idea for most people navigating our modern, consumerist world.