How to pay off your home loan with your credit card

It takes a bit of discipline, but your credit card can be a tool for paying off your home loan earlier.

Don’t believe me? Here’s how it works.

You’ll need a home loan with a redraw facility or an attached offset account, plus a credit card – a card with higher rate but an interest-free period is fine if you follow this plan.

A redraw facility allows you to put extra money on your home loan but withdraw it if needed; an offset account sets any money deposited there against your mortgage, so you only pay interest on the difference between the balance of the account and your loan.

Now, as soon as your pay hits your bank account set aside your day-to-day cash needs for the fortnight or month – whatever your pay cycle is – then transfer the rest of the money onto your home loan or into your offset account.

For the rest of the month, use your credit card for all your expenses: groceries, bills, insurance premiums, visits to the doctor, eating out … whatever you usually spend your money on.

When your credit card repayment falls due, clear the card debt completely by withdrawing the money you deposited on your mortgage or in your offset account. If you’re really good, you may even get to leave some behind.

What’s happened in the meantime is that the money has reduced the value of your loan for anything up to 55 days, shrinking the amount of interest you have to pay. This means you’ll clear your home loan earlier, and will pay much less interest over the life of the loan than you would have otherwise.

In effect, you’re turning your standard home loan into a line-of-credit home loan – something the bank will try to sell you at a much higher interest rate.

But an important note of caution: This doesn’t work if you spend more on your credit card than you hive off to the mortgage at the start of the month. If you do that, your mortgage will gradually increase over time. So this little trick is only for those who are good at keeping track of their spending.

On the other hand, if you’re really good and you spend less on your credit card than you set aside, you’ll be even further ahead.