Smart New Zealand homeowners are taking advantage of credit cards to reduce interest on their homeloan while avoiding paying interest on their credit card. In fact some banks may offer to wave the credit card annual fee for their home loan customers.
How can a credit card save you interest on your homeloan?
To use a credit card to reduce your the interest on your home loan you would need a credit card with a high credit limit of about 10-15K (preferrably a rewards credit card) plus an offset account.
What is an Offset account
An offset account is a transaction bank account that is linked to a home loan. All the money in the offset account ‘offsets’ the balance of the loan – this means the bank would only charge interest on the home loan balance minus money in the offset account.
How does it work
Home owners can charge their living expenses (up to their credit limit) to the credit card over the course of the month which would increase the amount of funds available in their offset account and therefore reducing the amount of interest charged on their homeloan since the amount of money in the offset account reduces the amount of charge for the home loan.
What’s more, by charging their living expenses to their credit card home owners can earn reward points if the credit card is a rewards credit card. This can also be used to offset the annual fees of the credit card.
What to watch out for
In order for this approach to work you have to make sure you pay off credit card balance in full before the interest free period expires. Many credit cards come with a 44 days for 55 days interest free period – this means that you can setup an automatic repayment every month or 6 weeks depending on the interest free period of the card. A credit card with a 3-6 months interest free period is even better. For example, Amex offers a credit card with 6 months interest free but keep in mind that even with an interest free credit card you will still need to make a minimum monthly repayment of the amount you borrowed (althought that would usually be a small portion of the total amount). Plus, you need a credit card with a high credit limit to cover your monthly expenses for this to work.
For more information and tips to help you choose the best credit card in NZ, visit our website Credit Cards Compare.
