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How Can I Minimise Mortgage Interest By Using Revolving Credit ?

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Contributor:
Mary Holm
Mary Holm

Question:

I am a lawyer and I see many mortgages. Some years ago a client of mine brought in his broker to explain the how mortgage savings work.

From what I could see the savings were achieved by careful management of the "free" interest period on credit cards offset against a floating
loan. You manage the payment of bills so that the interest-free period is used to its maximum advantage, and time payments against income.

The broker offered a service to manage this cash flow, and I could see
that through careful management there were some savings to be had. By leaving the mortgage payments unchanged, the term of the loan can be reduced by the savings. That is my understanding of the process, which looked too complicated and anal to do oneself, and costly to employ another.

Answer:

Mary Holm: I'm sure you're right, although it's not all that hard to make at least some gains through using a revolving credit mortgage.

You set things up so that all your income comes straight into the mortgage account as quickly as possible. And most spending goes on to your credit card, which you pay from the mortgage account by automatic payment on the last payment date.

That means a fair bit of money sits in your account for several weeks, temporarily repaying some of your mortgage. As a result, your interest payments are lower, so more of your mortgage payments go towards principal, reducing the loan term.

If you're disciplined enough not to increase your spending with such a mortgage, it can work well. But anyone can set this up, without paying an adviser.

And it's not something for nothing. For one thing, you lose the interest income you might otherwise have made in a savings account using a similar strategy. Sure, that interest wouldn't be as high, especially after tax, as the "return" you get by reducing your mortgage, but there's still a loss there.

And in any case many people already have revolving credit mortgages. They are hardly an exciting new secret.

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