How to pay less interest with an offset mortgage account and credit card

The key benefit of an offset account is that the money you put into it reduces the amount of interest you pay on your mortgage.

The strategy we walk you through on this page is pretty hands-on, and it gives you a way to put your salary into your offset account, leave it there for a month, and benefit from all the offsetting – while paying for your life on a credit card.

At the end of each month, you use the money in the offset account to pay your mortgage and credit card balance.

Interested in seeing if this offset account hack will work for you? Let's take a look at what's involved.

First – how do offset mortgage accounts work?

The balance of an offset account is 'offset' against the amount of money owed on your home loan and reduces the interest that you pay.

For example, if you have a $700,000 home loan and an offset account with a $50,000 balance from year 3, you would only be charged interest on $650,000 of your home loan. If the interest rate was 6% p.a., this could save you around $170,500 over the life of a 30-year loan. It would also cut 3 years off the life of the loan, so you'll own your home sooner!

Expert insight

"If you have a package loan at your bank you will likely have an offset account – this can be linked to a debit card for you to easily 'tap and go' to access your cash. Offset and redraw have different functions which can get quite technical – the differences are critically important, particularly around investment loans – but they offer a similar benefit."

Julian Finch

Founder and principal financial specialist, Finch Financial

Your guide to using a credit card and an offset account

1. Get a home loan with an offset account – If you already have a home loan and it doesn't have an offset, ask your bank if they can set you up with one, or refinance to a new loan with offset.

2. Deposit a lump sum into the offset account – This could be as low $1,000 - you just need an amount to get started.

3. Have your salary deposited into the offset account.

4. Work out how much you spend each month – Use a free budget planner to estimate your monthly spending, including supermarket shopping, transport and utilities, as well as non-essentials such as streaming subscriptions, gym memberships and dining out.

5. Use a credit card to pay for your monthly expenses – Get a credit card with interest-free days and then pay off the entire outstanding balance by the due date on each statement. This allows you to use the card for everyday spending without being charged interest on the balance.

6. Transfer your mortgage payment from the offset account – When your mortgage payment is due, set up an auto-pay so it's paid directly from the offset account. Your repayment amounts are likely to stay the same when you use this strategy, but you will be charged less interest (based on the daily balance of your offset account).

7. Pay your credit card balance before the due date – This is important! Use the salary that you have deposited into your offset account to pay your credit card statement balance in full, at least 2 days before the due date. For this strategy to be effective, you need to pay the total amount that is listed on your statement before the due date. Otherwise, sky-high interest charges on your credit card will undo the benefits you get from having money in your offset account.

If you're interested in how much value you could potentially get by using this strategy, you can also use the mortgage offset calculator below to get an idea of the potential savings based on different offset account balances.

What type of credit card can I use for this strategy?

You can use almost any type of credit card for this plan. But there are 3 major factors to consider before you choose one:

1. Does the card offer interest-free days on purchases?

This is essential, as interest charges on your credit card would be more expensive than potential savings you could make by using this strategy.

2. What credit limit can you get?

Make sure it's high enough to cover your monthly expenses, but not so high you end up over-spending.

3. What are the annual fees?

Some cards, especially those that earn rewards or frequent flyer points, can be $300-400 or more, which could erode the savings you make when using this strategy.

Finder survey: Would Australians of different ages package a home loan with a credit card?

What if you have a joint mortgage with someone?

To clearly explain this strategy, we have focused on how it works for an individual. If you're repaying a mortgage with someone else – and you both earn an income – you could consider the following:

• Depositing both your wages into the offset account. You could both put all your income into the offset account and share a credit card account for your monthly spending. With this approach, you would need to factor both of your expenses into the credit limit. You could choose to get separate cards, but would still need to be clear on your spending budgets to make sure you get the most out of the offset account balance.
• Splitting up your wages. Instead of using a credit card for your everyday spending, with this option you could have one person put their entire salary into the offset account and use the other person's salary to pay for everything. You would still need to keep track of your spending, but it would cancel out the need for a credit card and could make it easier to track the savings you get from the offset account.

Ultimately, the way you use this strategy with a partner will depend on both of your circumstances and goals. Discussing your options in detail before taking any action will ensure that you and your partner are both on the same page in terms of the benefits and ongoing commitment involved in this repayment strategy.

What's next?

Your next step will depend on your current situation, so here are a few examples of what you could do to get started with this strategy.

• If you already have a credit card. Check with your credit card provider whether you're currently eligible for interest-free days and request a credit limit that fits with this strategy. If you don't like your current card, compare your other options instead.
• If you don't have a credit card. Or if you don't like your current card, compare credit cards and apply for one that fits with your goals, keeping in mind that having interest-free days and not carrying a balance are essential.
• If you have a mortgage without an offset account. Ask your provider if you can add an offset account. If that's not possible, you could look at refinancing to a home loan with an offset account option.
• If you don't yet have a mortgage. Compare options that offer you an offset account. It's also a good idea to spend some time getting your finances ready by paying off debts, increasing your savings and reducing spending on non-essentials. This guide for first home buyers offers some helpful tips on what to consider before you apply.

Written by

Amy Bradney-George

Editor

Amy Bradney-George was the senior writer for credit cards at Finder, and editorial lead for Finder Green. She has over 16 years of editorial experience and has been featured in publications including ABC News, Money Magazine and The Sydney Morning Herald. See full bio

Amy's expertise

Amy has written 565 Finder guides across topics including:

• Credit cards
• Frequent flyer
• Credit score
• BNPL
• Money management
• Sustainability