Aussie Firebug

Financial Independence Retire Early

SHOUT-OUT: This post was inspired by reddit user ‘CallMeSobriquet’ who wrote a great piece on /r/fiaustralia

 

If you have a home loan in Australia at the moment, odds are your interest rate is sitting anywhere between 4-6%.

As I’ve already mentioned before in how much does it really cost to buy a house, interest repayments for a loan over 25+ years can sometimes cost more than the actual house.

Ain’t that some shit?

 

There are a few ways you can lower the costs of interest repayments:

  • Refinance to another bank at the lower interest rate
  • Pay off the loan quicker
  • Dump money into an offset account

What’s an offset account? Basically an account that reduces the principal that the banks calculate the interest repayments on.

Say you have a loan for $100K and the interest rate was 7%

You would have to pay $7K in interest every year.

If you had the same loan and interest rate but also had an offset account with $20K sitting in it, the banks would calculate your interest repayments in the following way:

Loan amount ($100K) minus offset ($20K) * 7% =  $5,600

You essentially saved $1,400 bucks of interest repayments by just having your spare cash ($20K) sitting in the offset account.

Mr_Burns_Excellent

 

Enter Credit Card Tarting/Stoozing

Some credit cards in Australia have the ability to transfer the balance (usually up to 80% of the credit limit) to another banking institution without a fee.

This is relatively unique to Australia and whilst I have read some other country being able to do it, it seems like most banks overseas won’t allow you to.

Credit card tarting/credit card stoozing is where you basically use a credit limit that has a 0% interest free period and dump that amount into your offset account to lower your interest repayments on your home loan.

Here’s a break down on how it works:

  • Open a low or zero fee credit card with a financial institution different to the main bank where you hold your home mortgage loan and mortgage offset account. You also need an existing credit card with your main bank.
  • When applying, ask for the largest credit limit they’ll give you.
  • Immediately balance transfer the maximum amount to your CC in your main bank, and then internally transfer this to your mortgage offset account.
  • Set up an automatic monthly payment from your mortgage offset account to the new credit card for the minimum repayment amount the card requires (usually 2% of the current balance).
  • You’ve now effectively got yourself a fee-free one-year loan at 0% interest, which you are using to offset (tax free) your mortgage!!!
  • One month before the interest-free period on the balance transfer expires, transfer the entire amount back from your mortgage offset account to the new credit card, and either (a) close the CC account, or (b) ring the bank and ask them to give you a new 0% balance transfer on the same card.
  • Wash, rinse, repeat.

 

How Much Could This Actually Save You?

Imagine that you and your partner both applied for CC’s with a max credit limit of $50K on each.

Following the strategy you both transfer 80% of the combined balance ($80K) into the offset account that is offsetting your home loan of $400K that currently has an interest rate of 7%.

Without the offset you would be paying $28K in interest every year

With the extra $80K offsetting your loan you would now be paying $22.4K in interest!!!

That’s $5,400 dollars every year in interest repayments saved without paying a cent!

And who said there’s no such thing as a free lunch?

Credit_Card_Tarting_Homer

Things To Be Aware Of

  • This strategy works best if you have a home loan. You could transfer the money into a high savings account and make money instead of saving it on interest repayments. But the interest rate on a HISA is lower than a home loan and you would have to pay tax on money earn’t so it’s not as effective.
  • Need to be earning a high income and have good credit rating. The bigger the limit is on your CC the better. And to get a big limit you usually have to be a high income earner with little debt already.
  • This may affect your credit rating! This is a big one. Applying for too many CC’s can negatively affect your credit rating which could affect your ability to get credit in the future such as home loans.
  • MUST STAY ON TOP OF THE GAME! If you stuff something up like not reading the fine print on balance transfers or missing your interest only period this strategy can very quickly cost you more than it saves you. You must  be on top of everything. Not that hard to do but the banks are aware of credit tarting and the only reason they allow it is because they have statistical data that says that even though this is possible, odds are that the majority of people won’t have the discipline to stick to the plan and will end up paying more in fees than they save.
    Have you ever wondered why CC’s offer big sign up bonuses for free even if you cancel the card straight away? What’s the catch right? There is no catch, they just have the data that verifies that the majority of people are not financially savvy enough to stick to their budgets and they will most likely blow out their spending of their CC and incur CC interest fees which is where the banks clean up! They would much rather be charging you 22% (CC rate) interest than 7% (home loan rate) and are willing to give out freebies (CC sign up bonuses) in order to suck you into the trap.

Conclusion

Credit card tarting can be an easy way to ‘beat the system’ and knock thousands off your interest repayments, but to the undisciplined home owner who is not prepared to strictly stick by the plan it can end up costing you more than what it’s worth…
Photo credit: Sean MacEntee via Foter.com / CC BY

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