Line of credit loans

One decent strategy people adopt which helps them reduce interest payments on their mortgage is to make effective use of their credit card and their mortgage offset account. If you have all of your money paid into the offset account, and do all of your transactions via a credit card, you take advantage of the interest free period on your credit card to effectively reduce your mortgage principal. The money you need to pay the credit card is left in the offset account until the credit bill is due, then the credit card is paid in full. The result is in effect a reduction in the principal by the amount you spend each month.

If your monthly spending is $2,000 and this full amount goes through your credit card, you are keeping $2,000 in the offset account every month, and thus paying less interest. This $2,000 won't compound over time and the end result is a few thousand in savings over the length of the loan, and perhaps a few years cut off as well.

Wild claims made that line of credit approaches can cut a 30 year loan to 7 are exaggerated, the calculations that show such reductions are a bit twisted, the drastic reduction in period advertised tends to come from making extra payments, since the provided calculations usually demonstrate a budget significantly less than income, the extra money stacking up in your offset account does reduce the mortgage payments as advertised, but credit is not due to the credit card "trick".

Avoiding mortgage insurance

The amount lenders charge for mortgage insurance varies, as does the requirement that mortgage insurance be paid. Mortgage insurance is an extra fee levied by some lenders that is a once-off expense, usually added to the principal. A typical figure might be a requirement that 0.7% of the principal be paid if the amount borrowed exceeds 80% of the value of the home. This means for a $150,000 home, where the buyers have saved every cent they can, who can only afford a 16% deposit, 0.7% of $126,000 will need to be paid as mortgage insurance. This extra expense, $882 is added to the loan amount.

If they were able to come up with the extra $4,000 the bank would waive the insurance fee. One method people occasionally use is to borrow the extra $4,000 from elsewhere, including placing the money on a credit card. If the debt is paid off within a year, and the interest rate on the extra loan is 16%, the amount of interest would be $689.08, if the compounding period is monthly. This seems like a pretty minimal saving or course, but run the numbers for six months instead (=$330), paying a higher rate of interest on a small amount of the loan has saved the borrower a few hundred dollars on mortgage insurance, as well as saving a year's worth of interest on the $882, which would be $64. So the total saving by using the credit card to raise a few thousand dollars extra for a bigger deposit would in fact be about $250. The technique only works if you can pay off the amount very quickly.