Credit Card Reduces Mortgage?

I received an e-mail a little while ago asking if using a Credit Card to pay for all purchases would really help reduce a mortgage over a long period of time or not.  I figured that this is probably a question that thousands of people have wondered about at some time or other so thought it worth replying to publicly.

Here is the e-mail I was sent.

David

We live on our credit card and it gets paid out in full each month from our mortgage account which is like a line of credit account.  I would now prefer to pay the credit card as I use it just to be able to manage it more fully, how much of an impact does having this couple of thousand sit against the mortgage before it goes to pay the card off make?  If it doesn't make too much of an impact then I feel it safer to not even use it as a 'credit' card.  What are your thoughts?

Regards
Mavis

Here is my reply.

Mavis,

I have been asked this question quite a few times in the past and can say that it does help speed up the mortgage repayment a little bit but nowhere near the amount most people have been led to believe. I have met people who honestly believe it will halve the time it takes to repay a mortgage but this is garbage! It will reduce it by maybe one year, possibly less and quite likely stretch it out longer because of how easy it is to spend more than usual each month because Credit Cards are like magic money.

If you are wondering how simply putting everything on a Credit Card during the month could have any effect at all on the time it takes to pay off your mortgage then maybe I need to explain just a little bit more.

If you deposit your income into a Line of Credit type mortgage and don’t have to draw on that money until the end of each month then the daily balances of that mortgage will reduce quite considerably during the course of the month before jumping back up to a normal position again after the Credit Card is paid out in full.

The same would apply to people using a Mortgage Offset Account in the place of a Line of Credit. Having all of your income sitting in savings, offsetting (reducing) the daily interest charged to your mortgage while your expenses are charged up ‘interest free’ to your Credit Card until the end of each month will definitely have a positive effect on the time it takes to reduce your debt. The question is, how much time will it save you?

The answer is easy to calculate if you have a loan calculator.

What is actually happening in the above scenario is this. Your mortgage is reduced by one month's spending for the life of the loan. The money comes from an interest free Credit Card so you have effectively managed to cancel out the interest you otherwise would have been paying on one months worth of spending. You have taken the debt off your mortgage and placed it into an interest free loan. 

To find out how much you will save is easy. Calculate the loan based on the full amount and then recalculate it based on a loan reduced by a few thousand dollars (the amount you estimate you spend in a month).

Both 'Simply Budgets Personal Edition' and 'Simply Budgets 1st Steps' have loan calculators built in so you can do calculations like this.

Here is an example. 

A $250,000 mortgage paid off over 25 years at 8.5% interest has a repayment of $2013 a month.

Making the same repayments on a $248,000 mortgage at 8.5% interest will pay the loan out in 291 months which is 24yrs and 3 months.

9 repayments saved will obviously be approx $18,000 less you will pay off the loan. Better in your pocket than the banks but not the impact a lot of people would have expected.

I hope this helps. 

Regards
David Wright

Some other comments that apply to this issue:-

The answer to the e-mail is quite clear…. but then again there are all the brownie points you get for using your Credit Card all the time. What can you do with them? If you can convert them into cash and pay it off your mortgage then maybe you will save a lot more!