Hi Nicole, We have just dropped our mortgage and banking package – and the $300 annual fee – and opted for a home loan without all the bells and whistles. Now, we are getting a ludicrous $250 annual credit card fee! We pay out the card balance in full monthly. I think I can change to a no-points/less-fees card. I would love your thoughts. Andrea.
Boiled down, your question is basically: what is the best banking strategy for tighter times?
Credit cards often come with high annual fees.Credit:Fotolia/TNS
It is certainly not always the packaged home loan product of which you speak.
Yes, an all-in-one banking package may provide a discount off the premium interest rate on a mortgage, perhaps as much as 0.8 percentage points. However, the annual fee is usually steep, and you might not need some of the products (such as a credit card or savings account) included.
Going with an all-in-one package may also tie you to some dud products.
Let’s start with the credit card. A $250 annual fee is a lot to pay for presumably a rewards credit card.
Redeeming points now is also problematic/pricey, as airlines struggle to meet new demand from paying customers after the pandemic-induced shutdown.
A spokesperson from website Mozo tells me there are 21 credit cards that charge no annual fee, as well as offer 55 days interest-free. Some of these providers are well-known names, including American Express, Bank Australia, Bank First, BankVic, Bankwest, Citi, Coles, Credit Union SA, HSBC, Hume Bank, ME, Qbank, St George, Teachers Mutual and Virgin Money.
You do not need to care about their respective interest rates, given that you clear the balance in full each month.
Now for your home loan… and a potential strategy, using your new credit card, to pay it off sooner.
You say you have opted for a new mortgage without bells and whistles. That often means it is a basic variable-interest rate product that does not come with a mortgage offset account. A home loan that forms part of a bank-packaged product would usually carry one as an option.
An offset account is a debt-busting secret weapon. It allows you to use every dollar that passes through your hands twice: Both for its intended purpose – holidays, school fees, and any emergency cash stash – and also to reduce your loan interest.
For any extra cash you can afford to put into your mortgage, an offset account is also the safest and smartest place to house it.
It is safest because you retain full access to the money in case of emergency.
Should you instead pay excess directly into the loan, you would be relying on your lender to allow a redraw release. It is a lender’s right to prevent this, if you get into financial trouble.
Some lenders have also re-calculated loan balances, controversially, and absorbed extra payments into the loan balance itself, effectively locking up redraws.
If you instead make extra repayments into an offset account, you can also withdraw them for a potential deposit on your next home.
What’s more, your loan balance never technically falls more than it would if you made no extra repayments – only the loan interest reduces. This means you preserve potential future tax deductions for interest, should you decide to turn your existing house into an investment property after you move to your new home.
Paying money into a mortgage offset account should carry identical benefits as a direct deposit into your home loan, but always check first.
So, I would investigate a mortgage with an offset account backed by an authorised deposit-taking institution.
Some cheap-and-cheerful loans may come with offset accounts, but these could merely be disguised redraw facilities because the lender is not permitted by the regulator to offer deposits.
You can obtain a variable-rate mortgage with a real offset account at an interest rate as low as 3.09 per cent, compared with the average big-four bank discounted packaged rate of 4.5 per cent.
Opting for such a home loan product – and incorporating a smart credit-card strategy by clearing the balance each month – takes your savings to the next level.
Have your salary paid into the offset account, too, then leave it there for an entire month, or the interest-free period on your card.
Live off the card for the period and only shift money from the offset account to pay off the card balance when the bill is due. That way, you use the bank’s money to save loan interest… and become debt-free years early.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.
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