Hello Nicole, I managed to refinance my mortgage at an interest rate of 1.85% (comparison rate of 1.88%). Looking back, I realize that I should have chosen another lender with a lower comparison rate (interest and comparison rate of 1.87%) who also assured me that it was an authorized depository institution. Now I’m looking at the credit cards to put all spend on the card and keep my earnings in a mortgage clearing account. However, I don’t know what the best strategy is. I found a credit card with a 110 day interest free period, but no rewards feature. Would it be better to have a rewards points card with 55 days interest free (pretty high fees though)? I plan to fly to Europe once a year, but if I can keep more than three months of salary in my compensation account, I think it would be better. What are your thoughts? Esther
You are using what I call a “compensation on steroids” strategy. This involves putting all of your paycheck into a mortgage offset account linked to your home loan account, reducing your loan balance by the amount of your deposit.
Saving interest is the same as paying the money outright on a mortgage, but the move is safer, provided the lender is an authorized deposit-taking institution, and therefore your money is covered by the deposit guarantee of the federal government and guarantees that you will retain access to it.
You then live off a credit card and transfer money from the clearing account to pay the full balance on the card only when the interest-free period is about to expire. This way, you use the bank’s interest-free card money to save you a ton of interest on the home loan.
You need to be disciplined with your spending and repayments, and make sure you never carry over a credit card balance from month to month and incur interest.
Esther, you don’t say how much you borrowed for your home loan, but you may have made the right refinancing decision.
While the comparison rate is useful as a comparable observation tool, unlike the aggregate rate, it has some shortcomings. It was created to capture the initial and ongoing costs on a mortgage, which have the potential to significantly increase the effective interest rate.
Thus, an identical comparison and overall rate implies that there are no costs.
However, the first flaw is that it is calculated over the possible life of a loan of 25 years, which would be irrelevant if you intended to refinance every three years – as you should to trap the latest and cheapest mortgage interest rate offers.