Hi,
I always read about people using their credit card to pay for living expenses throughout the month and putting all wages into an offset account to save on interest. I have made a few calculations based on a simple example and wanted to make sure my thinking was right.
Example
Mr Smith wants to know how much interest he would save per month on his home loan if he put all of his wages into his offset account and used his credit card to pay for living expenses. The credit card is paid on the due date (ie no interest paid).
Assumptions
Income: $5000 per month net of tax (he gets paid monthly at the beginning of the month)
Living Expenses = Income (ie does not save)
Credit Card: 30 days interest free, due at the end of the month.
Interest rate on mortgage: 5% pa
Mortgage repayment: Interest only
Month 1
Day 1: Account balance $5,000
Day 30: Account balance $5,000, minus credit card payment ($5,000) = $0
The interest saved by having money in the offset for the month is [$5000 x 5%]/12 = $20.83
Month 2
Mr Smith now has surplus funds of $20.83 as he saved on interest from previous loan repayment.
Day 1: Account balance $5,000 + $20.83 = $5020.83
Day 30: Account balance $5,020.83, minus credit card payment ($5,000) = $20.83
The interest saved is [$5,020.83 x 5%]/12 = $20.92
Month 3
Day 1: Account balance $5,000 + 20.83 + 20.92 = $5041.75
??????.And so on.
I have done a quick excel spreadsheet and after 12 months of this the interest saved over the year is $234.
I just wanted to make sure my thought process was correct. Saving on interest is always good but it is a lot less than what I thought it would be by using this method.
Your thoughts on this are appreciated.
I always read about people using their credit card to pay for living expenses throughout the month and putting all wages into an offset account to save on interest. I have made a few calculations based on a simple example and wanted to make sure my thinking was right.
Example
Mr Smith wants to know how much interest he would save per month on his home loan if he put all of his wages into his offset account and used his credit card to pay for living expenses. The credit card is paid on the due date (ie no interest paid).
Assumptions
Income: $5000 per month net of tax (he gets paid monthly at the beginning of the month)
Living Expenses = Income (ie does not save)
Credit Card: 30 days interest free, due at the end of the month.
Interest rate on mortgage: 5% pa
Mortgage repayment: Interest only
Month 1
Day 1: Account balance $5,000
Day 30: Account balance $5,000, minus credit card payment ($5,000) = $0
The interest saved by having money in the offset for the month is [$5000 x 5%]/12 = $20.83
Month 2
Mr Smith now has surplus funds of $20.83 as he saved on interest from previous loan repayment.
Day 1: Account balance $5,000 + $20.83 = $5020.83
Day 30: Account balance $5,020.83, minus credit card payment ($5,000) = $20.83
The interest saved is [$5,020.83 x 5%]/12 = $20.92
Month 3
Day 1: Account balance $5,000 + 20.83 + 20.92 = $5041.75
??????.And so on.
I have done a quick excel spreadsheet and after 12 months of this the interest saved over the year is $234.
I just wanted to make sure my thought process was correct. Saving on interest is always good but it is a lot less than what I thought it would be by using this method.
Your thoughts on this are appreciated.