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  • Profile photo of BjoernBjoern
    Participant
    @suoksa
    Join Date: 2015
    Post Count: 23

    Hi, we’re just about to buy our first investment property and were thinking what ways there are to use credit cards to reduce the interest. Does anybody do this in any way?

    I was thinking of making use of the 12/18/24 month 0% balance transfers many credit cards offer:
    1.) Pay the deposit with a credit card
    2.) In order to avoid the interest on cash advances, you immediately move the balance on to another credit card using this 0% balance transfer
    3.) At the end of the free balance transfer period move it on to another credit card again
    4.) Repeat step 3
    Meanwhile you can put the money you had saved for the deposit into the offset account and save on interest.

    Would that system work (given you have the discipline)? Or is it bad for your credit? Or are there other/better ways to use credit cards?

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,010

    Hi Bjoern

    Try finding a Real Estate agent who will take a Credit card payment to his Trust Account.

    Isn’t going to happen.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of StoreybuilderStoreybuilder
    Participant
    @storeybuilder
    Join Date: 2016
    Post Count: 45

    Perhaps you mean with cash advance.

    There’s a fundamental you’re probably missing.

    http://m.yourmortgage.com.au/article/how-to-get-your-credit-card-debt-under-control-79362.aspx

    You can’t keep borrowing on credit and get a loan, eventually the banks will refuse.

    Profile photo of BjoernBjoern
    Participant
    @suoksa
    Join Date: 2015
    Post Count: 23

    Thanks Richard, but it would be possible to pay using normal transfer / bpay from the credit card account. Then it is like a cash advance and the regular, huge credit card interest rate applies. But that can be avoided by transferring the balance to another credit card on the same day and have this money interest free for the 0% balance transfer period. Doesn’t this work?

    Profile photo of BjoernBjoern
    Participant
    @suoksa
    Join Date: 2015
    Post Count: 23

    Thanks, storybuilder. Makes sense. So you can’t do that forever, but maybe once or twice? Would still save a lot of money.

    Profile photo of StoreybuilderStoreybuilder
    Participant
    @storeybuilder
    Join Date: 2016
    Post Count: 45

    It would depend on your financial situation. Use a borrowing calculator with the limit of cards you intend. Let’s say you want $40,000. That’s probably $150,000 less you can borrow. Then you’d need to get a transfer card, and their lending criteria may be that they don’t like you having $40,000 limit already, and now you’d need another $40,000. You may get stuck with $40,000 high interest and no balance transfer available.

    Also, if less than 80% LVR you may need to show genuine savings, which if you’re using cards and not savings to start its may be difficult. I understand your thinking, but a lot of the time the straight forward approach is the best.

    Profile photo of BjoernBjoern
    Participant
    @suoksa
    Join Date: 2015
    Post Count: 23

    Yes, I wouldn’t plan to finance the deposit using this approach. We got our loan approval with our genuine savings already. I was just thinking of using these savings to put into the offset account instead in order to reduce the interest payment rather than for the down payment. So when there are issues with that approach you can still use that money to repay the credit card debt. But I see you will substantially damage your borrowing ability.

    Is there any other way to make use of credit cards with regards to property investment? I went to a property seminar a few months ago and they talked a lot about how important credit cards are, to finance renovations and down payments, etc. But somehow I keep hearing that it actually doesn’t work. So, really wondering if they were just plain wrong or if there is an important role of credit cards in the property investment game after all.

    Profile photo of StoreybuilderStoreybuilder
    Participant
    @storeybuilder
    Join Date: 2016
    Post Count: 45

    Al this and more…

    http://www.thepropertycouch.com.au/ep-53-money-smarts-system/

    I have looked into it too, even if I could get an interest free $50,000 using your strategy that’s $100,000 of cards, and I couldn’t borrow for another house and in an ING saver I could earn $1500 a year in interest. I don’t think that’s worth it. The damage done wouldn’t be worth it. The best method I know is use the credit card with an offset on your PPOR first and then against any other non dudctible loan, then against the highest interest rated mortgage for an investment. That’ll save you megabucks, but that’s in the podcast.

    Good luck.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Yes it is possible.

    But the negatives are:

    – hurts serviceability by having a number of credit cards
    – if you forget to pay on time or accidently pay less you will start paying penalty interest
    – you will be paying PI and not IO
    – tax deductibility issues as easy to accidently lose deductibility of interest.
    – if you use the card you will be incurring interest

    I did this many years ago but paying $20k for a car using a cash advance (just went into bank and took out cash from CC). Then immediately did a 12 month balance transfer at 0% interest. I had credit cards with different banks so had to manually pay them by transferring money. After about 4 months I got a bit slack and forgot to pay on time. I copped a penalty charge and then large interest from then on – so I just paid it out.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Profile photo of Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338

    Could be done but as mentioned things can go wrong.

    Extra hits on your file and perhaps questions (possibly not asked to you) may arise causing the lender to decline your application.

    Also need to weigh up the time and effort expended v interest saved!

    Could spend your time other than managing the credit cards working overtime at your job for example therefore potentially increasing serviceability.

    • This reply was modified 3 years, 2 months ago by Profile photo of Colin Rice Colin Rice.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
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    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,366

    Hi Bjoern,

    Or are there other/better ways to use credit cards?

    There was a book out about 15 years ago that talked of some interesting ways of using a credit card. Back then there was no Offset Accounts, but there was some kind of loan that worked in a similar way. I will talk of using an Offset Account as it makes more sense today.

    The premise was that, since interest is calculated DAILY but added monthly, with CAREFUL use of a credit card, the homebuyer could do some serious damage to a mortgage. In our case, put some serious extra cash into an Offset Account.

    The skeleton of the plan was to put EVERYTHING into the Offset Account as it arrives – this includes salary, lotto winnings(?), a birthday gift of cash, a Tax Return cheque, etc.
    1. Shop weekly and all purchases go on the credit card.
    2. If you eat out with friends and cash is pooled on the table, collect the cash and pay from your credit card, but Deposit the cash into your Offset Account next day.
    3. If your Mum has saved up for a new Lounge suite, and is about to pay cash, offer to pay it on your credit card and take the cash and… (you guessed it) pop it into the Offset.
    4. Think of other ways you can take cash in return for using your card – e.g. maybe shop with Mum and Dad, pay for THEIR shopping on your card, and take their cash.

    It sounds a bit strange, but if your parents know they are helping you by doing this, wouldn’t they want to? In fact, maybe THEY would like to contribute some savings of their own – offer them a BETTER Interest Rate than what they are getting in their savings account.

    The MAIN thing is that your credit card is PAID IN FULL on the due date (no slip-ups mind…) from the Offset account. In that way, you pay no interest. Don’t draw cash from that credit card though – pay everything on the card – if you need cash, draw it from the Offset.

    So what do the savings look like? Let’s say you earn $5000 a month after Tax. And maybe you need $4000 a month to live (food, petrol, clothing, mortgage, etc). You need a spreadsheet to work it out, but you might have a few days with $5000 in your Offset before you need to take some out. If your Mortgage Interest Rate is 5%, then $5000 earns you about $20 a month.

    OK, not big news right off – but over time, as your Offset Account grows (by at least $1000 a month – and, did Mum buy a new Lounge Suite, or did she offer to drop $20k in your account?) you could find yourself with $20k or $50k in the Offset. The more that stays in the account DAILY, the better off you are. And with $20k in there full time, that is around $1000 a year.

    And now, though it shouldn’t make any difference, (because you ALWAYS pay off the credit card as it falls due, so no Interest is paid) WHAT now can you do with another 0% credit card? Will it allow you to keep your IP expenses separate from your daily living expenses? Can RENT be added to an Offset account but all bills for the IP paid from the credit card? What will THAT allow you to save? Given that rent is paid weekly, but Rates are paid quarterly, there is a serious amount that accumulates before you need to pay Rates. So all good…..

    Bjoern, I’m sorry I can’t think of the actual name of the book, and I don’t even know if it is still available to purchase. The name was something like “How to pay off your home loan earlier” (or similar to that). Hope that helps…..

    Benny

    Profile photo of Tony FlemingTony Fleming
    Participant
    @the-dark-knight
    Join Date: 2008
    Post Count: 396

    Benny has hit the nail on the head. I literally can’t remember the last time I had cash in my wallet. It’s all sitting in offsets

    Tony Fleming | Triumphant Property Group
    http://www.triumphantpropertygroup.com.au
    Email Me | Phone Me

    NSW Buyer's Agent specialising in Western Sydney-Blue Mountains-Orange-Albury

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Benny, I have that book.
    It is called “own your Home year’s sooner without making extra repayments” by Gill and Therry

    It is the best book that I have ever read on learning about the compounding of interest.

    BUT the method described involves using LOCs and anyone implementing the ideas using a LOC would create a tax nightmare.

    Fortunately the same ideas can be applied to using an offset account and thereby avoiding the tax issues.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,366

    Thanks Terryw,
    I Googled the authors’ names and up came the book on Ebay. Looks just like I remember it. And thanks too, for the warning about LOC’s.

    http://www.ebay.com.au/itm/H-GILL-S-THERRY-HOW-TO-OWN-YOUR-HOME-YEARS-SOONER-/371417618753

    Even today I think it is worth the few bucks one might pay to get it. I am sure they had many other thought-provoking ideas in the book itself – I just posted those I could recall.

    Benny

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    thats it Benny

    I lent my one to a client year’s ago and he lost it so I only recently bought another one from ebay!

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of BjoernBjoern
    Participant
    @suoksa
    Join Date: 2015
    Post Count: 23

    Thanks guys, will definitely have a look at the book. Talking about offset accounts, brings me to another question, but maybe it’s better to post this in a separate thread since it’s a different topic. I am just about to buy my first property and decided to fix the whole loan, i.e. not having any part of it on a variable rate with an offset account. In short the reason was that the gap between fixed and variable was too large and the gap between variable and my savings account too little to justify the extra interest paid on the component of the loan that pays the higher variable rate or I would have to put that much money into the offset account to break even, that it is rather unrealistic.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Bjoern I would never advise my clients to do that. What sort of rates did you fix at? Variable are generally lower than fixed atm.
    What if you want to or need to move lenders?

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of BjoernBjoern
    Participant
    @suoksa
    Join Date: 2015
    Post Count: 23

    Hi Terry, I’ve posted about this here:
    https://www.propertyinvesting.com/topic/5028580-is-an-offset-account-worth-it/

    If the variable is indeed lower than fixed, then my whole calculation doesn’t make sense anymore. But our mortgage broker suggested Newcastle Permanent and their variable is 4.17% and 2-year-fixed is 3.74%

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