Using credit card lump sum to save int

GMA732

Hi what’s views/opinions on using a credit card that transfers money into your current account and then using it to pay a lump of your mortgage? Even with the transfer fee it appears to save such a lot off the mortgage. Am I missing something? 

i.e 6k on credit card with transfer fee of £179, repaid over 2/3 years interest free. Mortgage interest saved nearly £1300  and 9 years off mortgage. Is there a catch of doing this apart from the risk of not affording the credit card payments? 

Thanks

julicorn

The fair way to calculate this would be to compare how much the initial lump sum would save you over the course of 2/3 years, compared to paying off that £6k gradually over the same time span (which is essentially what you'd be doing with paying off that CC). It looks to me like you are comparing what you are saving over the rest of your mortgage term, rather than during those 2/3 years. 

GMA732

Thank you! I knew I wasn’t understanding it fully. Without sounding really stupid, how would I do this, as when I use the overpayment calculator I can see I would reduce my mortgage term and interest, but not sure how I would calculate what you mean? Do you mean just look at what my monthly interest reduces by?

(mortgage is fixed rate 1.94% 5 years)

julicorn

At 1.94%, it looks to me like you would be saving around £116 in interest by paying £6,000 at the start of that 2-year period, compared to just overpaying £250 per month (which would add up to £6,000 over the course of the 2 years) - so that difference wouldn't cover your transfer fee, and would leave you worse off. I have to admit that was a bit of a back-of-the-envelope calculation though, so might be worth someone else having a look at those numbers too. I don't 100% trust my maths skills on a Saturday morning!

Another way to get an approximation from the overpayment calculator would be to compare the two scenarios:
1) one-off overpayment of £6,000 - what's your remaining balance after 2 years?
2) regular monthly overpayment of £250 - what's your remaining balance after 2 years? 
Does scenario 1 leave you at least £179 better off than scenario 2? If not, it's not worth it, because of that transfer fee. 
[Caveat: I've heard people mention that the MSE mortgage overpayment calculator isn't 100% accurate either, but it should at least give you an idea]. 

julicorn

To play devil's advocate: another alternative would be to save that £250 in a savings account each month over the course of the 2 years rather than pay it off your interest free credit card (and then just pay off that £6k lump sum at the end of the interest free period). At 1% interest rate, you'd make £60 on your regular payment of £250 over the course of 2 years, so would also not break even with that initial transfer fee. At a higher savings interest rate, your plan could work out, but wouldn't save you lots of money either. 

Edited to add: The savings rate would need to be much higher than the mortgage interest rate for this to work out better if I'm not mistaken.

GMA732

Amazingly helpful, thank you 

julicorn

No worries. I think it's one of those things (pretty much the same as regular 'stoozing') that would work out really well if you could get a really good interest rate on savings, or maybe if your mortgage interest was much higher than it is.