Value of Using Credit Card Advances To Pay Off Mortgage

SPL

Hi All

Firstly Happy New Year to everyone!!

I have been following the various threads and diaries of everyone on here and we too want to formally join the club!! in fact it is becoming a slight obsession for me at the moment after having looked at all the different calculators and really seen in black and white just how we can reduce the time to pay off our mortgage and how much we would save in the long run by doing this

...and probably a combination of too many calculations , the rush of realising what it means by reducing mortgage and a long first day back at work!!! has left me getting myself totally confused in terms of working out whether what i am doing at the moment is worthwhile re playing the credit cards and i would really appreciate any help from those who can explain maths simply

we currently have money put against our mortgage which has been generated from the cash advances you can get from credit cards at 0% and as a result have reduced the mortgage monthly repayments required by the bank down but keep the amount we pay the same and so therefore paying off the capital. i thought this was a good idea but after looking at some of he calculators cannot work out if it is working as for example, if i put in the calculator the amount we owe now and work out the term to pay it off and the amount of interest we pay and then do the same calculation but add a £1000 to the amount we owe it does show that the interest over the term of the mortgage wil be lower but given that we are now having to pay balance transfer fees , for the life of me, i cannot work out if it is worth doing or not over a 16 year term?

in my head i am sure it is beneficial but cannot find a way to illustrate what the benefit is or otherwise and then we can stop asap !!!

thanks again and good luck to everyone else on the quest this community really is very inspirational !!!

watcherman

I'm no expert, but the way I work it out is this:

Each £1000 I offset, saves me £5/mth in interest. So if I offset £10K, for 12mths, that's 10x5x12=£600. If the fees are 3%, it has cost me £300, so after 6mths I am in profit, and my net saving is £300.

HTH some.

sinizterguy

The effective interest rate you get for the 0% funds would be

2% / Time of 0%

If you are getting a 0% transfer from a card (3% balance transfer fees) for 6 months, then the effective interest is 0.5% per month. Now if you mortgage interest is higher than that, then you are doing better. The longer the interest free period, the better than benefit.

If the same 3% balance transfer fee applied to a period of 12 months, then effectively only 0.25% per month (a little less when compounded). If your mortgage rate is above that, then you are doing better when you use the credit card to pay off the mortgage.

Hope that makes sense.

bunking_off

It may be overcomplicating things a little, but another thing to keep in mind is what the policy is on minimum payment for the particular credit card.

On some cards it can be really low (e.g. on my Sony/Amex I think it's only a fiver a month), hence not material. However, if you consider the situation where you have to payback say 2.5% of the outstanding balance as a minimum payment, and there's a long - e.g. 12 months - 0% period, by time you get to month 12 you'll have paid off 25% of the amount you'll have BT'd. It takes a spreadsheet to work it out, but that effectively means the average amount you're reducing your mortgage by is only 87% of the amount you originally BT (but obviously the BT fee applies to the amount you initially transfer).

It can still be worthwhile, though.

It's also worth checking out "life of balance" transfer cards as well as 0%, but on these the minimum repayment (and time when you expect to pay off your mortgage) become particularly important when looking at the BT fee.

SPL

thanks ever so much for your replies and helping to work things out in my head .... still not so sure that i am quite there with working out what the benefit is that i am getting but at least it looks like there is some logic and that it is worth doing (though i will start to have a look about how much i have to pay as the minimum)

i was also thinking that there was further benefit in keeping the repayments at the same level as though i had not put any lump sum down this I guessed would be paying towards the capital amount too??