This article has been written to help explain the principal behind Mortgage Minimisation.

From time to time you will be approached by mortgage brokers or introducers who claim that you can save large amounts on your mortgage, usually impressive amounts such as $100,000. They usually use catch phrases such as "We will tell you what your bank doesn't want you to know" and "beat the banks" He will then show you exactly how you can achieve these savings by living off your credit card using the interest free 55 day period, and crediting your whole salary directly into your loan or line of credit. Once a month you will redraw or sweep from your loan and repay the credit card debt in full so that no interest cost is incurred on the card.

This process is referred to as Mortgage Minimisation. By paying every spare dollar off your loan, and by using your credit cards interest free terms, you will pay your loan off sooner and save yourself a lot of money.

To set this up they will refinance your existing loan on a line of credit, and tell you that the savings on your loan will more than cover the expense of refinancing. Actually if you follow the plan and carefully budget your spending, it will work. However it is difficult not to deviate from a strict budget over a long period of time, as things can happen unexpectedly.

There is no doubt that the strategy is useful, but I have often seen examples of people who do not have the required discipline, and they end up with an overdrawn credit card, and a line of credit drawn up to the limit. When you consider that it usually costs from $1000 to $3000 to set this up, these people have simply gone backwards and the only one who has benefited is the mortgage broker who has earned a commission.

Also the strategy relies on you staying in your house until it is paid off to achieve the savings, but the chances are you may move and sell your home within a few years. Then the expense of refinancing is completely wasted.

Before you do anything that costs you money, consider that all they are really saying is that if you increase your loan repayments then you will shorten the term of your loan, and in doing that you will save a significant amount of interest. Use our free calculator and try shortening your loan term a little. For example if you had a loan of $200,000 on a 30 year term at 7.07%, then monthly repayments would be $1340. If you increased payments to $1559 (about $50 extra per week) you would pay the loan off 10 years earlier saving $108,244. If you paid fortnightly or weekly, then the savings would be much greater.

Where I am leading to is, if you pay every spare dollar off your loan, and make your payment weekly or fortnightly, then you will save the cost of refinancing, and also make a similar level of savings in interest that the other method promises. You can still live off your credit card, and pay it out each month by using the redraw facility that your loan probably already has.

I don't want to be negative about this. The strategy does work so I encourage you to pay as much as possible off your loan. Then if you run into financial difficulty you can still get back your extra payments by using your redraw facility. If you don't have a redraw facility, contact your existing lender or broker. Most banks and lenders have a switch ability, where for a modest fee you can switch to another loan type with a redraw. A Line of Credit is also fine with me, as are 100% offset accounts, but you may find that you are paying extra in interest for facilities that you really don't need. Loans are like cars, the more options you take, the more they cost. Unless you have a particular need for a "Line of Credit" or an "Offset Account" I would suggest that you consider basic loans with a fee free redraw facility.

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