A tight budget might make you think about alternate ways to help shoulder the mortgage repayments. Or, you might want to earn rewards points, since your mortgage is the biggest expense you have. So, should you or can you use a credit card towards a mortgage or deposit?
Before we get into it, let’s clarify that funding a home deposit with a credit card is generally frowned upon. It’ll likely be treated as a cash advance, which will cost you fees, charges and often a higher rate of interest than the card’s standard rate.
Lenders consider credit card-funded deposits as a high-risk transaction since you’re essentially adding more debt to your credit profile. And, you’ll be juggling a home loan as well as a sizeable credit card repayment with interest.
Mortgages are a little different and the answer is yes, you can use a credit card for your repayments. However, it’s a strategy that must be considered wisely and for your own benefit, like earning rewards points – not to keep the wolf from your door when you’re struggling to meet repayments.
How to earn points on your home loan
If your strategy is earning rewards points, you can consider using a rewards card with a low annual fee to keep costs down and the value of your points higher.
Using a credit card can help you meet minimum spending criteria that unlock bonus points, and builds your credit score as long as you’re keeping on top of repayments.
Just remember to compare the points value to the extra costs involved in using a credit card. For instance, let’s say your card earns 1 point per $1 on a $3,700 monthly loan repayment. You pay 1.8% in fees for a third-party service to make the payment with your card, which comes to $68. You’ll need to see what 3,700 points buys from the card’s program and if the redemption value is more than $68.
The downsides to using a credit card for your home loan
If you’re using the card because you’re in financial straits, it’s important to know that there are several potential problems. Let’s take a look.
- The payment is treated as a cash advance. Most credit card providers won’t let you pay your mortgage directly on your card, but the rare ones that do will treat it as a cash advance (a direct cash withdrawal). Cash advances have withdrawal fees per transaction that can be as high as 4%. Interest rates up to 24% apply to cash advances, and any interest-free periods are voided.
- You’ll need to use a third-party app. It’s more likely you’ll need to use a middleman service that processes bill payments on your behalf. These services charge fees as a percentage of the transaction amount and some even have monthly fees on top, making your loan costs higher.
- You’ll be charged a much higher interest rate. If you don’t pay your credit card off in full each month, or you don’t have interest-free periods on your card, you’ll be charged interest. The average credit card interest rate is 18%, which is around three times the amount of current home loan rates. Once you start falling behind, it can be more difficult to get on top of your debt.
- You risk hurting your credit score. Defaults on credit card payments stay on your credit report for two years, making it difficult to access other lines of credit down the track, such as a car loan.
Finally, use credit cards for gain and ask for help instead
Repossession of a home is rare since most lenders would rather help you with financial assistance than foreclose on you. So, before you fall behind on your home loan, you can contact your lender or speak to Soho Home Loans to ask for financial hardship help. Between you, your lender and a mortgage broker, you can consider:
- Refinancing your home loan
- Organising temporarily reduced home loan payments
- Taking a total break from repayments for a period of time (often around three months)
Using your credit card should be a last resort, since it’s just a means of moving debt from one place to another.
If you have used your credit card for your mortgage or deposit, you can consider moving the credit card balance to a card with a balance transfer, which means you won’t pay interest for a promotional period. Some cards have balance transfer offers of up to 36 months, giving you time to manage your repayments and get on top of your debt.
Just remember your credit card is best used as part of a home loan strategy, like offsetting your home loan to pay it off faster or earning rewards points, rather than as a quick fix for mortgage pressures.
