Velocity Banking: Borrowing on your credit card to pay your mortgage

Status
Not open for further replies.

Lightbulb

Registered User
Messages
4
Does anyone know about the theory behind 'Velocity banking' and whether it could work in relation to an Irish mortgage? From what I've read this strategy uses short term credit (e.g. Credit card balance) to make lump sum payments off a mortgage with the aim of reducing the term or overall loan interest paid. This works because the structure of mortgage repayments is that in the earlier repayments you pay off a smaller principal (and larger amounts of loan interest) than later repayments.

Maybe this only works in US mortgage markets?
 

RedOnion

Frequent Poster
Messages
3,132
Never heard the term before, but a quick Google suggests the people who use the term don't have a clue what they're talking about!
Suggesting credit card debt is cheaper than mortgage?!
 

Lightbulb

Registered User
Messages
4
There are YouTube videos on 'velocity banking', one with a couple of million hits...

General concept being is that there is a saving on interest repayments if you put short term credit card borrowing as overpayment into mortgage then pay back credit card debt in an efficient manner
 

Brendan Burgess

Founder
Messages
37,699
Hi Lightbulb

If someone gives you an interest free loan and you use it to pay down an expensive mortgage, then you will save money.

The two most popular cards in Ireland are BoI and AIB Visa. Both charge a 1.5% cash advance fee and then interest at rates up to 20% a year if you don't clear it in time.

So if you borrow €10,000 on your credit card for one month, it will cost you €150.
If you pay the €10,000 off your mortgage and you are paying 4.5% a year APR (currently the highest mortgage rate in Ireland), you will save €37.50 mortgage interest (10,000 @4.5%/12).

So this transaction will cost you over €100 net.

I don't think that an interest-free and charge-free credit card exists in Ireland. But if you can find one and you pay €10,000 off your mortgage, you will save €37.50 interest per month. However, there is always a catch. For example, if you miss a credit card payment date, the charges you face will be a multiple of your savings.

Brendan
 

RedOnion

Frequent Poster
Messages
3,132
The first few articles I read were terrible - suggest that because 78% of your first repayment is interest, you're being charged 78% interest!

What it seems to suggest is using credit card / overdraft debt to repay mortgage - because you'll be borrowing less days between payday and when you need the cash. So you're running your finances with no capacity for the unexpected.
It's a bit like the myth that paying your mortgage twice a month instead of once saves you money.

It's an over complication. If you've extra money, just pay it off the mortgage, and shorten the term.

Offset mortgages were a brilliant consumer product, as they achieved this without the consumer taking risks.

A very good friend of mine got caught out in the crash doing something similar. He borrowed over 30k on credit card to repay part of a property loan. Then switched CC at 0% for 6 months. He managed to switch 3 times, so 18 months interest free. Then he lost his job, and couldn't refinance. So ended up paying 18% instead of the 6% he would have been paying if he'd done nothing.
 
Last edited:

RedOnion

Frequent Poster
Messages
3,132
Turns out I was missing something, but a lot of the articles I found didn't explain it.

The US has a Home Equity Line of Credit (HELOC) product.
So, if you have equity, you can effectively borrow overdraft at mortgage rates. The theory works similar to the idea of an offset mortgage.
It's also more effective due to the way interest is calculated in the US. On a mortgage, you are charged interest monthly, irrespective of when you pay. Whereas on a HELOC, it's based on the daily balance.
 

Brendan Burgess

Founder
Messages
37,699
This idea makes no sense in Ireland.

So there is no point in new contributors developing confusing theories to promote it.

Brendan
 
Status
Not open for further replies.
Top