A growing number of mortgage and home loan accounts include debit cards. Having this card linked to your home loan account lets you access your funds anytime, anywhere, and pay for your everyday expenses without affecting your interest rate.

If you’re a homeowner in Australia with an offset account, you’ve probably been sent a debit card. This debit card will allow you to access the funds in your offset or redraw account for everyday spending. In Australia, we watch the home loan market very closely. Countless news articles are churned out daily around house values and interest rates. The Australian Bureau of Statistics tracks the total value of owner-occupier home loans written in Australia in February 2023 at $12.12 billion, with the average Australian home loan size being $586,366. For first home buyers, this average loan size drops to $479,260. With such large amounts of debt, it makes sense to look for ways to save money on interest and pay off your home loan faster.

So why do banks offer debit cards with mortgages?

In a nutshell, banks will offer debit cards as a way to encourage customers to use their home loan as their main transaction account. This can have several advantages for both the bank and the customer:

– For the bank: it means that they can keep more of your money in their system, and charge you interest on it. It also can reduce the administrative costs of managing multiple accounts for each customer.
– For the customer: it means that you can reduce the interest you pay on your home loan. The money sitting in your offset account can lower your loan balance with your income and savings. It also simplifies your banking by having only one account to worry about.

How does a debit card linked to your home loan work?

It basically links your home loan to the Visa or Mastercard network. This means that you can use your card to make purchases online, in-store, and withdraw money from ATMs, just like any other debit card. However, there are some important differences to be aware of:

– Decreasing your offset balance. Every time you use your card, you are increasing your home loan balance and the interest you pay on it. This is because you’re spending money that is offsetting your home loan balance. You’ll need to be careful about how much you spend and whether you repay your loan monthly or fortnightly.

– Daily limits. Your card will have a limit on how much you can spend in a day. You need to make sure that this doesn’t exceed to your available redraw amount. If you reach this limit, you won’t be able to use your card until you make more repayments or apply to increase your redraw limit.

– Watch out for fees. Your debit card most likely has fees associated with it, like home loan package fees, foreign transaction fees, or ATM fees. Factor these fees into your budget to be mindful of your home loan balance and future repayments.

What are some of the pros and cons?

Having your debit card linked with your mortgage can have some benefits and drawbacks. But this all depends on how you plan to use this feature. Here are some of the main pros and cons to consider:

Pros

– Potential savings. You could potentially save money on the interest you pay by using your income and savings to offset your home loan balance. For example, if you have a $500,000 mortgage at 4% interest and $50,000 in savings, you will only pay interest on $450,000 instead of $500,000. This can potentially save you thousands of dollars over the life of your loan.
– Banking simplicity. You’ll be able to have more flexibility and convenience by only having one account for all your banking needs. There’ll be no need to transfer money between different accounts or worry about having enough funds in each account to meet your repayments. You’ll also be able to access any extra repayments when you need them.
– Get rewarded. Some banks let you earn rewards points or cashback on some debit cards transactions. There may be incentives for using their cards, such as points that you can redeem for travel, shopping, or entertainment vouchers, or even a cashback that you can apply to your loan balance.

Cons:

– Home loan interest. You could end up paying more interest if you don’t manage your spending and repayments carefully. If you use your card too often or for large purchases, you’ll increase your loan balance and interest charges. One to watch out for!
– Potentially overwhelming. If you’re not on top of things, you could lose track of your finances by having only one account for everything. It can be harder to monitor your spending and budgeting if you don’t separate your income and expenses into different buckets. There’s also the temptation of spending more than you can afford if you have easy access to your home equity.
– Home loan default. You’ll need to be super careful not to fail to make your loan repayments or breach any other terms of your loan agreement.

What to do next?

Linking a debit card to your mortgage can help give you more flexibility and control over your money. But it’s important you know exactly what you’re doing. If you want to learn more about how you can link your debit card with your mortgage and whether it’s right for you, you should definitely talk to a mortgage broker or a financial adviser. They’ll help you understand the pros and cons of different home loan options and find the best deal for your personal needs.