Principal and interest loan - live on credit card, all money in one account. Withdraw cash when you need to.
Interest is paid on outstanding money...
For example $100,000 loan - you have $10k in savings in the account, you pay interest on $90K. The catch is that you rarely take money out of the account (do it once a month and live on credit card) as the longer the cash is in the account, the less interest you pay.
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This is exactly how ours is worked out too. But we also have a $30,000 Line of Credit on top of our savings.
So.... ALL our wages go into the LOC on top of the $30k while we live off the credit card. Anything over $10 goes on credit.
Our interest is calculated at day 31.... so say if we have $38k in the LOC and we owe $98k on our home loan, we only pay interest on $60k at the end of the month.
Our credit card is then due on day 40. So we pay that out of the LOC, so it might be $3000 for the 40 days for example, this reduces the LOC to $35k after payment has been made to the credit card. We then transfer maybe $2k straight into the home loan, taking the LOC back to $33k and we start the 40 days again.
The only thing you have to be VERY careful with is that you STILL stick to a budget. It can be very tempting to have $30k at your disposal. You will only pay interest on the LOC IF you use any of the money. We choose to pretend that the $30k isn't there and live within our means. But its also handy to know that it is there, just incase. wink
We have had friends set their mortgage up like this though and they have fallen into one great big massive hole! Ended up spending all that was in the LOC and couldn't even pay their credit card in full at the end of the 40 days, so started having to pay interest on that as well. It was a nightmare for them! But they had no one to blame but themselves. blink
An offset account is the only way to go for investment properties too so I highly recommend them. BUT you need discipline to make it work for you.
Also paying your mortgage weekly reduces the amount of interest you pay too. We pay ours weekly and then a lump sum at the end of the 40 days. smile
Hope that helps and makes sense for you.