How to Use Credit Card Rewards to Pay Down Your Mortgage

by RateHub.ca November 11, 2015 / No Comments

This post was sponsored by Vancity.

Rewards credit cards are typically used to earn points that are redeemable for travel rewards like flights, car rentals, and vacation packages. But what if you could maximize your daily spending to improve your financial situation?

What if you could use your points to pay down your Vancity mortgage?

Fortunately, now you can, thanks to the My Visa Rewards Plus program by Vancity. If you enroll in this program, you can make a lump sum mortgage payment using points you accrue from everyday spending.

Let’s look at how you can use the enviro Classic Visa and the enviro Gold Visa from Vancity to pay down your Vancity mortgage.

Pay down your mortgage with the enviro Classic Visa
The enviro Classic Visa is a Vancity credit card that allows you to use credit card rewards to pay down your mortgage, donate to charity, or redeem for travel or merchandise. This card has no annual fee, an interest rate of 19.50%, and offers extended warranty on purchases and travel accident insurance.

With this credit card, you’ll earn 0.5 points for every dollar you spend¹, and a 2,000-point bonus when you enroll at myvisarewardsplus.com (worth $20).

Let’s look at the dollar value of the rewards you’ll earn in an average year using the following spending profile:

Monthly Credit Card Purchases Annual Credit Card Purchases
$3,000 per month $36,000 per year

 

With the spending profile above, you’ll earn:

Annual Fee Sign-Up Bonus Rewards Monthly Spending Profile Return
$0 $20 sign-up bonus 0.5 points per dollar spent on everything 0.5 points x $3,000 spent = 1,500 points First Year
Sign-Up Bonus: $20
Rewards: $15 x 12 = $180/year
Annual Fee: $0
Total: $20 + $180 – $0 = $200Subsequent Years
Sign-Up Bonus: $0
Rewards: $180/year
Annual Fee: $0
Total: $0 + $180 – $0= $180

If you use these rewards to pay down your mortgage each year, you’ll be mortgage-free sooner. Let’s look at the effect on a $350,000 mortgage with a five-year fixed interest rate of 2.49%, and an amortization period of 25 years. If you paid all of your earned rewards towards your mortgage every year, you’d be mortgage-free three months sooner, assuming the interest rate stays at 2.49% throughout the 25-year amortization period. Here’s exactly how much you would save:

Mortgage Without Credit Card Rewards Mortgage With Credit Card Rewards
Mortgage Amount $350,000 $350,000
Interest Rate 2.49% 2.49%
Years to Pay Off 25 24 years, 9 months
Total Amount Paid $469,818 $468,167
Total Interest Paid $119,818 $118,167
Money Saved $1,651

With the enviro Classic Visa, you’ll earn $200 in rewards in the first year and $180 after that. If you apply these rewards to your mortgage every year and the interest rate stays the same throughout the life of the mortgage, you’ll pay it off three months early and save $1,651 in interest.

Pay down your Vancity mortgage with enviro Gold Visa

The enviro Gold Visa with the accelerator option is similar to the credit card we reviewed above except you can earn more rewards, faster. The rewards you earn from your day-to-day spending and can be redeemed for charity donations, extra mortgage payments, or RRSP contributions. You can also use your points for free travel and merchandise. This credit card has an annual fee of $147 and comes with a variety of insurance options such as:

  • Extended warranty
  • Auto rental collision/loss damage
  • Price protection
  • Delayed and lost baggage
  • Travel accident
  • Purchase security

The major difference between this credit card and the one mentioned above is that instead of earning 0.5 points per dollar you spend, you’ll earn 1.5 points per dollar spent. Also, you’ll also earn 2,500 points with your first purchase ($25), 2,000 points when you enroll at myvisarewardsplus.com ($20), and 3,500 points for every credit card anniversary ($35). Plus you could be eligible for an additional $200 when you sign up and become a Vancity member with a payroll as your direct deposit.

Let’s look at the dollar value of the rewards you will earn using the spending profile outlined above:

Annual Fee Sign-Up & Anniversary Bonuses Rewards Monthly Spending Profile Return
$147 Up to $245 in sign-up bonuses$35 anniversary bonus 1.5 points per dollar spent on everything 1.5 points x $3,000 = 4,500 points First Year
Sign-Up Bonus: $45
Non-member Sign-Up Bonus: $200
Spending Bonus: $35
Rewards: $45 x 12 = $540/year
Annual Fee: $147
Total: $245 + $35 + $540 – $147 = $673Subsequent Years
Sign-Up Bonus: $0
Spending Bonus: $35
Rewards: $540/year
Annual Fee: $147
Total: $35 + $540 – $147 = $428

Even with the $147 annual fee, you’ll earn more rewards with this credit card. If you spend $3,000 per month, you’ll earn $673 in the first year and $428 after that. If you put those rewards towards your $350,000 mortgage amortized over 25 years with a 2.49% interest rate, you’ll be mortgage-free nine months earlier, assuming the interest rate stays at 2.49% throughout the 25-year amortization period. Here’s how much you would save on your mortgage:

Mortgage Without Credit Card Rewards Mortgage With Credit Card Rewards
Mortgage Amount $350,000 $350,000
Interest Rate 2.49% 2.49%
Years to Pay Off 25 24 years, 3 months
Total Amount Paid $469,818 $465,815
Total Interest Paid $119,818 $115,815
Difference In Interest $4,003

As you can see, the enviro Gold Visa with the accelerator option has a higher annual fee but the potential to pay down your mortgage is greater. If you put all of your earned rewards towards your mortgage and the interest rate stays the same throughout the life of the mortgage, you’ll save $4,003 and pay off your mortgage nine months early!

Vancity does not make any express or implied warranties or representations with respect to any information or results in connection with these calculations. Vancity will not be liable for any losses or damages arising from any errors or omissions in any information or results, or any action or decision made by you in reliance on any information or results.

These calculations are for illustration purposes only and are not intended to provide investment advice. The applicability and accuracy of the calculations are not guaranteed. All examples are hypothetical and are for illustrative purposes only. Actual mortgage rates may fluctuate and are subject to change at any time without notice. Mortgage prepayments may be subject to a prepayment charge. You may qualify for a larger mortgage amount based on other sources of income such as rental income. For mortgage approval you will typically need at least 5% of the purchase price as a down payment. Mortgage default insurance is mandatory for down payments between 5% and 19.99% of the purchase price.

¹Conditions apply. For complete terms and conditions, visit vancity.com/visaterms. For rewards program terms and conditions, visit myvisarewardsplus.com/termsandconditions.

Flickr: Valentina