Even though Canada’s real estate market is as frothy as a beer poured by an inexperienced bartender, most people will still end up owning a house. Owning your own home is terrific, you can paint it any ugly color you want, (I’d suggest lime green) you can turn the basement into a kinky sex dungeon or you could even have enough space to store an army of midgets in the closets. Those things would make you pretty weird, but whatevs. It’s your house.
Unless you’re some sort of freakish saver or you buy a place 43 kilometers from nowhere, you’re going to need a mortgage on this there house of yours. After 25 years or so, this mortgage gets paid off and the house is all yours. You should probably try not to burn the house down during your mortgage free party, although that would be delightfully ironic.
Most people get a pretty standard mortgage. In Canada, that usually means a five-year fixed mortgage, these days you can get one of those for a little over 3%. Once the five-year term is up, typically a borrower will just go back to the same lender and just sign a new five-year term. If they’re feeling a little frisky they might sign up for a variable rate mortgage, but that’s about as exotic as most people’s mortgages get. Canadians are a conservative people, obviously. Also, eh.
But what if I told you that there was a different kind of mortgage, one that would let you save thousands of dollars over the lifetime of the mortgage, without increasing your payment or actually doing anything different? Would that type of mortgage literally make you drop your pants in excitement? Well Sparky, let me tell you about it. Once you pull up your pants, anyway.
These new exotic mortgages are commonly referred to as “all in one” loans, and they work a little differently than traditional mortgages. Whenever you get money deposited in your account, it automatically decreases your loan amount by that much. As you spend every day, that increases your mortgage amount. Since interest is calculated daily, you save quite a bit on the first days after you get paid, and then by the time you get close to the next paycheque it works out just like a regular mortgage payment. But in the 2 weeks (or 1 month) in the meantime, you’ve saved interest. What they’ve done is combined your chequing account with your mortgage.
Let’s look at a real example. You owe $200,000 on your place. Twice during the month you get paid $2000 net to make things easy. On the day you get paid, your mortgage balance goes down to $198,000. As you pay your bills, say your mortgage balance eventually makes it back up to $199,000 before you get paid again. Since you’re only paying interest on $198,000 and change for most of those 2 weeks, you save a minuscule amount of interest.
It doesn’t seem like much at the time, but the small amount of interest you save adds up over time. And since every spare dollar automatically goes towards your mortgage balance, this mortgage makes it easy to really buckle down and get rid of the mortgage. The interest rate is typically a variable rate, at prime, so you know you’re getting a competitive rate.
There’s another advantage of this product. Say you want to make a $10,000 purchase, but you don’t have the cash, probably because all of it is being sent towards your mortgage balance. As long as you’re underneath the magical borrowing limit (typically set at 80% of the value of your house, but that may have changed with the new mortgage rules) you can spend that money on whatever your screwed up little heart desires. Even hookers. They want to make it easy for you to stay in debt.
Basically, this is a good product if you’re financially savvy enough to make smart choices. If you’d constantly borrow against your house to buy frivolous things, you’re probably going to want to stick with a mortgage that makes it a little tougher to borrow against your house. This product is basically a giant line of credit, and all sorts of people use their HELOCs to spend like horny dudes at Las Vegas nightclubs.
Where can you get one? There are two options that I know of. The first option is from Manulife Financial, who are pushing the product on TV pretty hard. This blogger, for one, doesn’t mind, since the brunette in the commercial is pretty hot. Youtube it or something. If you’re interested, you can go to their website for some more info on it, including several testimonials that I’m assuming the company paid for.
Or, you can go with the other company that offers this product, National Bank. Even though they’re a bunch of filthy Frenchmen, National Bank is happy to take your online application. Or, if you’re more inclined, most mortgage brokers should be able to get you the product. National Bank also gives you most banking transactions for free with this account, once again making it easy for you to spend more money and stay in debt longer. They’re a crafty bunch, those French bankers.
Here’s the bottom line: these mortgages are actually pretty interesting, providing you can resist the temptation of always having credit available to buy new shoes. Luckily for me, I hate shoes and feet in general.
The trouble with Manulife One is there’s a $14/month fee, sort of like an unlimited chequing account. Plus the interest rate is 3.5%, so not exactly the best rate out there if you go variable.
National Bank doesn’t charge a monthly fee, but their interest rate is 3.5% (if you pay the legal fees yourself) or prime +1%.
Once banks implement the OSFI guidelines of reducing HELOC’s to a maximum of 65%
Loan to Value both Manulife One and National Banks All-in-One will have their
maximums lending loan to values reduced from 80% to 65%.
I asked a Manulife rep about these changes and he said they’ll still lend you 80%, but 65% will be revolving debt and up to 15% will have to go into fixed rate sub-accounts.
I’m not sure the amortization savings from dumping all your cash and monthly paycheque into this account will offset the higher interest rate (and monthly fee, in Manulife’s case).
I’m pretty sure BMO has started offering something similar to this; my parents have the type of mortgage you’ve described here. As soon as my mom started talking about it I recoiled, because I didn’t think they’d have the will power to not use it on new vehicles and toys. I’m not sure where their balance is right now, but I don’t think they’ve gone completely nuts. It’s a great idea for those with willpower, but unfortunately I think the reason it was introduced is because most people think they have enough willpower but don’t :s
As a ‘frisky’ Canadian with a five year variable mortgage at prime – ,85%, I think I have a pretty good mortgage. However , this is a pretty interesting concept and one that is definitely worth some thought. Kind of shakes me to my budgeting core, but a really cool concept.
Thanks,
I forgot to mention (maybe this shows I need to get a life) that when you receive your monthly statement it was cool to see that each month your interest charged, dropped a couple of $. If I put in a work bonus, then the next month it dropped even more. Seeing that change every month helped my motivation to pay it down faster. I was able to pay my first and second homes off completely in this way in less then 10 years each time, saving so much in interest costs.
If this is your second home purchase or have a large downpayment I would suggest you modify this idea as I had done. Get the highest home line of equity secured against the equity in your house that you can. This can be done at any bank and the rates when secured to your home are very favourable. Use that as your mortgage and set up automatic payments. I submitted a payment twice a month + a payment equal to the interest charged each month. plus any bonuses or extra money that came my way, I dumped these into paying this down. There are no penalties, you can pay back your mortgage at your pace faster or slower, more or less. I agree with Cassie – people have no willpower or discipline if you do this in an all in one pot way. You will most likely make purchases because you can to easily add it to your all in one LOC and not even really look at it. Like on table dances, beer or other bad things, that are sort of good – but in a bad way.
If you seprate it like i have mentioned, you see your progress and you watch your debt dissapear, it makes you happy and you tend to take it more seriously and work on paying it off faster.
I wish I was Canadian so I could spell “check” cheque. Its so European. BTW, I’m finally mortgage free, so I don’t have to pay the banks anything anymore. Yeah!
Unless those midgets are permanent roommates and you have to add them to the lease, you can do all those things in a rental (also depending on whether your sex dungeon requires any built-in equipment and doors, or just freestanding/bolt-on kit).
The problem with most readvanceable mortgages is that they charge the same rates as HELOCS: typically 0.5-1% higher than a vanilla variable rate.
Having every last cent available to pay down your interest is very much worth the higher rate. I just opened an All-In-One with National Bank. It’s nice to pull up an amortization schedule and see how fast you get ahead by having your whole paycheck pay down the interest. As was mentioned earlier, National Bank has no fees. Furthermore, they reimbursed me for $1500 worth of legal fees while giving me prime +0.5.
Another huge advantage of this mortgage is you are able to open up as many sub accounts as you like. I now have a dedicated sub account I use to track my investment loans for tax purposes (Smith Manoveur).
Is that a rhetorical point, or would you like to do the math?