Mortgage question…in Canada

Hendog · 01-04-2007, 12:12 PM

Our Mortgage is due for renewal this month. I’m looking at ways to pay it down faster of course. There’s the usual mortgage with accelerated payments and that speeds things up. But I’ve come to know of a different mortgage strategy, at least here in Canada, known as the Australian Mortgage Concept. It boils down to being a big personal line of credit which you use as your all purpose bank account. The idea is that your paycheque gets deposited into the account which reduces your debt by that amount. Then you spend as you normally would between paycheques. The advantage is your entire paycheque reduces your exposure rather than a set portion of it. Rather than keeping another account in positive territory, which really doesn’t bring you any return, you put it all against your debt (mortgage). If you spend less that month then you’re ahead in mortgage reduction. The KEY, as I see it, you have to be disciplined in your monthly expenditures to make this work. My wife and I are doing well on that front. We spend less than we make, all our cars are paid for, the only exposure we have is our mortgage and some recent upgrades (hard wood floors) to the house. We hold approx 50% equity in our house. I like the idea of hammering the negative bank balance every paycheque. Thoughts?

Christien · Christien's Garage

That sounds like a great idea. Basically, you're using your home equity as your main savings account, rather than letting savings build up in an account which, as you say, doesn't really earn anything. Whatever's left over at the end of the month goes to knock down your debt. So long as you earn more than you spend (and you're responsible about it), you're in good shape. Plus, if something comes up you've got quick access to lots of cash, which is always nice.

The only downside I can see to it is the argument that money tied up in a house is money that isn't working. There's a good argument that you'd be better off with an interest-only mortgage and the money that would be building equity earning 10% somewhere else. But then I also like the security that home equity brings.

Hendog · 01-04-2007, 12:31 PM

Quote:

Originally posted by Christien

The only downside I can see to it is the argument that money tied up in a house is money that isn't working. There's a good argument that you'd be better off with an interest-only mortgage and the money that would be building equity earning 10% somewhere else. But then I also like the security that home equity brings.

But Christien, my house here in Coquitlam has increased in value by approx 30% in two years, so I figure it's a good place to "invest".

Dottore · 01-04-2007, 12:36 PM

The idea sounds great in principle - but my focus would be entirely on the interest rate.

If there's a better rate around elsewhere, I'd do the math.

If you are paying more interest for a novel concept - you are making a mistake.

You just have to do the math. Find out what each point of intererst is costing you.

Christien · Christien's Garage

Well, yeah, ok 30% in 2 years is pretty damn good!

However equity is still money tied up, in that you always need a place to live, so unless you're willing to sell when the price gets high to realize a gain (like you would with stocks) your house could increase 1000% and you wouldn't be any richer.

Hendog · 01-04-2007, 12:43 PM

Yes, I've taken the interest rate into consideration. The BMO (Bank of Montreal) rates are 6.35 6mos convertible, 6.3 1yr closed, 6.4 2yr closed. These can typically be negotiated down by 0.5. The Australian Concept is a floating rate at 1% above that banks' prime for a rate of 6%. The institution offering this financial device is Capital One, wether that matters at all.

jorian · 01-04-2007, 12:44 PM

Henri,

You have a PM.

Hendog · 01-04-2007, 12:47 PM

Quote:

Originally posted by Christien
Well, yeah, ok 30% in 2 years is pretty damn good! However equity is still money tied up, in that you always need a place to live, so unless you're willing to sell when the price gets high to realize a gain (like you would with stocks) your house could increase 1000% and you wouldn't be any richer.

Another financial tool I'm considering in conjunction is borrowing penny for penny against all interest payments, and investing in some other investment vehicle; Therefore converting my interest debt into investment debt. This would allow me to write off my interest (something we can't do in Canada as opposed to the US).

Hendog · 01-04-2007, 12:51 PM

Quote:

Originally posted by jorian
Henri,

You have a PM.

PM replied. THX

ejames19 · 01-04-2007, 01:07 PM

'Current Account Mortgage' really great concept, like you have said though, really need to be on top of your spending. If your income is higher than out going payments, you can pay off your house real fast. I only thought it was available in the UK, has it already come to Canada?

Hendog · 01-04-2007, 01:15 PM

Quote:

Originally posted by ejames19
I only thought it was available in the UK, has it already come to Canada?

These are links to the two financial vehicles I am considering.

http://www.australianmortgage.ca/index.php

http://www.smithman.net/

jorian · 01-04-2007, 01:23 PM

I've not heard of the Capital One product but Manulife One has been around for a few years. Each product has a perfect client in mind, you just have to figure out whether thats you!

The Smith Manouever is great but needs to be done right to avoid a Rev Canada challenge.

Hendog · 01-04-2007, 01:37 PM

Sorry, I meant Manulife One. I guess the Capital Direct advertising is working