In fact they don’t get it.

I don’t want to be in debt and I feel that is can be done but because of the excessive $13K penalty on the existing RBC mortgage it can’t be done as simply as I would like it to be.

That is a shame really. If I had done this 3 years prior before the realestate market corrected itself there would be more room to make this work. Right now it doesn’t.

The simple reality is that I was looking for a massive operating LOC but that no one lending group was interested in taking it on.

Any other suggestions?

I must be missing something key.

I’m being offered:
$248K mortgage at 2.35% VR / 36m
$100K LOC at 3.25% VR
$40K LOC unsecured at 5.25%

The reduction in interest even this way is amazing but it is still a little restrictive. I still haven’t worked out all the details of it yet.

What do people think?

DAvid

I had paid it off in 5 years instead of the remaining 21 years.
I saved over 100,000 dollars in interest.

The 14 bucks a month for unlimited banking is comparable to other banks.

I took some money out again to invest in the stock market. (Interest is tax-deductible). I’ll have that paid off in a few years and still have my stock portfolio.
I bought a vehicle and just wrote a cheque.
Vehicle will be paid off in 2 years.

It’s like I run my own little bank.

I never have to ask for loan ever again. I have one simple account that I use for almost everything.

I have been using it for appr. 5 years now and I would not use any other product that is currently on the market.

I am currently a customer of RBC out west and have been for some time. I’ve got 2 LOC’s, both unsecured, one for $60K @3.25% and one for $5K @3%. I don’t have a Homeline but I’m really concerned about the amount of interest I pay out over the course of say this mortgage ($315K balance on 30yr accelerated bi-weekly payments @5.1% fixed 5yr closed).

The problem to me is that I need to get a way of making this pay down faster but I also require more flexibility incase employment gets a little bumping in the next few months.

This is why the ML1 looked good to me. But now, I’m not so sure? With a large penalty on the RBC mortgage I want to sit here and not deal with that but in turn figure out a way to instead use the LOC or HELOC (homeline) as the primary chequing account, similar to the ML1 which I read was done with a credit union in an above example.

With the existing chequing account there are months with cash flow is tight or completely the other way based on lack of funds coming in. This means overdraft – yet that interest is something horrific like 38% if I’m not mistaken. Our RBC Visa is 19.5% and they still make BILLIONs in profits so why would they give me a break?

I’ve thought about the SM but have leaned away from that with issues of cash flow and leveraging adding to the risk of what could happen.

If anyone is reading this still I’m interested to learn all I can before I meet with the bank and ML today and tomorrow.

Cheers,

DAvid

Try Canadian Money Forum where you will find several spreadsheets at http://canadianmoneyforum.com/showthread.php?t=897

The Loan Comparison Calculator offers a take on the M1 calculations.

Historically, M1 has been at prime, while other banks have been at prime -0.75 or better. For instance RBC is offering P+ 0.4 and P+0.8 on their variable mortgages just now. Also, with historically low interest rates, is this a time to consider a fixed rate? It is pretty clear prime won’t be sitting where it is now in the foreseeable future. Might 5 years at 4.29% (ING) be a better deal in the long run?

No simple answers here!

DAvid

I am purchasing a house for $425,000 and putting $85,000 down. That will deplete my savings and investments.

I will make $68,500 this year and it usually goes up 6% every year.

I will rent out 2 rooms in the house for around $1000/month total.

I usually save around $1000/month on top of a $690/month rent that I currently pay.

I have no debt.

I have been offered a M1 at 3.25% (p+1). The advisor told me that as rates go up and banks start offering p my rate will automatically be adjusted and that no renegotiating will be required.

If people are still reading this blog I would love to hear some people’s thoughts on the M1 and my situation. If I didn’t include enough info let me know. I am new to serious finances.

I believe that although Manulife markets the M1 as a means to quickly pay one’s mortgage, the reality is they want you to have a mortgage for life. That way they continue to gather interest payments for a longer period.

I agree a lot of people don’t use their savings to reduce their mortgage costs. A lot of folks don’t pay their credit cards in full each month either. There are many actions in which folk could engage to reduce their costs & debts, however not all take the step. I expect many will see the available credit on the M1, and use it for consumptive spending, just like folks do when they realize their other debts are reduced. Thus, we see all the renos or cottage purchases that occur once the original mortgage is paid. Call it Human Nature.

DAvid

From what I’ve heard on the ‘net, MFC was simply the first to stick with the concept of not lowering their base rate in tandem with BofC. On the other hand, I haven’t heard that they’ve gone back to clients and actually increased rates to existing clients or told them that any future advances on a HELOC would now be at a much higher rate.

I still remain skeptical that an M1 type product will, either consciously or subconsciously, change the behaviour of people over the long haul (i.e. for more than 10 years) in a way that they will be out of their mortgage sooner.

For example, let’s take a $240k mortgage at 5% amortized over 25 years. This gives monthly payments of almost $1,400. Let’s imagine that a couple has an extra $250 a month that comes in which doesn’t get spent and it goes up annually by 3% (inflation). With the M1 that is applied every month resulting in their mortgage being discharged 7.42 years earlier all things being equal.

My issue is that without the M1, this couple is receiving $3,000 of discretionary income (in today’s dollars) every year for over 17 years. I find it hard to believe that most couples, according to Manulife, would fritter away that kind of money each and every year without knowing it because they don’t have the M1 to change their ways. I think such a change would be noticed and felt over the long term. You would realise that you don’t go out for dinner as often, or your clothes are looking a little dated, the house needs a new paint job, and boy, or that it has been quite awhile since you went on a vacation.

On the other hand, let’s say this couple did realise and embraced this new paradigm. They saw that they were careless in their fiscal responsibility and got excited by how quickly their debt was declining. Once they have seen the light and are fully aware, they don’t need the structure of the M1 anymore. Most mortgages these days have the option for increasing the payment amount, doing lump sum payments, etc. I’ve run the figures for just how much $ is saved by the M1 if you simply look at the timing of credits/debits and believe me, it is quite small even in the most ideal of cases (i.e. all your income arrives on the 1st day of the month and all of your expenses are paid on the last day of the month). The only substantial impact is if you leave income stay there and don’t remove it when it otherwise would be spent.

Could the M1, and others like it, be a catalyst for discovering a smarter way to handle household finances for some people? Yes, I do believe it has that potential. Once learned, then those people have the option to choose more frugal ways to master their debt. (I say frugal because for the majority of the time that M1 has been in existence, it’s rates were higher sometimes egregiously so than other options out there. Plus, M1’s rates are compounded monthly and they even acknowledge on their website that it costs more than a semiannual compounded mortgage. Finally they do have those monthly fees.)

I needed training wheels to learn how to ride a bike, but once they were removed I never put them back on.

What I can’t envision is that people would choose the M1 because of its promise to make them mortgage free sooner and then blindly be unaware that more of their discretionary income is being applied to their debt – and this is the only way that they are going to see any improvement vs. a traditional flexible mortgage. If there are such people, then they would be the only ones that would be better off staying with M1.

I just wanted to quiet some of the notions here that Manulife did something funny with their rates that wasn’t industry wide – that and variable rate mortgages are now “prime +”.

Only a wild amount of cashflow could result in a savings equal to a 1.60% mortgage, I recognize that, but unfortunately that rate isn’t a market reality at the moment.

One thing that hasn’t been mentioned here is the fact that alot of people don’t use their savings to make lump sum payments on their mortgage. People have good intentions, but when it comes down to it, putting their rainy day fund into a mortgage doesn’t sit well. So for those people the M1 works (assuming they at least have the restraint not to spend the money unless it is an emergency or an otherwise budgeted item).

That’s OK, I don’t know many people who have $6000 net income monthly. I do know quite a number who pay their mortgage and other debts aggressively.

I do believe the points made in the original article are still valid: do your research before arriving at a decision, and don’t believe everything marketed to you.

DAvid

I was shocked to hear of mortgagees receiving letters noting them that their base rate actually went up even though the BoC rates were going down. Fortunately, even though I’m with BMO (where I heard they were party to this exercise) I had their Readiline product and it has continued to go down.

We renewed our mortgage at about $117k last summer and we are making $2500+ monthly payments plus periodic lump sum payments (bonuses, tax refunds, dividend income, etc.). It should be discharged sometime late next year – probably before we see any significant rises in the interest rates.

The rate environment has changed drastically and now all banks are charging the same “premium” on their HELOC’s – and worse yet, in many cases existing clients are no longer being grandfathered at their old rate.

Further, minus variable rates simply don’t exist anymore. So all of those lucky ducks out there paying sub 2.0% mortgages are going to be unhappy when renewal kicks in.

Personally, I love my M1 account. My wifes income is stable, and mind variable. All in all our expenses per month (not including the “mortgage”) are about $3750.00 – and our income is over $6k.

I don’t know about you, but I don’t know many people who make $2250+ mortgage payments on a $240k mortgage.

We call the limit of the STEP your GLOBAL limit, as the term products are paid down, we can increase the limits on the revolving credit(lines of credit as you go).

Keeping LOC’s separate for interest expense’s…ie smith maneuver.

Most clients, split up thier mortgages, part variable, part short term fixed part long term fixed.
With our mortgages you can also: Prepay up to 15% of the original mortgage amount each year AND make double payments AND increase your payments 15% per year.

I believe it is the most versatile product out.

We register a collateral charge on the property, so as the value of the home goes up, you can increase the global limit of the STEP without any further legal fee’s. Subject to you affording the STEP and appraisal of the property.