Quote:
Originally Posted by GP_Matt
That is a crazy argument. Most people spend their paychecks occasionally. Assuming you regularly keep 2 months salary in your bank account I think $16000 is a fair number for calculations.
$500000 mortgage at 2.5% interest is a monthly interest payment of $1042
$500000 mortgage less the $16000 leaves $484000 at 3.5%. Your new interest payment is $1412.
The interest rate makes far more difference than any slight reduction in your account balance.
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Again, that's too shortsighted. Of course in one month you're not really going to see the benefits, although your principal amount is going to be much lower in the AIO vs. traditional mortgage. Month after month you're going to be driving down that principal rapidly.
As for your example, on a $500,000 mortgage, you're never going to have that full amount in the AIO portion, unless you're making close to that in an annual salary. This is why I examine one's cash flow and break up the principal accordingly. If you make 100k/year, of course it's not going to make sense to have a full 500k at a higher interest rate, as your cash flow isn't going to have an impact on the majority of that balance. More realistically, you'd be best putting 100-150k in the AIO portion @ 3.35%, and 'locking in' the remaining 350-400k in a traditional variable/fixed mortgage at a much lower interest rate. What your cash flow isn't going to have an impact on, you might as well lock it into a lower interest rate.
This is why in my previous posts I said there is a lot more to it, because there really is. If in our example, you notice you're driving down the principal really quickly on the AIO side, you can take funds from that account and transfer it over to the traditional mortgage portion in the form of pre-payment privileges. It's a balancing act that allows you to be very hands on.
Here's a calculator you can fool around with if you want to see some numbers:
http://manulifebankmortgages.ca/manu...e/calculators/
It's for the Manulife One account, which operates almost exactly the same, except they don't allow variable sub-accounts (locked in portion). Note that on the last page when you get your 'manulife one' number, it allows you to 'Edit Sub Accounts', which is where you'd break up the mortgage between the AIO and locked in portion depending on your cash flow.