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Originally Posted by OMG!WTF!
This is what isn't making sense. Most mortgage products (all open/vaiable rate mortgages) allow you to make up to 20% lump sum payments every year, or double up monthly payments, or some scheduled increased monthly payment plan to reach 20%. Why pay a higher rate on an loc principal and then transfer that principal to the fixed portion later. That makes no sense. Just do it all at the same time at a lower rate. 20% is enough to take care of most people's extra cash for sure.
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Couple things, and you do bring up good points...
- First off, most people can't afford a full 20% pre-payment privilege every calendar year. For example, on a 300k mortgage, that's a $60,000 lump sum.
- Secondly, you're only realizing the savings on a pre-payment privilege when you actually make that payment. With the AIO account, you're essentially making pre-payment privileges every time you get a paycheck. It's a fully open mortgage, meaning you can put any amount against it at any time. Got your Christmas bonus? Deposit it into the AIO account until/if you decide to use it elsewhere.
- Simple daily interest on the AIO account vs. semi-annual on your mortgage.
- As mentioned, the AIO account is fully open. The locked in portion (either fixed or variable) comes with some of the best pre-payment privileges in the industry. 10% lump sum/calendar year.
The 10% is based of the year 1 mortgage amount. (ie. 300k, you can still do 30k in year 5). 100% increase in payment per calendar year. Unlimited double up payments on every payment date.
One of the nicest things about the AIO is that it does the work for you. Not everyone can afford to do the full pre-payment privileges.