Slava,
I must be missing something with the M1 account. I tried to figure it out last year when setting up my mortgage but can't seem to wrap my head around the advantage that allows for such significant savings. Using the $300000 example, the difference between making normal payments on a normal mortgage and making those same payments on the M1 mortgage will be about $2250 with the advantage to a traditional account. The advantage of M1 is that any money sitting in your bank will reduce your interest owing for whatever length of time the money sits in your account. If you always maintain a balance in your account then your interest owing is always reduced by that amount. I think this is a great feature as the interest on your mortgage is always higher than your savings account.
The second benefit that I see is that traditional mortgages usually limit you to doubling your monthly payments and paying a lump sum of 20% yearly. I assume that with the M1 there are no such limits. If that is the case, there should also be no penalty for canceling your M1 account while a variable rate mortgage carries a penalty of 3 months interest to cancel before your term is up. Both of these are good features, but in my example that means that the advantage from the M1 comes if you expect to want to pay more than $60000 annually on top of your mortgage payments. I don't think this applies to the general public and suspect that the limit was only put in to prevent people from trying to dodge the penalties for breaking the contract.
The M1 also lets you dump money on your mortgage the same way that a traditional mortgage does with the advantage that with the M1 you can take that money back out at any time where as with a trad mortgage you would have to apply to borrow money from the bank if you paid down your mortgage and found you need that money back. I think this advantage can be mostly eliminated by taking out a HELOC and using it as a reserve the same way you would pull money from your M1 account if you are in a bind.
So far, I am not sure of a scenario above where the M1 mortgage provides a benefit greater than the extra $2250 in interest.
Correct me if I am wrong, but the M1 number that they always talk about representing how much money/time you can save is based on the all in one account options discussed above and also on the plan to put extra money on the mortgage as it becomes available. This second step is where I find the product misleading because most mortgages allow you to make extra payments.
There has been discussion of compounding frequency as well with this product which may be the magic that I don't understand. I have tried to find something written about the difference between compounding daily and semi-annually but never found anything could answer how much money is saved between the two options. The million dollar question for compounding is if I had two mortgages for identical amounts with the same interest rate. If both start on the same day and the only money I put into the M1 account is the same payment as my standard mortgage on the same day as my standard mortgage will one account be paid off sooner? To add to that, If I make the same periodic lump sump payments to both accounts will one benefit more due to the compounding frequency? If so, is it significant enough amount of money to cover the interest gap?
As for your statement about the current interest rates being historically low, do you expect the spread between the two to close as interest rates rise. ie. in an environment with prime at 6% what discount from prime would the banks normally offer on a variable mortgage and will M1 introduce a lower than prime product?
I would love to hear your response as I spent a lot of time trying to find the answer to this problem last year and always came up with nothing. I also find that people get defensive regarding their financial decisions so I apologize in advance if I come of as attacking the M1, that is really not my intention.
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