House down payment

[rotten42]

I put $80k down on my first house. I didn't want to be house broke with a crippling mortgage.

[MillerTime GFG]

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.

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.

[GP_Matt]

The AIO mortgage seems to make sense for someone whose paychecks vary wildly throughout the year. I still can't figure out how a person with a regular salary position could come out ahead when the interest rate is 30% higher than a variable rate mortgage.

My mortgage gives me the ability to increase my payments up to double and I can make unlimited lump sum payments whenever I want up to a max of 20% per year.

The only advantage I can see is that if gives the ability to park money on your mortgage but that seems like a small advantage compared to a lower interest rate.

As well, if you park the money and never use it then there is no advantage as you could have just prepayed the lower rate mortgage. On the other hand, if you park money and then use it you lose all the future savings and are now paying a higher rate for no gain.

[OMG!WTF!]

Originally Posted by MillerTime GFG

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.

-First off--your example was people paying 4k very two weeks. You are right though, only 17% of mortgagees pay anything towards the allowable prepayment. But if few people can actually make the 20% mark, then there is even less reason to pay higher rates in an LOC. Put all your extra money towards paying down the lower rate product instead.

-Second-- yes, but most mortgage products allow you to make that prepayment anytime during the year, anytime through double payments, or anytime during the year with any lump sum payment in any month. So you can pre pay anytime you get a paycheck just exactly like an LOC.

-AIO has the best prepayment priviledges in the industry? 10%? Not by my books. Kind of sounds like a sales pitch now.

Funny thing is, I actually have this exact set up with TD. The revolving portion is nice for convenience. But as a tool that pays my mortgage down fo me? The point is to pay less interest not more. (and yes, I do understand the compounding interest/paying principal down daily theory behind this) I suppose if you had no prepayment priviledge what so ever, you might make a fraction of 1% spread by doing this.

[MillerTime GFG]

Again, not everyone can afford a 20% lump sum. In fact, very very few can. Not to mention that a lump sum is from funds that you have saved up in order to do so. Once you make that lump sum, you can't draw those funds back without doing a refinance. By utilizing your monthly cash flow in the AIO, ALL of your income is impacting the principal amount, not just what you're able to save.

One of the key strategies is to use your credit card for essentially everything so you're keeping the principal amount at the lowest amount possible month-to-month. Pay off the credit card at the end of the month from your AIO, and repeat the next. Great way to earn points on a good rewards card as well!

[GP_Matt]

I fully understand the strategy of paying your payments a month later to save the interest charges. In your example though that is only $8000 and it is a one time thing. You can't count it every month because at the end of the month you have to pay your credit card bill from your AIO account and start again.

Being generous, keeping $8000 in your AIO account saves you $280 in interest every year on the AIO 3.5% rate. Having your whole mortgage on a 2.5% rate saves you $5000 a year on a $500000 mortgage. To make up for the poor interest rate you would need to have a monthly expenses of $142000 before you break even.

The amount to make up for a bad interest rate is staggering.

[TSXCman]

Agh, extra complicated but maybe beneficial method to learn... hah.

I have JUST gotten a condo offer accepted and am working on financing. I'm pushing the limits though... 20% is my entire savings, less about a grand. I am putting that down. My intention is to go with a variable, then lock in fixed if my broker gets warning of an increase of .25 or more%.

I will soon be in the definition of house poor! exciting times

[MillerTime GFG]

Originally Posted by OMG!WTF!

-AIO has the best prepayment priviledges in the industry? 10%? Not by my books. Kind of sounds like a sales pitch now.

Funny thing is, I actually have this exact set up with TD. The revolving portion is nice for convenience. But as a tool that pays my mortgage down fo me? The point is to pay less interest not more. (and yes, I do understand the compounding interest/paying principal down daily theory behind this) I suppose if you had no prepayment priviledge what so ever, you might make a fraction of 1% spread by doing this.

Bolded part - Let's calm it down a tad. I'm a mortgage broker with access to 50 different lenders. National Bank is one of those, I have no allegiance or extra incentive to send business there. I'm only advocating a product that I am a big believer in that has worked favourably for many of my clients, and by the looks, people within this thread as well. You also chose to ignore their other prepayment options, such as the unlimited double up payments.

TD has a similar product to National Bank (as do most major banks), but it is not the same. They can be set up to operate similarly, but it does require extra admin. Only Manulife and National Bank have these products in Canada.

If you have the ability to make 20% pre payment privileges every calendar year, then all the power to you. If you're diligent enough, getting a low interest rate can be more effective by doing so. However, as you eluded to, only 17% of people use the full lump sum privilege. The AIO does the work for you once you have it set up properly, and still offers phenomenal prepayment privileges on the mortgage portion.

[darklord700]

Nm

[MillerTime GFG]

Originally Posted by OMG!WTF!

-First off--your example was people paying 4k very two weeks.

That is their total income, yes. Monthly expenses haven't been deducted from that, and ideally won't be until the end of the month. So outside of a couple days/month, your principal amount is lowered by your net income amount, before expenses. Those lump sum amounts every 2nd week will lower your daily interest.

I do encourage you guys to try that calculator I linked. I think you'll be surprised by the results.

[OMG!WTF!]

I'm actually just trying figure out what the deal is here. Right now I can get a 3 year variable rate loan at prime -.8 or 2.05%. I can prepay up to 20% a year anytime I want...300k mortgage, 60k prepayment, 5k per month in prepayment priviledge. The same site is telling me the best HELOC I can get is 4%. I'm sure I could do better. Mine is 3.65%. The very best spread a HELOC can offer me is 5k for 30 days at a 2.05% spread (assuming I get a bonus paycheck on the first of the month and can't apply it to my mortgage until the end of the month). Or about $8 bucks minus whatever extra interst I'm paying (1.6% extra) on my loc balance.

The thing is, you can find mortgages that are just about the same as an LOC minus the ability to use it as a checking account. If you're just trying to pay down a mortgage, you're way better off getting the lower rate with much better prepayment terms than the fixed part of your mortgage scenario. I'm just puzzled because you you're suggesting people are using this to great benefit. Can you give an example?

If I had or expcted to have a large lump sum (more than 20%) coming in, I'd just get an open mortgage and still pay less interest than an loc.

[MillerTime GFG]

Originally Posted by OMG!WTF!

I'm actually just trying figure out what the deal is here. Right now I can get a 3 year variable rate loan at prime -.8 or 2.05%. I can prepay up to 20% a year anytime I want...300k mortgage, 60k prepayment, 5k per month in prepayment priviledge. The same site is telling me the best HELOC I can get is 4%. I'm sure I could do better. Mine is 3.65%. The very best spread a HELOC can offer me is 5k for 30 days at a 2.05% spread (assuming I get a bonus paycheck on the first of the month and can't apply it to my mortgage until the end of the month). Or about $8 bucks minus whatever extra interst I'm paying (1.6% extra) on my loc balance.

The thing is, you can find mortgages that are just about the same as an LOC minus the ability to use it as a checking account. If you're just trying to pay down a mortgage, you're way better off getting the lower rate with much better prepayment terms than the fixed part of your mortgage scenario. I'm just puzzled because you you're suggesting people are using this to great benefit. Can you give an example?

If I had or expcted to have a large lump sum (more than 20%) coming in, I'd just get an open mortgage and still pay less interest than an loc.

Thankfully it's a slow day in the office, mixed with the lack of concentration ability due to the game tonight...

You can't get mortgages that are similar to a HELOC. There are significant differences. (Interest compounding - semi-annual vs. simple daily. Mortgages are not readvancable like HELOCS are. What if you need access to some of the money you used on a prepayment privilege? You can't get it back without refinancing a mortgage. Always nice for the what-ifs. You can always borrow up to the maximum borrowing limit, which is 65% LTV.) As for interest rates on a HELOC - you're right, you can do much better than 4% with multiple lenders.

The difference between prepayment privileges, like the 5k/month you mentioned, and the AIO, is that the AIO gets all of your income/cash flow working for you, not just your savings. If your income allows you to prepay 5k/month, I'd imagine your total income is upwards of 8k. That's an extra $3000 that could reduce your principal for the majority of the month, up until you have to pay out your bills.

I can't really give specific examples of success stories, but again, go check out that calculator. It will give you an idea of how it would work for you. I know many of my clients will turn 25 year amortizations into half of that or less, and save ten's of thousands along the way. I have yet to receive a negative review of the AIO (not lying here), and only positives. I send out annual messages for checkups, and multiple have raved about the AIO. People enjoy the simplicity of it, as the prepayments take care of themselves, and you really become your own banker. For me, it's another tool in the toolbox. It's not for everyone, but it can work very well for some. At the end of the day it's an product that I will make clients aware of, but am happy to go the more traditional route if they prefer. It's not my money, I just want to make sure they are well advised and know what's out there!

[OMG!WTF!]

Ok. Gotcha. Good plan for the steady eddies with surplus savings. The key to this is not having a large balance owing in the loc and actually increasing the available credit in the loc very month with your surplus cash and savings. Like an offset mortgage.

[GP_Matt]

I ran through the website and there were potential savings if you committed a portion of your savings to your mortgage every month. If you are unwilling to make extra payments then it comes out and states that the account provides no savings.

Those savings will still be realized if you make accelerated payments on your normal mortgage but you will also have the advantage of the lower rate.

[mrkajz44]

I feel this argument is 6 of one, half a dozen of the other.

The account offers the ability to put all of your available money "down" on your mortgage amount to reduce the interest charge as much as possible. Of course you pay your expenses out of this account, but it basically eliminates hundreds or thousands of dollars sitting in a chequing account doing nothing.

But the offset is the higher interest rate. So I'm able to use all of my money to lower the principle amount as much as possible, but the interest rate is higher on that lower principle. So the end question is, do those amounts offset each other? Would I come out ahead?

It all depends on your situation really.