In response to the Manulife 1, National Bank has upgraded their All-in-one product.
You can now have a global all-in-one (let’s say 200K HELOC) and include variable or fixed mortgage inside it. Therefore, you benefit from a line of credit that increases every time you are making a principal payment on your mortgage, a checking account and a fixed or variable (or both!) mortgages.
I don’t they are the only one offering this product (I think that BMO has a similar one) but it definitely overcome the MAN1 cost problem without taking over flexibility.
I agree with FT and CC. This product is very expensive for a typical consumer with a large mortgage. I’m sure there are applications for this product but most people are better off staying away.
Their advertising and “calculator” are extremely misleading since they somehow assume that all potential customers are paying the banks posted rate for their current mortgage and therefore will save quite a bit by switching to M1.
Mike
from my understanding Manulife is an insurance company, I’m curious to see the benefits of working with this product from a legal perspective considering the bank act and the insurance act are 2 different things. I remember someone mentioning that is more difficult for creditors to come after your assets when the first person in-line is the insurance company
I know this might be out of scope of this article, any thoughts?
First of all, I should point out that those figures were for a $250,000 mortgage.
Secondly, the monthly payment is either the mortgage payment or the available amount that you put towards the M1 balance.
The argument for the M1 is that you can, without any thought or effort, allow all income that isn’t already accounted for go against the M1 balance. If that is a small amount it could easily become part of a routine that would be harder to envision with a traditional mortgage since you would have to make an online or in-branch/over the phone adjustment to your payments and it would be fixed. The M1 would allow this to ebb and flow depending on what expenses crop up that particular month.
However, if it is a large portion, then it certainly seems possible that one should be able to commit to a larger mortgage payment with a traditional mortgage. After all, if the M1 is to come out ahead in spite of the higher interest rate and the monthly fees, you are going to need to increase the amount that goes towards the principal significantly while also eliminating temptation to dip into that account to pay for certain unanticipated expenses.
To give you an idea of how much extra per month you would have to assign to a $250,000 M1 mortgage at 4.75% vs. a $250,000 semi-annual compounding mortgage at 3.85%, your M1 monthly payments would be $1589.04 over 20.4 years as opposed to the mortgage payments of $1294.80 over 25 years. This would obviously discharge the mortgage faster but the total cash outlay (including fees) would be identical.
That is almost $300 per month difference, each and every month for over 20 years, and represents almost a 25% increase over the traditional mortgage payments. For me personally, this is a difference that I would notice and, if I decided I was comfortable, would then commit to increasing my traditional mortgage payments. But I think differently than some (most?) people – perhaps someone on the other side of the equation could explain how they can honestly expect to apply significantly more money to their M1 balance but wouldn’t be able to commit to it with a bank mortgage that costs less?
If I then went and changed my $250,000 mortgage at 3.85% to $1589.04 monthly payments I would spend not much less than before – $347,359 vs $388,441 but instead of eliminating my mortgage in 25 or even 20.4 years, I would be done in 18.25 years. Where would my M1 balance be at that time? It would still have $38,425 in principal left to pay down.
This is the end of the factual section of this post. Below is a devil’s advocate position in favour of the M1 but with tongue firmly planted in cheek.
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So, let’s imagine that we are looking at the M1 vs. the traditional mortgage and we accept that if we treated the M1 like a traditional mortgage it will end up costing us a lot more. But, we decide we are going to treat the M1 differently. We will not commit to making mortgage payments ever again. We will instead hope that by not ensuring we make payments we will enjoy the freedom of having the M1 account automatically apply the difference between income and expense to M1 balance. We are confident that this will easily surpass 120% of what would be a traditional mortgage payment and that if we waiver from that course of action it will only be temporarily and not enough to lose the advantage.
If we are challenged that we are not disciplined enough to commit and there really is no structure we will counter that it is the structure of a defined mortgage payment which has obstructed our ability to pay down our debt faster. How can we be expected to consciously, and repeatedly take hundreds of dollars and apply it to our mortgage payment for so many years?
Once we see, after just a few months, that we have quite a bit more money coming in than we needed to spend, we will be as diligent as reformed smokers – debt will be our enemy and if we want to apply an extra $500 or $1,000 or $2,000 this month against debt, then we definitely will. And no bank in the land would allow us to prepay those kinds of amounts any time we want against a traditional mortgage, right?
Sure, they try to entice you with their teaser rates of Prime -0.9 but they will go up just as sure as the BofC rate will go up. But, we with our M1, won’t be concerned. We know that our M1 rate will go up just like the bank mortgage but we won’t care because we will have shaved thousands of dollars and years of payments of our balance something that was impossible to do with a traditional mortgage.
With the bank mortgage they tell me how much we can pay and when. The best a bank can offer is payments every 2 weeks – with the M1 we can pay it every single day. And that’s the key… we can pay it down every day just by not spending as much on other things, whether it is entertainment, clothes, electronics, whatever we classify as discretional spending that is a ‘want’ and not a ‘need’.
We are not going to change too much. The RRSP? Still contributing the same. Utilities? Of course. Car payments, gas, insurance? Naturally. We are talking about the little things that add up to hundreds of dollars per month or thousands per year. Like that decaf espresso with chocolate shavings. Or that hair salon appointment. We’ll take lunch to work more often. Movie theatres are expensive – we can have a family night in with a few of the latest movies for less than 1 tub of popcorn. See? We can do this and any changes we make are for the better. Do you think a bank mortgage would allow us to do that?
The bank also won’t let me take my money back out when we want even if it is for an emergency. With the M1 if we’re running a little short we can access the money immediately. And it won’t be like we’re borrowing the money at Prime because it is our money – we put it there in the first place so we can’t very well charge ourselves interest!
And although it is so easy to take the money out of the M1 we will have the discipline to ensure it is only for the important things and that we pay it back quickly. We will be very rigid on this and the reason we can demonstrate this discipline with the M1 when we couldn’t with the bank mortgage is because it is on our terms, not the bank’s. We will decide when and how much we pay back, or rather not spend, every month, week, day.