“I want to be mortgage-free, but … what type of mortgage is best for me?”

Your home is the single biggest purchase you will make. Figuring out what type of mortgage product you should use can be tricky. The traditional mortgage product is the term mortgage but there are other products having both positive and negative features.

The Umbrella Mortgage
This product sets up one document that covers any mortgage on the property. For example, if you have an umbrella mortgage of $350,000 but have paid off $75,000, that amount is made available to you in a line of credit (LOC). Since the mortgage and LOC are in one account the total balance is really what you owe on your home. Features can vary and in some cases you can split your mortgage up into more than one type; so you can have a portion of your mortgage in a term and some in a variable. This type of mortgage is best suited for individuals who are disciplined about paying off their LOC. Remember, as long as there is a LOC limit you do not own your home. On the positive side you can gain access to the equity in your home without reapplying for a loan.

The All-in-One Mortgage
This product combines all loans, mortgages, chequing and savings products into one account. That is where the all-in-one comes in. How does it work? Based on your personal circumstances such as income, credit history, value of your home and the amount you owe you are given a borrowing limit. This is also your chequing and savings account, so your pay, investment income and any savings are deposited in the account. The theory is that by combining deposits and loans in one account any deposits decrease interest owing.

Each day your account balance is reviewed – if you are in a debt position then an interest owing is calculated. When your pay is deposited your loan balance will go down and interest owing will decrease. But you still have to pay expenses and like any chequing account there are service charges. It can be really easy to overspend and actually increase your debt. That means you will lengthen the time before you are mortgage-free. This type of account is best suited for individuals with growing cash reserves, who have significant positive cash flow and are diligent with their spending and budgeting.

The Reverse Mortgage
With a reverse mortgage, Canadians 60 years or older are able to access up to 40% of the equity in their home without making payments, while still retaining ownership of their home. That is the hook, receiving a large sum of tax-free income with no payments. Sounds too good to be true and in many cases it can be. The interest rate is typically higher than a regular mortgage and while the borrower is not required to make any payments, interest does continue to accrue on the loan. So depending on the rate and the amount, over a 10-year period the actual mortgage amount borrowed can double. On the positive side, for the majority of borrowers the final amount of the loan is not more than the value of the home at the time of the sale, the loan is guaranteed to never exceed the value of the home. For the savvy investor taking the money and investing it can mean the interest on the mortgage becomes tax-deductible. But for the senior who chooses not to make payments, or pay off the mortgage until they leave their home they can find the value they are left with at the time of sale severely if not completely depleted.

No matter what type of mortgage you are interested in, talk to your financial advisor. Your mortgage is the biggest debt you will likely ever incur and it is important you make the best choice for your financial health.