Is your mortgage keeping you in debt?

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 two newer products you need to be aware of. All have both positive and negative product features.

Term Mortgage
A term mortgage has a total amortization period over which the mortgage plus interest amount is repaid. Longer amortization periods mean smaller monthly payments, but the total cost of borrowing increases substantially because you pay interest longer. The amortization period can easily be confused with the term of the mortgage, but they are very different. The mortgage term indicates the length of time over which an interest rate is applied. Fixed term mortgages range between 6 months and 10 years. When the term is over, the mortgage is renewed and a new interest rate is applied. The renewal process continues until the mortgage is paid off. The good thing is you have a loan with a scheduled end and fixed payments. The down side is that there are often fees for paying off your mortgage early, and sometimes there are restrictions on the amount you can pre-pay.

The Umbrella or Wrap-Around 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. In some products 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 product. This type of mortgage is not for everyone and is best suited for individuals who are very disciplined about paying off their LOC. As long as there is a LOC balance 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 has been around for the last several years. It combines all loans, mortgages, chequing and savings accounts 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 as well. 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. Different products will require different amounts to be deposited each month. Likewise, if you are in a total credit position you will earn interest. So when your pay cheque is deposited your loan balance will go down and your interest owing will decrease. But you still have to pay expenses out of the account and like any chequing account there are service charges. It can be really easy to overspend and actually increase your debt, as some products immediately re-advance your principal payment. That means you will lengthen the time before you are mortgage free. Some products allow a portion of your debt to be in a fixed payment sub-account, but you lose some of the advantages of consolidating deposits and loans. This type of product again is not for the faint of heart and is best suited for individuals with growing cash reserves, who have significant positive cash flow and are very diligent with their spending and budgeting.

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.