There are lenders that suggest that combining all your account into one will save you thousands of dollars in interest and you will be taking years off your mortgage. Your day-to-day chequing account, savings account, and your line of credit will be bundled together as one.
You will hear from these lenders that by paying off expensive credit card debt and taking advantage of having your payroll deposits go straight into your “all in one” account, you will be saving money. The truth is, you will…BUT the main point is to really determine if this is the best deal for your situation. If you consider the high cost of credit card debts, just about anything would be better than that. Keep in mind that most of these products are interest only and the rate is usually geared to the Bank Prime lending rate. The rate is normally Prime plus 0.50% which is 3.50% today. If you’re used to paying rates as high as 18% on your credit cards, I can well imagine the enthusiasm of getting into a product like this. By the way, don’t forget the idea of having your payroll deposited directly to your account and you are told how much of a benefit this will have in paying your mortgage off so much faster, perhaps even by years.
Sounds good so far, doesn’t it? But could you have saved even more interest? The answer is yes!
Let’s consider a new all in one mortgage where your current balance owing is $300,000. Your average monthly net pay is $8,000. (both yours and your spouse). You’ve paid all your credit cards, car loan, etc. with this new mortgage so you’re on the road to financial freedom!
But wait a minute…what’s the rate again?…3.50%! A better rate would be 3.00%, right? A 0.50% difference is a whopping $1,500 annually in more interest paid for having an “all in one” account. By choosing a re-advanceable variable rate mortgage at Prime (3.00%), you would be putting your hard earned dollars in your pocket instead of the bank’s.
“But Ed . . . I’m saving more on interest because my payroll deposits reduce the amount of interest I pay each month.” Okay, let’s take a look.
That $8,000 going into your account each month has the impact of $23.33 monthly (provided of course that you don’t use any of it during the month but you will need to eat, probably put some gas into your car, and pay bills). Perhaps you may not use all of your $8,000 every month so you may even see your balance come down over time. However, the most you can possibly save by a direct deposit to this all in one account is still only $23.33 monthly or in a year $280.00. The difference between the higher rate is $1,500, less the maximum advantage of your payroll deposits, is now $1,220. That’s $1,220 more you are spending than with the normal variable rate mortgage at 3.00% and having your day-to-day chequing left alone!
If you find that during the year you have extra cash in your chequing account, you can choose to pay down your mortgage with your prepayment privileges (up to 15% pre-payment is allowed per year, which in our example of a $300,000 mortgage is $45,000 pre-payment allowed per year). Or, invest into a TFSA (Tax Free Savings Account), purchase an RRSP, or plan a vacation. You already have peace of mind knowing that you are meeting your mortgage obligation and have a good understanding of when your mortgage will run it’s course. With an all in one product it is often difficult to really appreciate where you stand at any given time, and in the worse case scenario you may end up exactly where you started.
In my example above, it may be in your financial best interest to choose a re-advanceable variable rate mortgage at a lower rate than an all in one product. However, if your mortgage balance is relatively low, say under $50,000, the difference between paying the extra 0.50% and having your average monthly payroll deposits of $8,000 going into the same account is minimal when comparing it to a re-advanceable variable rate mortgage. Just make sure your lender has your best interest in mind when helping you choose between the two!