Tuesday, May 20, 2008

Combining Your Mortgage with Other Accounts

Some lenders offer mortgage accounts that include features of chequing and savings accounts as well. The idea is that you can save money by combining all your bank accounts into a single flexible low-interest mortgage. To pick (or pick on) an example, see the Manulife One mortgage account. Thanks to a friend, Susan, for suggesting this topic.

On the surface, this seems like a great idea. The money in your savings and chequing accounts goes on your mortgage so that they are effectively earning tax-free interest at your mortgage rate rather than the pathetic interest rate those accounts used to get. Your line of credit and car loan move to the mortgage at a lower interest rate. Even your high-interest credit card debt moves to the mortgage.

Manulife illustrates their account benefits with a fictitious case study. Our heroes are Mike and Sarah who start with a mortgage, car loan, line of credit, credit card debt, and savings and chequing accounts. They save $46,980 in interest over the life of their mortgage by consolidating everything into a Manulife One account.

The first thing to observe is that our couple’s finances start in a sorry (but sadly typical) state. Any time you carry credit card debt at typical interest rates, your financial life is swirling the bowl. Mike and Sarah could save a lot of money by just paying off the credit card debt with their cash savings.

The calculation that our couple will save $46,980 is based on the assumption that their spending levels will remain stable. But, Mike and Sarah were foolish enough to build up all this debt in the first place. Now that they have tens of thousands of dollars of room on their flexible mortgage, a paid off line of credit, and paid off credit cards, what is going to happen?

Mike and Sarah need to find a way to get their spending under control. If they can’t do this, then the Manulife One account would be a devastating financial mistake. In an earlier post, I discussed the strategy of creating artificial scarcity to control your spending. The all-in-one mortgage takes away some of the signs of overspending that people use to control themselves.

If Mike and Sarah can’t pay off their credit cards one month, they get a strong signal that they are overspending. With their pay flowing onto the mortgage, and then all expenses coming out, they can blissfully ignore their financial problems until Manulife tells them that they have reached the maximum mortgage size based on the value of their house.

Another consideration is what happens if Mike or Sarah gets laid off. One of the purposes of cash reserves is to see you through temporary tough times. What happens if your lender refuses to let you expand your flexible mortgage because you no longer qualify based on your income?

A single mortgage account isn’t always a bad idea. If you are careful to live within your means then it could be a good way to simplify your banking. But, if you have any doubts about your ability to control your spending, then think twice.

3 comments:

  1. Conceptually, I like the idea of consolidating all debt. If users indiscriminately increase debt because it's so easy, that would be a problem. Thanks for sharing your thoughts.

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  2. Promod: I like the idea on the conceptual level as well. As long as the overall costs are lower with the single account, it is a nice simple approach to banking. But many people seem to need the rigidity of fixed payments on loans to give them the discipline to dig themselves out of debt.

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  3. Manulife One product is quite good. There is also the National Bank All-in-One to consider as well. Either product can help someone manage their finances better than having everything split up like most Canadians do.

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