Convenience Store Mortgages

Do your homework, shop around

I am sure you have seen and heard the ad on TV: What is your number? You then see a crowd of people in a room with a number attached demonstrating the interest savings on their mortgage if they select an all in one mortgage. Does the math support their claim? Under the circumstances they present, yes however you can do much better if you are sufficiently disciplined to manage your financial affairs.

To summarize, the product being offered is a giant Home Equity Line Of Credit (HELOC) that encompasses your mortgage, chequing / savings and other debt. The maximum amount available is based upon 80% of the appraised value of your home. Assuming you were qualified and the house is appraised at 250,000 then a line of credit in the amount of 200,000 would be advanced. (250,000 X .8= 200,000). With a conventional mortgage you would make a monthly payment each and every month and depending on the lender may not be able to pay down principle beyond what was in the agreement. Most lenders allow prepayment features of 15% per year or the doubling up of payments. With the HELOC all surplus funds in your account will be applied directly to principle each and every month with no penalty being incurred. Sounds good in theory but lets do some basic math.

The rate being quoted at the present time for the HELOC is 3.5%. If we take the above noted amount of mortgage (200,000) calculate the monthly payment based on a 25 year amortization our payment would be 1,001.25 and you could make extra payments if you had surplus cash on hand. Total interest for one year 6,918.76 assuming no extra cash available. Compare this to a variable rate product currently at 2.25%: Monthly payment of 871.22 and total interest for one year 4,417.32. The extra interest is 2,501.44. If you had extra cash on hand the total would be less however even with a VRM most lenders allow extra payments to be made with no penalty. In addition to the interest rate premium, you pay a monthly service fee of 14.00 and interest is compounded monthly rather than semi annually as is the case with most other lenders.

By exercising the prepayment features you could apply the extra cash to your principle without incurring any penalty.

I like to refer to these mortgages as ones of convenience. Most consumers who shop at convenience stores do so knowing that they must pay a premium; if you are disciplined and can manage your money in a timely fashion you shop here as little as possible. The purchasing of a home for most Canadians represents the largest expenditure they will ever make, do your homework and shop around.

As a mortgage broker we can present many alternatives and find a product that fits your needs. Give us a call for a no cost or obligation meeting to explore the possibilities.