Mortgage twist appeals to conservative investors
By Gordon Powers, Sympatico / MSN Finance
A new type of mortgage has arrived in Canada. It’s from HSBC and is called the Smart Savers Mortgage.
It works like this: You take out any kind of mortgage and then link it to one or more HSBC accounts. From there, any money in those linked accounts reduces your mortgage rate by a percentage that equals your savings divided by your mortgage.
For example, homeowners with a $300,000 mortgage at 4.6% who link $45,000 in deposits throughout the life of the mortgage, effectively reduce their interest rate to 3.9% since the total deposits equals 15% of the mortgage balance.
Since your payments stay the same, however, this reduced rate means you’d pay off more principal and cut your amortization by close to 3.5 years over the life of the mortgage.
HSBC, which has enjoyed success with this type of mortgage in Asia, is hoping the product will appeal to conservative investors. And there is a benefit if you insist on keeping a lot of cash on hand.
As interest rates charged on mortgages are higher than those offered on savings deposits, you’re effectively generating an interest “premium” over what you would receive on your regular savings. Get a mortgage broker to help you determine how competitive the HSBC rates are however.
The truth is, rather than sit on a pile of cash, you’re still better off paying your mortgage down whenever you can – an option, according to the Canadian Mortgage and Housing Corporation, which seems to appeal to the majority of us. 78% of Canadians said they wanted to pay their mortgages off as fast as possible and 33% said they had made a lump-sum payment toward that end.
I’m with them.
Posted by: Accter | Jun 1, 2021 11:34:40 AM
Gordon the conservative approach certainly is to pay down your mortgage first but its a poor decision for most people for several reasons.
1. Investing knowledge takes time to accumulate. You can't just one day when you have paid off your mortgage wake up and understand the investing world. By investing early (while you still have 20 years on your mortgage) you will begin to learn the financial ropes before crunch time (ie turning 50 just paid off the mortgage and looking at retirement in 10-15 years). I would bet a fair chunk that you invested as a young individual instead of always paying down your mortgage.
2. A 5 year locked in mortgage is at 3.75% today. That is really cheap money. It takes very little imagination on an investors part to return far better than that. Personally I need my money doing better than 3.75% if I want to reach my retirement goals and I would assume most people are right there with me. Add in the RRSP benefit and it is a tremendous difference.
3. A 20 year mortgage is a long-time. In the modern economy most of us will likely have a need for the extra money once or twice (brief unemployment, birth of children etc). that safety net of the cash is more difficult to get at if it is tied up in your house than if it is in RRSPs/investments.
4. Lastly we both know real returns are made in leveraging (yes I know added risk but lifes a risk). Deleveraging your house by quick paydown will reduce the return you receive on your house and your portfolio in general.
As your the article above it would be a very small part of society that would have any sizeable % of their mortgage sitting in cash
Posted by: 39nholdn | Jun 2, 2021 12:45:04 PM
Speaking of mortgages, is it just me or does anyone else find it disgusting that TD (my bank) is raising mortgage rates after the government agreed to buy their toxic assets, with prime at an all time low....things that make you go hmmmmmmmm......
Posted by: Rick sabourin | Jun 3, 2021 9:21:24 AM
Is there anyway to get money out of a locked in RRSP as I could use this money to pay down credit cards that are charging 21% interest.
Posted by: John Beck Property Vault | Sep 10, 2021 1:07:38 AM
The issue i see in our market is that the high end is compressing down into the market areas below it. There is little distinction between pricing of homes in certain categories.
Posted by: Real Estate System | Sep 19, 2021 1:34:23 AM
Great blog. Very informative, especially in light of the ever changing mortgage market,
consumers need up-to-the-minute updates on what’s going on.