Thursday, August 19, 2010

Mortgage Options

A friend of mine and his spouse just re-negotiated their mortgage on a new to them home of 3 yr in order to incorporate a couple of renovation loans. The bank pitched them on the idea of one giant LOC instead of a traditional mortgage.

There is a growing trend of people I know who have gone that route. I was thinking of the pros and cons of that the other day.

The pro is that you can get everything you owe consolidated into such a loan and when managed under one big umbrella, and with one rate, it is easier and can save interest.

Continuing on the saving interest front, when income gets put into this account, it gets to work on all the debt all at once, right away, and you save interest that way too as you will not need to worry about when the timing was on all the different loans.

One of the first companies to offer such a product is Manulife. It's called Manulife One. Last I checked, there was a fee to get this set up.

The biggest con I can think of with this way of managing debt is the lack of a hard deadline.

With a traditional mortgage, you have set terms and amortization. That builds in some discipline for most people. When the debt is somewhat free flowing, I can see there is possibility to take debt repayment too casually and it is easy for the years to just go by.

Depending on the person or couple, it can be a dangerous thing to be involved with. Banks etc. will sell people on the flexibility of it and how during low cash flow times, it will not demand as high a payment as a mortgage would as it will allow you to pay interest only...

We are too far along the mortgage road to consider such a product. If we were starting out, I wouldn't go this route. I like and hate the structure of a mortgage in that I find it too inflexible some days but it keeps me directed and that is valuable to me.


  1. I'm more comfortable with saving up enough money first then renovate the house once I can pay for it in cash.

  2. I agree with Jersey Mom - Why use the line of credit in the first place?

  3. Here, if you have a LOC instead of a mortgage, you can't get your property taxes absorbed each year into your mortgage debt. You have to pay it outright each year.

  4. Hi Sandra & Dave!

    I agree too. Considering the renos planned are in the $15000 range, you do have to wonder if changing everything and paying lawyers fees is worth it.

    Hi Jolie!

    Thanks for bring the property tax point up. I didn't even think of that. I hope they have...I wonder how banks get around that as I thought it was mandatory for banks to collect property tax if you don't own 25% of your property and in this example the couple do not.