Ask your Broker or your banker the following Question;
How have you structured your own mortgage and why?
Aside from discovering that an overwhelming number of mortgage professionals have their own residence set up in a Variable rate product (a topic touched on last month) you may gain an interesting perspective on creating Options for unexpected events.
Several hundred transactions later, with a wide variety of lenders, I have learned a few things along the way. Things which I try to apply to our own personal financing whenever possible.
Much of my role with clients is in creating options, options which may never be required, options for circumstances most clients had not thought to consider. Being overly prudent during Mortgage inception takes only a few extra minutes and can result in saving clients thousands down the road.
The following ‘no-cost insurance plan’ creates a safety net from strategic use of pre-payment privileges. This goes well beyond a simple ‘skip-a-payment’ policy offered with many lenders.
The first step is finding a lender with an aggressive match-a-payment/miss-a-payment program, I know of only one that ticks all the other important ‘options’ boxes as well (i.e. 20% open prepayment privileges).
The target audience for this plan is typically above the age of 45, has less than 15 years current amortisation left on their mortgage, and are somewhat fiscally conservative, as most CDN’s in fact are.
The heart of the plan;
On paper, we take what’s typically ~ a 15-year amortization back out to 30 years, on paper only-not in reality. We then implement the match-a-payment option, this doubling of the baseline payment will reduce the effective amortization to as little as 11 years and 6 months.
For each doubled payment (bi-weekly ideally) there is a banked ‘missed payment’ option. Not just skipping one, but potentially skipping up to 30 payments in a row in a 5yr term mortgage.
Of course none of us ever plans or wants to miss a payment. However this acts a bit like a disability insurance policy (which you should also consider having, as this is not a replacement for quality coverage) which costs nothing at all to have in place. Just a few minutes of planning and foresight.
Not only is there the option to miss payments, just as importantly there is an option of cutting the payment in half by reverting back to the original contracted amortisation.
Key Point: Mortgage payment and amortization have a symbiotic relationship, as you increase one, the other decreases, and vice versa.
You (the client) are in the driver’s seat. Rather than being locked into a higher payment, you have effectively created a two- step buffer should anything in life change radically. And really via a simple e-mail or phone call one can:
- Reduce the monthly payment by 50 per cent, simply by reverting back to the original amortization.
- Reduce a payment to zero for an equal length of time for which they have been making double payments (within the term of the mortgage only, as the miss-a-payment option resets to zero at the start of each new mortgage term).
This all about money management and creating options for the unpredictable path all our lives follow. This is simply a tool, one which may never be used, but is comforting to have handy.
As a happy personal anecdote, the fact that my wife and I had been enacting this strategy for 2 years gave us significant confidence when we wrote an offer on another property without having our current residence listed, let alone sold. We knew if we needed to we could turn off the payment on the old house for up to 2 years reducing the carrying costs to nil. Ultimately our former home sold within a few months, but having this knowledge and this power gave us the confidence and comfort to make a move on a property that we otherwise may not have.
This is part of my own approach to being more of an A-Z solutions oriented Broker than simply just A-to-B. Looking past the short term nature of the initial transaction and perceived basic needs are what quality planning is all about.
Thank you.
