In my office we have never looked at taking 40 years to pay off a mortgage as a proper strategy, however there are many instances in which a longer amortisation has proven a useful strategic tool for clients. Especially clients on their last 20 years of less of payments.
The fact is that the longer amortisation’ were typically used by first time buyers to allow for reduced payments initially while other things took initial priority, student debts, furniture, children, etc. Such are the expenses of being in your 20’s and 30’s. It also allowed many first time buyers to qualify for a mortgage prior to getting through that last year or two of student loan repayment.
Although there has been some comment on the potential negative impact on our Real Estate market of the shorter amortization period removing some first time buyers from the markets, and there is validity to these concerns – in particular for Boomers dependent on monetizing their largest assets at some point.
I equally concerned about the impact the adoption on shorter amortization periods has had, and may continue to have on my clients whose mortgages have less than 20 years remaining.
The following sets out a strategy that I have been working for the past few years with clients typically past the age of 50 with less than 15 years left on their mortgage. There are a few other additional tweaks that can be made, but here is the meat of it – my apologies in advance for the lengthy post.
Any lender that offers a match-a-payment/miss-a-payment program would qualify to use for this, I tend to find that for a few other strategic reasons typically Scotia is the best fit for my clients.
Typically a client with less than 15 years to go on their mortgage is over 50 yrs of age, typically very fiscally conservative (zero consumer debt and a stellar credit score) and being such a prudent individual is what has got them to this near debt free point. As an independent broker I often feel that I am lucky to have these folks as my clients at all as they have historically dealt directly with big bank. Having a strategy like this one set out for them typically gives my clients an idea of the options that are available outside the walls of their current institution, or in some cases ironically enough opens up the options that were there all along but were never presented to them.
I call this my ‘no cost’ insurance plan. On paper we take the amortization out to 30 years, (hear me out, I am not suggesting you take 30 years to pay the debt) and then we implement the match-a-payment option, this doubling of the new lower baseline payment puts the client back on track for the effective amortization they were after to start with.
This is due to the fact that mortgage payment and amortization have a symbiotic relationship, as one rises (payment) the other falls (amortization length), and vice versa. With this plan you (the client) are in the drivers seat. Rather than being locked into a higher payment, you have effectively created a two step buffer should anything in life change radically; 1. You can cut your payment in half if need be, back to that 30 yr AM option. 2. You can reduce your payment to zero for an equal period for which you have been making double payments (within the term only – the missing a payment thing resets to zero at the end of the chosen mortgage term).
Let me be clear here, the plan is of course to NEVER miss a payment, however this is a bit like an insurance policy of sorts that costs nothing at all to have. If something negative comes at you the option is there for some payment relief. Or to put a positive spin on it, should you ever find yourself in the position that I recently put myself in; buying house #2 prior to actually having a firm sale on your current home, you are able to turn off the mortgage payment on your original residence until it sells. (In my case it was only 2 months of payments on two properties before we had a sale, however it gave my wife and I the confidence we needed to make the move that we did).
There really is no downside to this plan other than for a client who will choose the ‘easy route’ and opt for that lower payment and not implement the double payment…however that is not likely how a candidate for this program is wired, as you did not get down to a ~15 year amortization without self-discipline in the first place.
Another common element with candidates for this strategy is that they often have very low mortgage balances in relation to their property values. This opens the door for a conversation about setting up a secured line of credit.
The conversation usually is along these lines; ‘I do not suggest a HELOC product for every client, however as you have significant equity in your property combined with the fact that you clearly know how to manage your capital and your debt, the Scotia STEP is worth discussing. Scotia offers what is called the Scotia Total Equity Plan or ‘STEP’ program. It gives you the ability to split your mortgage into as many as four different mortgage products, perhaps splitting the current balance between a 2yr 2.69%** and a 5yr 3.09%** and leaving the remaining equity (currently up to 80% of the property value) accessible should the need for capital arise. Perhaps an RRSP top up, an investment or vacation property purchase, a deposit on a new residence, assisting kids with a down payment for a property, or simply having the access to the capital should it every be required’.
As you can see there is more to elaborate on there as well…each case is it’s own.
With the buzz that we may see the new 25 year amortization adopted by all major lenders across all mortgage products there is some cause for folks at the other end of the mortgage spectrum to also be concerned about their own options being taken away.
The point of all of this is simply to add value, not to over-complicate things. There is a fine balance that I work hard to maintain between being perceived as a ‘pusher’ of debt as opposed to being seen as doing a first class job of creating maximum options for my clients in order to allow them to effectively deal as well as they can with whatever twists and turns the road of life throws their way.
Have a good day!
**rates listed are subject to change, not quotes and OAC only.