Did you know there are different types of mortgages? It’s true. Many people think that all mortgages are the same, but there are different types of mortgages with specific benefits and features that help you reach your financial goals faster.
Learn about the difference between an all-in-one mortgage and traditional mortgage and the pros and cons of each to choose the mortgage that best suits your situation.
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What is a Traditional Mortgage?
A traditional mortgage loan, like the Manulife Bank Select account, is a “charge” on a property that is registered against a loan. The borrower makes periodic fixed payments allocated to the loan, and each payment consists of a part that is used to repay the principal (the original amount of the loan) and a feature that is used to pay the interest.
Over time, your equity balance decreases, and your home equity (the difference between the current value of your home and your mortgage balance) increases.
What is an all-in-one (or revolving credit) mortgage?
First, let’s see why we call it an all-in-one mortgage. All-in-one mortgages – like our Manulife One account – allow you to combine your mortgage, bank accounts, short-term savings, and other loans into one account.
As with traditional mortgages, the payments on an all-in-one mortgage are made up of two portions: one is allocated to interest and the other to the principal.
But with an all-in-one mortgage, as the borrower repays the principal, that amount immediately increases their available credit. Let’s take the example of a payment of $1,500, where an amount of $500 is allocated to interest and $1,000 to the repayment of principal; the borrower then has $1,000 to withdraw.
The Priva Mortgage One account goes one step further by giving homeowners even more financial flexibility and customization, as you can create sub-accounts within the mortgage. Each sub-account has its own interest rate, term, and repayment schedule. So you can tailor the account to your preferences and needs.
Advantages of Traditional Mortgages
Some borrowers prefer a traditional mortgage, especially if they are new homeowners. A traditional mortgage is easy to manage and understand, and it requires you to increase the equity in your home as your principal is paid down.
Restrictions on Traditional Mortgages
Traditional mortgages have several restrictions. For example, you usually do not enjoy the privileges associated with combining a bank account and a mortgage.
If you need to borrow more money, you must reapply to increase your mortgage amount.
And you can’t access available equity due to mortgage payments made unless you get a new mortgage, which usually means paying additional prepayment, appraisal, legal, and administration fees.
Here are other restrictions or disadvantages associated with traditional mortgages:
- You will likely have to pay a prepayment penalty if you pay off your mortgage sooner than expected.
- You can only use it to consolidate other high-interest debt as long as you refinance your entire mortgage and amortize the additional debt over the entire mortgage amortization period.
- You cannot immediately access the equity in your home as you make your payments.
- In general, you cannot create sub-accounts to track amounts used for various purposes, such as investments or renovations.
Advantages of all-in-one or revolving credit mortgages
Although it’s a little more complex, many seasoned borrowers prefer a revolving credit mortgage as a powerful financial tool to help them achieve their short- and long-term financial goals.
Here are some of the benefits offered by revolving credit mortgages:
- Easily access available net worth when needed.
- Borrow up to the established limit, as long as you still own the property.
- Repay the portion of the line of credit without penalty at any time.
- Set up sub-accounts to track different expenses or loans (e.g., vacation savings, home improvements, long-term investments with no tax benefits).
- Create a personalized capital repayment plan based on your financial goals.
- Have the flexibility to repay only the interest on the loan.
- Combine your mortgage, savings account, and checking account into one account.
- Track interest charges on investments made on credit for tax purposes.
Restrictions on all-in-one or revolving credit mortgages
As flexible as they are, revolving credit mortgages also come with restrictions that may make them a less than ideal mortgage option for some.
For example, easy access to credit could encourage borrowers to overspend. These borrowers could end up using their home equity as a checking account to fund things they don’t really need.
And the temptation to spend more easily means that a revolving credit mortgage could make it harder for less disciplined homeowners to repay that loan and increase their home equity.
Another restriction of an all-in-one mortgage is the “limit” or registered collateral mortgage securing your revolving credit mortgage. This limit appears as your mortgage amount in your credit report because you can access it at any time. And that affects your total debt amortization ratio and your gross debt amortization ratio, which could limit the amount you qualify for if you apply for a new loan.
What type of mortgage loan is the most advantageous?
The best type of mortgage really depends on your current financial situation and your goals.
A traditional mortgage like the Manulife Bank Select account may be more beneficial if your goal is simply to pay off your mortgage as quickly as possible if you or your spouse have had spending problems, if you want a simple mortgage solution or if you don’t need to bundle other high-interest debt.
However, if you are looking for an affordable and flexible way to consolidate other debt or to borrow for investment or renovation purposes, for example, and if you have record-keeping skills and are a saver who wants to Combine with strategies to grow your wealth, a revolving credit mortgage like Manulife One could be just what you need.
For more information on how these mortgage options could fit into your financial plans, contact us today.
