Here’s a case study that shows why having a mortgage strategy that takes into account your cash flow, current debts, future income and financial goals can make a huge difference to your financial well-being.
Max’s mortgage renewal letter
Five years ago, Max bought a home with a $500,000 mortgage with a five-year term, beginning with a 25-year amortization. It had a 2.5% fixed interest rate with monthly mortgage payments of $2,240. Over those five years, Max paid off almost $77,000 of the principal amount owing.
A few months before the five-year term was up, Max received a renewal letter from her lender with this offer:
$423,190 mortgage
Five-year mortgage term at 6.79% interest rate
20-year amortization
$3,204 monthly mortgage payments
When Max read the letter, she was stressed out that her mortgage payments were going to increase by $964 a month. She’s also been worried about her other monthly debt payments, which had also risen over the last year.
She had heard from her IG Advisor, Jean, that banks typically don’t offer their best rates in their renewal letters, so she called her bank and they agreed to offer her a five-year fixed interest rate of 5.59%. This would bring her monthly mortgage payments down to $2,917.
While this was an improvement on the initial offer, Max was still concerned as to how she was going to find an extra $677 every month and keep her financial plan on track.
She contacted her IG Advisor, Jean to schedule a meeting to discuss her mortgage renewal and ways she could prevent her payments from jumping by such a high amount.
Jean’s mortgage strategy
Jean discussed Max’s complete financial plan, including her unsecured debt and upcoming bonuses from work.
Max had $36,000 worth of unsecured debt, made up of:
- $14,000 in an unsecured line of credit at 11% interest.
- $12,000 in a personal loan at 10.5% interest.
- $10,000 credit card balance at 29.99% interest.
Servicing this debt cost Max $1,200 per month in payments. Jean was determined to devise a mortgage strategy that would considerably reduce Max’s current monthly debt payments:
| Proposed mortgage renewal: | $2,917 |
| Current debt payments | $1,200 |
| Total monthly debt payments | $4,117 |
After discussing Max’s situation, Jean went over her details with a Mortgage Advisor. They analyzed a number of options, including a shorter mortgage term, a refinance mortgage, extending the amortization period (this is the length of time it would take to pay off the mortgage) and incorporating the IG Home Equity Plan to consolidate Max’s unsecured debts at a much lower interest rate.
They also talked about the most effective use of Max’s significant annual bonus payment from work.
Max’s mortgage strategy from IG
Jean presented Max with the options available to her, which were designed to not just provide a mortgage that helped keep her financial goals on track, but also to reduce her total monthly debt payments so that she could free up more money to put into savings. Jean was able to match Max’s bank’s interest rate and recommended extending her amortization by five years to reduce the monthly payments.
While this would mean it would take Max longer to pay off her mortgage, Jean also suggested changing her mortgage payments to accelerated bi-weekly: this would knock several years off the amount of time it would take to pay off the mortgage completely. This is the mortgage strategy that Jean devised for Max:
$423,190 mortgage
Five-year mortgage term at 5.59% interest rate
25-year amortization
$2,605 monthly mortgage payments
Jean also provided Max with a $100,000 IG Home Equity Plan (a type of HELOC). The idea was to use $36,000 of the HELOC to pay off her unsecured debts and replace them with one debt with a much lower interest rate (prime plus 0.5%, compared to between 10.5% and 29.99%).
Jean also proposed that Max make interest-only payments on the HELOC, which worked out at just $231 per month. Max would pay off the HELOC loan by using half of her annual bonus every year over three years, while the rest of her bonus would go towards her RRSP. Max also now has access to low-interest money in her HELOC for when she decides to tackle her next home improvement project.
With Max’s new mortgage debt repayment strategy, her new monthly debt payments look a lot more manageable:
| IG mortgage payments: | $2,605 |
| HELOC debt payments: | $231 |
| Total monthly debt payments | $2,836 |
This was considerably less than she would have been paying monthly to service her mortgage and debts if she had renewed with her old bank and continued to pay high-interest debt.
The result:
Originally, Max was facing an increase in expenses that would have reduced her monthly cash flow by $677. By working with an IG Advisor, she not only avoided facing an increase in monthly expenses, but her mortgage strategy meant that her monthly cash flow actually increased by $604. This was a difference of $1,281 compared to her lender’s mortgage renewal offer plus her other monthly debt payments.
In spite of mortgage rates increasing, by avoiding an expensive mortgage renewal by taking on an IG mortgage strategy, Max was able to reduce her overall debt interest payments, keep her mortgage payments at a manageable level and still have enough money to maintain her lifestyle and keep all of her financial goals on track.
How to switch to a mortgage strategy
If you have a mortgage renewal coming up, before you sign on the dotted line, talk to your IG Advisor. They’ll be able to provide you with a mortgage strategy that not only takes into account your whole financial picture, but which also complements your financial plan.
If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
Mortgages are offered by Investors Group Trust Co. Ltd., a federally regulated trust company, and brokered by nesto Inc. Licences: Mortgage Brokerage Ontario #13044, Saskatchewan #316917, New Brunswick #180045101, Nova Scotia #202507230; Mortgage Brokerage Firm Quebec #605058; British Columbia, Alberta, Manitoba, Newfoundland/Labrador, PEI, Yukon, Nunavut, Northwest Territories.
*In Ontario, a mortgage agent, and in New Brunswick and Nova Scotia, a mortgage broker or a mortgage associate.
*In Quebec, a mutual fund representative.
Mortgage advisors are licensed professionals and equivalent to the following titles per province: Sub Mortgage Broker/Mortgage Broker in British Columbia, Mortgage Associate/Mortgage Broker in Alberta, Associate/Mortgage Broker in Saskatchewan, Salesperson/Authorized Official in Manitoba, Mortgage Agent/Mortgage Broker in Ontario, Mortgage Broker in Quebec, Mortgage Associate/Mortgage Broker in New Brunswick, Associate Mortgage Broker/Mortgage Broker in Nova Scotia, or Mortgage Broker in Newfoundland & Labrador.
