September 5, 2017

Getting out of debt needs to be a priority for all Canadians – and here is why!

According to a recent report by Manulife Financial more than half of Canadians anticipate carrying debt into retirement.  Many plan to continue work as long as they can in order to pay off debt.

Interestingly, and perhaps ironically, Manulife was one of the first finance companies to promote the idea of leveraging residential properties to incorporate all indebtedness – the “Manulife One” account – which allows consumers to consolidate all of their borrowing into their mortgage.

How it works is that say your house is worth $250,000.00 and you are have a mortgage of $150,000.00 by using the “One” account you can borrow up to 80% of the appraised value of your property, which may go up as you pay down your mortgage.  So, the lender registers an interest in your property for the full $250,000.00 that effectively blocks other lenders from registering subsequent mortgages.

You can then borrow at preferred interest rates up to $50,000.00 in any combination of line of credit, credit cards or overdraft – all secured by the same mortgage package.  If your house went up in value to say $312,000.00 you would have access to the full difference between the remainder on the $150,000.00 mortgage and the value registered against the property.

But how does this help you?  In short it doesn’t it traps you, it locks you into one institution for all of your borrowing adding high penalty costs to getting out.  In reality your house should not be treated like an ATM – you should strive to pay down your mortgage so that when you do retire you can live relatively cheaply.  However, you should at the same time be focused on trying to save money to fund your retirement – not just fritter all of your earnings away on impulsive spending habits.