New ingredient to the mortgage stew

Despite my thinking I’d assessed all my options, I have a new ingredient for the mortgage stew.

When I dropped into my local CIBC branch on Friday to do some day-to-day banking, my friendly branch manager nabbed me to go over her numbers regarding my mortgage. I indulged her, even though I had already run the numbers myself.

She was working with a different set of numbers.  Here’s the wrinkle:

If CIBC takes on a new mortgage that is $400K, the cashback offer is 3%, rather than 2%. As you might imagine I said “well, my mortgage isn’t 400K, and the cashback offer is a bit of smoke and mirrors to me right now.”  She asked me to indulge her, and since she’s a nice lady, I did.

She added up my existing mortgage, and of course, there’d be the penalties to Scotiabank. Then there was a bit left over. She said “do you have any work that you need to do around the house?”

Gee, the house built in 1923…is there work to do? Heck yeah.

Then I told her I really didn’t want to see a $400K mortgage. She told me the $12,000 in cashback could go right back on the principle, leaving me with a $388K mortgage, which is about $17K more than it is right now. IF I moved it from Scotia, the penalties would be added to my mortgage principle, so the extra 17K is partly penalty, and partly just extra that might be used for some home repairs.

Then she started showing me the math on a 25 year amoritization. Again I slumped in my chair. “What’s wrong?” she asked. “I don’t want to be paying off this mortgage in my 80s” I answered.

She reminded me of a trick that I had used once in the past and had forgotten. The trick is to take out a longer amoritization than you may want, but boost your payments up to the dollar amount that you can tolerate. This way, in the event that something happens to your income (job change, illness, etc) you don’t have to break your mortgage to go back to a lower payment. In theory, you could take a 25 year amoritization and pay it down like it’s a 15 year amoritization. I suspect that many people may think they’ll do this, but they take the long road to pay it down anyway.

So, on $388K over 25 years at 2.5% on a 5 year term, I’d pay $133,141K in interest over the life of the mortgage. That’s if I never paid an extra penny over the required amount. (Not gonna happen).

If I took that same mortgage and treated it like a 15 year amoritization, I’d only pay $77K in interest over the life of the mortgage. That’s almost cut in half. Scary stuff.  If I treated it like a 12 year amoritization, the interest would be just shy of $61K. That’s likely too aggressive for me to pay, but perhaps 13 or 14 years might be doable.

To answer my branch manager’s question – yes, there are things to do around the house. My front steps are crumbling more each day. This was already on the books as a 2011 home repair. Where is the money to come from? I have no idea. I’ve already paid $1600 for eavestrough an facia repair and squirrel eviction. The trouble is, I see the squirrel is back, and she has babies. I’m not happy, but I still have to get them out. Yes, there’s a big hole in my new facia. Do they sell chainsaws to squirrels?

Finally, the brick on my home needs repointing. If not this year, then certainly next year. Next year my driveway needs to be dug up and replaced, and the side of the house needs waterproofing. These aren’t the “nice to haves”, these are the “must maintain the home” things. It’d be nice to have properly sealed windows on my upper level too, but frankly, these can wait for a while.

So, I’m pondering the offer of the CIBC again. I do worry about a job change or a change in my income. After all, I’m the only one bringing home the bacon, and I have nobody to back me up on this stuff. I also worry that I’m tired, I mean really tired, and I have daily fantasies about my retirement.

There was a point in my life when I was thinking about advancing my career, being upwardly mobile, rocking the office. Now, I’m trying to find the path of least resistance. I wish I could see the way clearly. Sometimes I just wish I could moan about it to somebody else and have that somebody else present some options I could bat around.

All this turmoil over a mortgage. The only think I know for sure is this: I’m not rushing this decision, I’ll wait until I’m really sure about the path, and then I’ll take it.

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8 responses to this post.

  1. Posted by DTN on May 9, 2011 at 3:25 pm

    I would see if you can get Scotia to waive some of their penalties and cover lawyer costs (make sure they pay to register ALL documents).
    I deal with TD and they gave me a credit for my lawyer, waived most of my penalties and I got a decent rate (3.74 locked in for 5 years – which is how I like to do my mortgages, even though I know I shouldn’t).
    DTN

    Reply

    • Hi Darla,
      Scotia will waive a chunk of penalty if I stay with them. They’ll take off a 15% prepayment, then the branch manager has discretion to waive another 20% of the fee. There’d be no lawyer needed in this deal (thankfully!) There’s nothing wrong with locking in, and you got a good rate! At least with locked in, you know what you’re up against for the life of the term. Thanks!

      Reply

  2. Posted by barb on May 10, 2011 at 10:09 am

    NO.
    Taking on more debt to pay it off longer is a trap.
    You have a house. A house always needs work. Always.
    Dont think about the work on the house. Focus on how
    you can pay off your debt(mortgage)faster/sooner .
    The sooner you carry less debt (any kind) you feel better, breathe easier, you relax .

    Good luck
    Barb

    Reply

    • Hi Barb,

      The furthest thing from my mind is more debt. However, as a home-owner I HAVE to think about home repairs. The longer that necessary repairs remain undone, the more it will cost to do them, and I’m not protecting my most valuable investment. One of the reasons insurance companies have been putting up insurance rates for single people (rumoured) is that people with single incomes have a more difficult time executing necessary home repairs. As repairs go undone, property values depreciate. The more a property depreciates, the higher the incidences of some need for a claim.

      So, while there are necessary and unnecessary home repairs, the necessary ones have to get done, and since I have no savings for this, they will be done on some kind of credit – whether it’s a mortgage (at 2.5% or 2.2%) or through a line of credit (4.5%). So it’s really all part of the broad “pay off your debts/mortgage faster” suggestion you’ve made.

      It will be a LONG time until I’m not carrying any mortgage debt. I’m not breathing easy yet!

      Reply

  3. Totally agree on the “many people will think they’ll do this – but don’t”. Every single person I know in real life that has financed with a HELOC is like this – they’ve paid nothing down on it, even after several years. So there’s a certain element of “know yourself” there.

    I’m not sure if you’ve posted on this, but do you have a 5-10 year plan for getting out of the workforce (maybe not completely but part-time) and / or downsizing the house? I found having the light at the end of the tunnel made the tunnel a lot more bearable. Actually, I started liking the tunnel, which kind of sucked. 🙂

    To know that in 15 years you’d have probably a million bucks in paid-off real estate is pretty awesome. And there’s nothing like a mortgage for forced savings. 😉 I still think that a balance between investing and paying off a mortgage is a good thing. I just can’t justify paying off 2.5% on a mortgage and foregoing investment gains. It doesn’t make sense to me. I know Canadian Dream is doing that, but the opportunity cost can be so substantial – in my experience. Maybe it depends on how risk averse you are and your exposure to public companies and the markets.

    Reply

    • Jacq, thanks for this. I think I’ll have to keep re-reading it (since I’m a dufus with investing), but I will.

      Reply

      • Tracy, just start with putting your TFSA into a good dividend growth fund through your bank. (I’d just go for the dividend fund initially because you’re probably guaranteed around 5% in just dividends annually with really solid companies that don’t experience wide fluctuations). Set up a practice account with your bank if you have that option – my RBC does – and just pretend that you’ve invested for awhile. It’s like monopoly money then.
        Between you and me, I think gas stocks are going to go up in about 2-3 years and companies like Encana have pretty good dividends even though they’ve stayed stable in the 2 years that I’ve been in them. And my friends in the Oil biz say that drilling is starting to take off again. I’m holding off selling my house until then anyway. Ask Kelsi what she thinks – she’s way more diversified than I am and actually monitors stuff instead of having a lazy portfolio like me and would probably love to help.

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