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Rather than traditional, separate mortgage and personal banking accounts, an all-in-one account combines the mortgage and debt accounts and personal banking accounts into one pot. (Darren Calabrese For The Globe and Mail)
Rather than traditional, separate mortgage and personal banking accounts, an all-in-one account combines the mortgage and debt accounts and personal banking accounts into one pot. (Darren Calabrese For The Globe and Mail)

Lines of credit

All-in-one mortgage accounts and the benefit of putting your debt in one pot Add to ...

The whole premise seems geared toward keeners.

All-in-one mortgage accounts – a kind of mortgage account that acts like a big line of credit – seem aimed at the kind of borrower who uses every trick available to pay off the mortgage quickly, the type who can play an online mortgage payoff calculator like piano keys.

Drawing Conclusions: How much does it cost to break a mortgage? (The Globe and Mail)

They tend to be astute, experienced mortgage borrowers, says Anthony Contento, chief executive officer of Sherwood Mortgage Group in Toronto.

So what’s their secret? First, some basics.

A line of credit offered by banks is a simple concept. As a mortgage gets paid off, the amount of available credit for a customer to reborrow rises proportionately.

All-in-one accounts are similar, but they take the line-of-credit premise a step further.

Rather than traditional, separate mortgage and personal banking accounts, an all-in-one account combines all of the mortgage and debt accounts, and all of the personal banking accounts, into one pot. The logic of this is that the moment a deposit (say, a regular paycheque) is made into the all-in-one account, that money immediately goes toward helping to pay down the mortgage and any other debt.

But unlike regular bank accounts, paying bills and other living expenses requires taking money out of this catch-all account, which can feel like withdrawing from a line of credit. Again, think of it as one big pot of income and liabilities.

On its promotional websites, Manulife Bank of Canada highlights its mortgage payoff advantages and displays its payoff calculator prominently.

The sales pitch is that by combining all of a customer’s personal banking, debt and mortgage accounts into one pot, customers can potentially save more on interest costs and pay down the mortgage faster. National Bank similarly stresses the potential savings and the ease of having a streamlined account with the all-in-one account it offers.

“Manulife brought this product to Canada, having seen its popularity in the early 1990s in Australia. That’s where the product first manifested,” says Rick Lunny, chief executive officer of Manulife Bank.

“The ability to offset every dollar you earn automatically toward paying down your debt ultimately could save thousands of dollars of interest over the term of your mortgage,” he says.

Yet the draw for sophisticated borrowers isn’t this payoff structure. They are already good at that. They are instead looking at using these lines-of-credit accounts to restructure debt. An all-in-one account and just a simple home-equity line of credit caters to “the individual who is looking to diversify their portfolio. What I mean by that is hedging themselves maybe against rising interest rates,” Mr. Contento says.

For instance, this is a customer who may take $100,000 of the mortgage and put it in a variable-term mortgage, but then have $200,000 in a fixed five-year mortgage, all as a hedge against a possible interest-rate rise. “Given the possible volatility in the market, they are going to try to hedge against that,” Mr. Contento says.

So, these tend to be second- or third-time home buyers, Mr. Contento adds. They are typically people with more experience in handling mortgage debt.

Manulife and National Bank allow customers to create sub accounts, within the all-in-one account, giving them the ability to portion off debt under different fixed or variable terms.

Royal Bank of Canada, as another example, allows the same thing with its more traditional line of credit, letting customers segment their debt into different subsets. It requires a degree of sophistication to keep track of this, although Mr. Lunny at Manulife Bank argues that a customer can create this kind of setup and then let the debt payoff plan run its course with little oversight.

“Working with your financial adviser or Manulife representative, you develop this customized individual plan. And then it basically runs itself over that period of time. You don’t have to worry about moving your money from one account to another,” Mr. Lunny says.

But Mr. Contento notes that he would dissuade a certain type of borrower from adopting this. This would be someone who sees a line of credit as easy money, as an ATM from which to borrow. And the risk is that this person might foresee only making the required interest payments, but not give much thought in the short term toward paying off the underlying, line-of-credit loan.

“You have people who are thinking, ‘Hey, you know what? I can make interest payments only on the line of credit. It’s going to be cheaper than having to pay a principle and interest payment on a mortgage.’

“Those are the ones [to whom] you’d probably say, ‘Revolving credit is not for you at this time, but it may be five years from now when you might have a little bit more equity in your home,’” Mr. Contento says.

And that’s the concern about which most financial commentators warn. The immediate access of a line of credit can be too tempting, particularly if all one’s bank accounts are tied into an all-in-one line of credit account. It takes discipline.

However, the additional fees associated with all-in-one accounts aren’t a factor, Mr. Contento argues. He says all lines of credit accounts – whether they are more traditional home-equity lines of credit or all-in-one accounts – tend to be very similar in the end in terms of fees.

Manulife Bank’s Mr. Lunny argues that the real savings comes with money in an all-in-one account continually working to pay down debt, rather than just sitting around gathering dust in traditional no-interest chequing accounts or practically no-interest savings.

“That’s the significant difference between this type of account and a traditional bank account where you have a loan on one side, and cash sitting doing nothing on the other side,” he says.

He also takes exception to the common view that an all-in-one account is for the more sophisticated, experienced borrower. First-time home buyers may not typically have much surplus cash, and many will lock 90 to 95 per cent of their mortgage into, say, a fixed-rate, five-year mortgage contract.

“But they still get a paycheque every two weeks or so. And that money sits around for a few days. So why not have 5 or 10 per cent of your line of credit floating, so that you can assure you never have your money not working for you?” Mr. Lunny says.

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Follow on Twitter: @Guy_Dixon

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