Most Canadians view their mortgage as a massive, multi-decades-long financial obligation that they are forced to take on to be able to buy a home. Few would look at their mortgage as a savings vehicle that can be used to fund goals such as renovations and vacations – or serve as emergency funds.
But that is precisely how it worked out for Kristie Johnson and her husband Todd, using an unconventional banking arrangement offered by Manulife One that allowed them to both pay down debt and fund a once-in-a-lifetime trip to New Zealand, marking the first time her Kiwi husband had been home in 16 years.
How Manulife One operates is simple but efficient: You place all debts such as a mortgage or home equity line of credit in the same account as deposits, rather than a scattering of accounts for savings and loans with varying interest rates. All income is applied to the total debt unless and until it is needed for living expenses, which promises to help save thousands in interest payments over the life of the mortgage.
Manulife One also allows for the creation of sub accounts for longer-term savings goals such as the dream vacation or the creation of an emergency fund. Because “life happens” and unexpected expenses such as a major home or vehicle repairs tend to come out of nowhere, the account also offers financial flexibility to cover those costs or cash in on a once in a lifetime buying opportunity.
“It was accumulating assets and some debt so it was the perfect fit, to run one account the way that Manulife One is structured,” says Ms. Johnson, a Vancouver Island-based life insurance broker. Though there were some debts that she and her husband wanted to pay off as fast as possible, “we saw the freedom that we had being able to access extra money that we needed for vacation,” she says.
Two years after creating a Manulife One family account which included their mortgage, other debts and savings in one account, Ms. Johnson was able to achieve her vacation goal. Using this approach, she also expects she will pay off their mortgage years faster than they would with a traditional mortgage. “I definitely see that rather than a daunting 25-year mortgage, this is something that we can pay off a lot faster,” she says. The couple looks to be mortgage free in 12 to 15 years.
The ability to pay off a residential mortgage (the single largest item of debt most Canadians carry) faster than with conventional banking arrangements is perhaps the greatest benefit. It also allows people to take a different mindset and look on mortgages as a net positive to their family finances rather than as a burden.
“One of the biggest savings vehicles in Canada is a mortgage and for some reason we discount that as savings,” says Jeff Spencer, vice-president of retail sales and distribution with Waterloo, Ont.-based Manulife Bank.
The traditional banking model in which Canadians are both borrowers and lenders to financial institutions is not a great deal, he says. People are charged a certain rate for their mortgage, higher rates for other loans and far higher rates typically for credit card debt while they enjoy very low rates on their savings. To make matters worse, most banking advice is focused on investing those savings and little to no advice is given to debt management.
Ms. Johnson and her husband have made paying off their mortgage quickly a priority – even while maintaining the ability for a bucket list trip to New Zealand. Other families may in fact be better off taking their time tackling debt says Mr. Spencer, an approach that seems to fly in the face of common personal finance wisdom.
“Some people should get out of debt as quickly as possible and some people should get out of debt longer than the 25-year (mortgage) amortization depending on their income, tax, cash flow, risk tolerance,” he explains. “We always want things to be so simple today. When it comes to debt we actually need to complicate it a bit and there actually needs to be more advice.”
For Ms. Johnson, seeing her family’s net worth calculated every time she visits an ATM motivates her to save more and chip away at the debt pile even faster. “Normally you have a couple thousand in your chequing account and your mortgage is off to the side. You go to the bank machine and take $200 dollars out and now you have $1800. With Manulife One you go to the bank and it says you are negative $300,000.
“You just have to wrap your mind around how it works. I get great pleasure out of watching my assets grow and my liabilities decrease.”
Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.