Wednesday, 7 May 2008

Manulife One: a Mortgage-Banking Combi Product to Like

So often one comes across financial products that sound good in principle but are not good value for money. It looks to me that Manulife's ONE Account is a winner that every aspiring homeowner should have a good look at. Back in 2007, Million Dollar Journey did a review of Manulife One and generally seemed to like it, though not as much as me.

How It Works: The account combines a mortgage with a normal chequing and savings bank account. Every day, Manulife sums the positive amount on deposit on the bank side with the negative amount in the mortgage to arrive at a net amount borrowed, and then calculates interest at the mortgage rate on the net amount. There is no interest paid on the savings while the mortgage is not yet paid off and the daily balance is negative. Meanwhile the bank account can be used like any normal chequing account to pay bills, write cheques, withdraw cash at ATMs, the whole bit. If you ever suddenly need to spend extra, and go overdrawn, that is possible too, up to 90% of the appraised value of your home according to Manulife.

As an aside it is surprising that these types of accounts are not more prevalent in Canada. In the UK they have been around for many years and are commonly known as offset mortgages or current account mortgages (because the savings offsets part of the debt).

The Key - Staying Positive: The account works best when there is a positive bank balance however small and variable, because this accelerates paying off the mortgage. It does so not just by a bit but by a surprisingly enormous amount, in many cases years off the time it takes to pay off the mortgage. Manulife has a calculator on its site in which you can plug in your own numbers to see by how many years and how much interest is saved. If you have your pay deposited into the account and then use it till the next pay for normal household spending, then there could/should be a net balance throughout, which reduces the net debt and the interest charged.

Earning a Higher Rate with Savings: One of the neatest aspects is how a positive bank balance works in your favour. Instead of having your money sitting earning around 0.5%, the going rate these days on many chequing accounts, and which is taxable (perhaps taking another third off that, making it more or less zero), it saves interest at the much higher mortgage rate, currently around 4.75% for variable mortgages, which is after-tax dollars by the way. That's the equivalent of earning 4.75% on your bank balance. Getting no interest paid to you on the bank balance even saves the hassle of reporting the puny interest to the CRA of your annual tax return.

Multiple Applications: Manulife suggests several other uses of the account
  • debt consolidation and reduction of net interest costs by moving higher rate credit card debt, car loans, personal loans into borrowing against the secured debt of the mortgage, which is the cheapest rate available
  • access to home equity or reverse mortgage replacement for retired people
  • emergency savings fund instead of keeping this in a savings account, term deposit or GIC, which will earn less than the interest saved on the mortgage
Life on Autopilot: The great feature of the account is the combination by Manulife makes it all happen automatically. So many good plans for paying down a mortgage early never happen through neglect or being too busy with life.

Value for Money: All these benefits would be lost if the pricing was bad, the mortgage rate too high, the options too restrictive or the account fees uncompetitive. Happily, Manulife's pricing seems to be very comparable and competitive all round.
Mortgage rate - the open variable rate at prime 4.75% matches the big lenders and the 1 year seems to be the lowest around (see table from Cannex that I downloaded today)

Banking fees - the $14/month fee looks roughly comparable to big bank chequing options e.g. Bank of Montreal's Performance Plan charges $13.95 per month unless one keeps a minimum $2500 balance, which earns a princely 0.5% per year; Scotiabank's PowerChequing is better at $3.95 month unless a $2000 minimum balance is maintained, which earns exactly 0%. Nevertheless, even at $10 / month extra, the thousands saved in mortgage interest more than makes up for it.

Downside - Debt Temptation: The only downside I can see is that anyone with a tendency to get too easily tempted to use the borrowing margin and increase debt instead of paying down the mortgage will find this account too convenient and easy to abuse.

Other than that, I say kudos to Manulife for a smart, flexible and good value product that enables Canadians to pay down their mortgage much faster and with money that they are actually using for their everyday expenditures.

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