Pay off Your Mortgage Faster with a Money Merge Account
Although we were making good progress on having our mortgage paid off in 5 years by making extra payments I, wanted to pursue something further to enhance the process. We decided to take advantage of a Money Merge Account. There are different variations of how this can be set up, I will explain what we have done.
I want to caution you that you do not need to purchase any software to set up this process and most of the time this software will not pay down your debt as efficiently as possible and may hurt your progress in the long run.
For nearly two years we have been making mortgage prepayments when we have had excess cash in our bank accounts. This made an incredible difference in the projected interest we would pay and the balance itself. Our mortgage balance was approximately $239K after 22 months of prepayments. If we did not make any prepayments our balance would be approximately $311K. Our prepayments made a huge difference.
Every month for the past 22 months we would sit down and work out an amount we were able to prepay against the mortgage. We had to keep track of when money was coming in and when bills had to be paid in order to prepay the right amount without going into overdraft. Although it was very effective it was not the most efficient way to use our time.
We were able to hit a “sweet spot” when rates were increasing and refinanced our mortgage. The penalty and legal fees were absorbed by the interest savings so we switched to National Bank’s “All in One Mortgage”. In my opinion, this is the perfect mortgage product. It enables you to separate the line of credit portion into different sub accounts and use each as a chequing account. All of our income goes into one account and all of our bills come out of it. The line of credit is re-advance-able. When we make a mortgage payment the principle portion becomes available in the line of credit. The beauty of this is we no longer have to plan around our income and expenses. The money is always available.
Currently we are set up like this, $310K All In One Limit, -$189K in a fixed portion at 3.65%, -$43,726.62 in our main line of credit account which receives all of our income and pays all of our bills at 3.1%, -$832.25 in a second line of credit account to cash dam our rental property (explanation post to follow) at 3.1% and $86,441.13 available overall in the lines of credit.
The goal is to not have any money idly sitting around but have every penny we bring in offset mortgage interest. The interest rate on the line of credit accounts will fluctuate with the Prime Rate. As it increases we will pay down our main line of credit account so when our line of credit interest rate is above our mortgage rate at 3.65% we will no longer carry a balance. It would be ideal to have that account always at a $0.00 balance but with income and bills coming in and out that is not practical. The balance will likely fluctuate $1,000 either way.
This account has allowed us to use our money to offset as much interest as possible and has simplified our financial lives. All of our bills, utility, credit cards, taxes, phone, etc are automatically debited from our line of credit account. Well, all except for the AMEX, they won’t do direct debit without a personalized void cheque. We will work on that later. We no longer have to sit down and work things out on a monthly basis. Our finances are fully automated!
Our total debt currently is $233,558.12 which must decrease by $6312 a month in order to be debt free by July 2013 which is the goal. Although that is a lofty goal, we are waiting for the proceeds from the sale of one rental property and may sell the other next year if the tenants do not want to stay.
The only possible down fall with this is not properly managing our spending. We will have to monitor it and keep it in check. That is after our tropical vacation.
Income Tax Quarterly Installment Payments
I have filed my taxes this year and have mailed the Receiver General a cheque dated April 30, 2010. Due to my business income my tax liability was in excess of $3,000. I am not complaining as I was able to use the government’s money for the whole year, but nautrally they don’t like this. Like everyone else, if you owe them money the sooner they get it the better.
If I have to send them in excess of $3000 again for the 2010 tax year they will ask me to pay my taxes in quarterly installments. My business income is sporatic so I do not want this to happen. This was an easy fix. I simply supplied my employer with a TD1 Form requesting more tax be taken off of my cheque. Although I will get paid less every month, I will not have the same tax liability in the spring of 2011.
If you work a part time job you may want to consider doing the same. Your part time employer will only be considering your part time income when they take tax off of your cheques. This will likely require you to pay taxes the following spring.
If you want to read more about quarterly installments check out this link from the C.C.R.A.
Total Debt Service Ratio 2009
With our taxes now complete, I have the opportunity to figure out exactly what our Total Debt Service Ratio was for 2009. First I want to define GDS (Gross Debt Service Ratio) and TDS (Total Debt Service Ratio).
The GDS is the maximum percentage of your gross income that is allocated to paying the costs of carrying your home. This ratio includes your principal and interest mortgage payment, property taxes, heating and/or condo fees. To qualify your monthly carrying costs cannot exceed 32% of your gross monthly income.
The TDS is the maximum percentage of your gross income that can be used to pay your GDS plus all other debts. This ratio includes everything from the GDS as well as any other loans, credit cards or lines of credit. To qualify it cannot exceed 40% of your gross monthly income.
I want to mention that these are guidelines only and those with good history of managing their credit are allowed to go as high at 44% TDS without considering GDS at all. Yes, if people are not carrying any other debt and have no other monthly obligations their housing costs can eat up 44% of their gross income. This is somewhat scary as someone wanting a $400K mortgage could qualify making just under $60K per year. If you want to read further click here for the CMHC Quick Reference Guide.
I take the attitude that if CMHC uses 44% at the maximum TDS then that is what we should attempt to achieve. For 2009 our TDS was 41%. Not bad, but why were we unable to achieve 44%? $5523 represents that 3% of our income that we did not use for housing costs. This means that we were short approximately $460 per month for mortgage payments. Could we have found that money? Of course we could have. Cut gym memberships, cut donations, cut eating out, cut new computer, cut new theater seating, cut vacations and take advantage of public transit more often. Making up this $460 per month would be very easy for us.
Although achievable, I don’t see cutting those “luxuries” as an option. We are making great progress paying down the mortgage and as long as we are able to stay on track we are not going to change our lifestyle.
I want to note that we are at 41% by choice. Although with our regular mortgage payment and prepayment averaged just over $5,900 per month we are not locked into this payment and we have no other monthly obligations. There would be considerable stress if we were locked into those payments.
When considering your mortgage options ensure that you are not over extending yourself.
Mortgage Payment Error
Banking errors happen and they are much easier to accept when they are corrected quickly and at no cost to the customer.
Earlier this month I submitted an online form to my mortgage lender with a request to make a prepayment of $500. It is pretty easy and I have never had any problems in the past. A couple of days later I was woken from a nap my my better half because our joint account was in over draft because the mortgage lender had taken $12,500.
After transferring funds from our line of credit I tried to figure out how that could happen. I was 99.9% confident that I submitted the right amount, but had a little self doubt because I could not see how the bank could confuse $12,500 from $500. On the other side of that doubt was the fact that I knew we had enough money to cover a $500 mortgage prepayment but an amount of $12,500 for a mortgage prepayment would cause all kinds of havoc.
This happened over the weekend so nothing could be done and the end result was a NSF change for $40 as the bank had reversed the mortgage prepayment.
I contacted my mortgage lender and explained what had happened. They were able to see the $12,500 being withdrawn from and then put back into our account. The were not able to explain how a $500 mortgage prepayment could turn into a $12,500 mortgage prepayment. They asked for a bank statement to refund the $40 NSF fee.
I faxed in the bank statement and the $40 was back in our account within 2 days. I followed up with a phone call to see how that may have happened and they didn’t know. I was advised to phone in to make prepayments rather than completing the online form.
At the end of the day their mistake cost me about 20 minutes of my time to correct, but I was very happy with how quickly it was corrected.
Youth and Money
I was cleaning out some old boxes the other day and reminiscing about my youth when I came across a letter I had written my grandmother over 22 years ago. Reading this letter I realized that I had a desire to read and learn about money at a fairly young age. This desire was likely somewhat hampered by the education system at the time.
I remember learning how to make a pair of shorts from a pattern in Home Economics, make a plastic dish in Industrial Arts and the value of pi. I am confident that there was a purpose to learning these things, but looking back why did they not teach me anything about money? I am happy to report that things have changed in the last 22 years.
Government of Alberta Education has a mandatory Career and Life Management program that provides some financial education to high school students. This is definitely a step in the right direction. I would be interested to see if the students get something out of this program or just see it as being necessary to graduate.
Like most things, if you want it done well do it yourself. Educate your children about personal finance.