All-in-one mortgage vs traditional mortgage: what’s the difference?
Did you know there are different types of mortgages? It’s true. Many people think all mortgages are the same, but there are different types of mortgages with specific benefits and features to help you reach your financial goals faster.
Learn about the pros, cons, and difference between an all-in-one readvanceable mortgage and a traditional mortgage so you can choose the best mortgage for your situation.
What is a traditional mortgage?
A traditional mortgage such as the Manulife Bank Select, is a “charge” against a piece of property to secure a loan. The borrower makes regular fixed payments towards the loan, and each payment includes one portion that goes towards paying down the principal (the original loan amount) and one portion that goes towards interest.
Over time, the principal balance decreases, and your home equity (the difference between the current home value and the amount you owe on the mortgage) increases.
What is an all-in-one (or readvanceable) mortgage?
First off, let’s explain why it’s called an all-in-one mortgage. All-in-one mortgages – like our Manulife One – allow you to combine your mortgage loan, bank accounts, short-term savings, and other loans into one account.
Like traditional mortgages, payments on an all-in-one mortgage are made up of two portions – one goes towards the interest, the other goes towards the principal.
But with an all-in-one mortgage, as the borrower pays down the principal, that amount then becomes immediately available as credit for the borrower. For example, with a payment of $1500 where $500 goes to interest and $1,000 towards paying down the principal, the borrower can draw from that $1,000.
Manulife One goes a step further, offering homeowners even greater financial flexibility and customization, as you can create sub-accounts within the mortgage. Each sub-account would have its own interest rate, term, and repayment schedule, so you can tailor the account to suit your preferences and needs.
Don’t just take our word for it – Rates.ca named Manulife One Canada’s most flexible readvanceable mortgage.
Benefits of traditional mortgages
Some borrowers prefer a traditional mortgage, especially if they are new to homeownership. A traditional mortgage is simple to manage and understand, and it forces you to build home equity as your principal gets paid down.
Limitations of traditional mortgages
Traditional mortgages come with several limitations. For example, you typically don’t get combined banking/mortgage privileges.
If you ever need to borrow more money, you must reapply to increase your mortgage amount.
And you can’t access the equity available from paying down your mortgage unless you get a new mortgage, which usually means paying additional prepayment, legal, appraisal, and administration fees.
Additional limitations or cons to traditional mortgages could include:
- You’ll likely get charged a mortgage prepayment penalty to pay your mortgage off early
- Can only use it to consolidate other high interest debt by re-doing your entire mortgage and amortizing the additional debt over the whole mortgage amortization period
- Can’t immediately access home equity as you make payments
- Typically don’t let you create sub-accounts to track the amounts used for various purposes such as investments or renovations
Benefits of all-in-one/readvanceable mortgages
Although a little more complex, many experienced borrowers prefer a readvanceable mortgage as a powerful financial tool to help them reach their long and short-term financial goals.
Some of the benefits of readvanceable mortgages could include:
- Easily access equity available whenever needed
- Borrow up to the set “limit” as long as you own the property
- Pay off the credit line portion without penalty at any time
- Set up sub-accounts to track different spending or loans i.e. vacation savings, renovations, long-term non-tax-sheltered investments
- Create a customized principal payback plan based on your own financial plan goals
- The flexibility to make interest-only payments
- Combine your mortgage, savings, and chequing accounts
- Track interest charges on investment contributions using credit for tax purposes
Limitations of all-in-one/readvanceable mortgages
As flexible as they are, readvanceable mortgages also have limitations that could make them a less-than-ideal mortgage option for some.
For example, the easy access to credit might encourage overspending for borrowers. These borrowers could end up using their home equity as a spending account to fund things they don’t really need.
And the temptation to spend more easily means a readvanceable mortgage could make it harder for less-disciplined homeowners to pay down a mortgage and build home equity.
Another limitation of an all-in-one mortgage involves the registered “limit” or collateral charge amount securing your readvanceable mortgage. This limit is used as your mortgage amount on your credit report, because you can access that at any time. And this impacts your total debt service ratio (TDSR) and gross debt service ratio (GDSR) which could limit what you qualify for if applying for additional credit.
Which type of mortgage is best?
The best type of mortgage really depends on your current financial situation and goals.
A traditional mortgage like Manulife Bank Select could be best if you’re simply focused on paying off your mortgage faster, you or your spouse have had spending problems, you want a simple mortgage solution, or you don’t need to consolidate other high interest debt.
However, if you’re looking for an inexpensive, flexible way to consolidate other debt, borrow for investment, renovations, or other things, and you are good at keeping records and are an intentional investor keen on optimizing wealth-building strategies, a readvanceable mortgage like Manulife One could be exactly what you need.
For more information and details on how these mortgage options could fit into your financial plans, reach out today.