Fixed or variable mortgage rate? Get both with Manulife One sub-accounts

While many homeowners have heard of a fixed-rate mortgage or a variable rate mortgage, the term ‘mortgage sub-account’ is less well-known. However, they offer borrowers some specific benefits that could help them better organize their borrowing needs, pay off debt faster, save thousands on interest, and meet their financial goals faster. Here’s what you need to know about mortgage sub-accounts.

What is a mortgage sub-account?

With a mortgage like Manulife One, you can split your debt into different portions. One portion might be your ‘main’ account, and the other portions (known as sub-accounts) can be used to manage other debt or loans, or to lock in a portion of your mortgage loan with a fixed rate while keeping another part of it with a variable rate.

What is the difference between fixed and variable rate mortgage?

Before jumping into the benefits of sub-accounts, it’s important to outline the differences between fixed-rate mortgages and variable-rate mortgages.

Fixed rates are exactly that – fixed. For the term of your mortgage, you’ll pay the same interest rate. This gives you more certainty as you will know exactly how long it will take to pay off your mortgage, and if interest rates go up, your rate stays the same.

A variable-rate mortgage is tied to the lender’s prime or base rate, so if that rate increases or decreases, your mortgage interest rate will increase or decrease with it. For example, if rates go down, more of your payment will go towards the loan principal so you’ll pay off the mortgage faster, but if rates go up, more of your payment will go towards interest costs, which means it may take longer to pay off your mortgage.

Benefits of using mortgage sub-accounts

With Manulife One, homeowners can use up to five term sub-accounts with different fixed or variable rates, terms (i.e., open or closed mortgage sub-accounts), and amortizations for each. This means you can have fixed-rate and variable-rate sub-accounts within your mortgage, so you can get the best of both worlds.

A key benefit of using mortgage sub-accounts is their flexibility. Sub-accounts allow you to structure your mortgages to meet your family’s specific financial goals. Some additional benefits of using a mortgage sub-account include:

  • Protection against potential rising interest rates
  • Ability to access falling interest rates
  • Ease of tracking spending for tax-deferred/tax-deductible expenses
  • Organized debt tracking and repayment

Term sub-accounts versus tracking sub-accounts

There are two types of mortgage sub-accounts: term sub-accounts and tracking sub-accounts.

Term sub-accounts can each have their own fixed or variable rate, term (i.e., open or closed mortgage sub-accounts), and amortization period. This allows you to create more structure in your account, so you can pay off each sub-account on its own timeline.

You can set up a term sub-account to either decrease the lending limit of your main account or create additional borrowing room in your main account, and with a term sub-account, each principal (or lump sum) payment helps reduces the credit limit of your main account.

Tracking sub-accounts work a little differently. They let you track a portion of your debt and interest separately from your main account, yet at the same variable rate as your main account. And you can even decide between making principal and interest monthly payments, or an interest-only option.

How to use a sub-account

If you’re wondering how homeowners typically use sub-accounts, here are some examples.

Perhaps you decide to save on unsecured borrowing costs and instead borrow against your home equity to buy a new car with a lower interest rate. You’d like to pay off that car loan back in five years, but you still have 20 years on your main account. You could set up a term sub-account for a five-year-fixed term sub-account with a five-year repayment term. This gives you a lump sum amount immediately with fixed monthly payments going forward for the next five years.

Or maybe you’re losing sleep over the question ‘should I get a fixed or variable rate mortgage?’ In some cases, one spouse wants a fixed rate while the other prefers a variable rate mortgage.

With a mortgage sub-account structure, you get the best of both worlds. Simply set up one sub-account as a fixed rate account, and another as a variable rate account.

Or, if you’re in the market for an investment property, you could set up a tracking sub-account to track your interest payments separately for tax purposes.

While a mortgage sub-account may seem more complex than a traditional mortgage structure, it’s a powerful tool for homeowners. Get in touch with a mortgage specialist today to learn how to best use sub-accounts to help simplify your banking and borrowing activities while working towards meeting your financial goals sooner.