Banking tips to live by through a recession
Submitted by Peter Boys April 29, 2020
As a financial advisor, I sometimes test new products that I think will be beneficial for my clients; for example, soon after I became an advisor, Manulife Financial introduced an innovative new banking product. Similar to one that worked exceptionally well in Australia, launching this unique product combining a mortgage, a savings account, a line of credit and mortgage fraud protection all on one - called Manulife One or M1.
Our mortgage was coming up for renewal, so after reading up on this product, we decided to switch to this option. We had over 50% equity in our house, so we opted to set one up based on 50% of the equity value in our home, we also made the decision to work to pay off the balance as quickly as we could. One benefit of the regular M1 was that we had the flexibility to pay it off, as fast as we liked with no penalty, unlike with our conventional bank mortgage being limited to 10% once a year!
We paid it off very quickly as a result and then decided to build a garage, no issue because we now used the line of credit, built-in based on 50% of our home’s equity value. After paying it off in 3 years, we then decided on a significant upgrade, to renovate our home, with a new open plan kitchen with custom cabinets, hardwood floors, a high-efficiency furnace and water heater. Also, increased insulation in the attic and on the outside walls along with new windows and siding. After completing all of this, we once again paid it off very quickly, and now Manulife pays us interest every month because we keep a large positive balance in the account. Plus, we still have the line of credit based on 50% of our home equity if ever needing this in an emergency.
So over the last 15 years, I have had a large number of people opt for an M1 account; one qualification I look for in prospective new clients is to only recommend it - to those wanting to get out of debt quickly and then start to build real wealth. One thing I learned very early on living in Canada is banks want to own your mortgage, your savings, investment and credit card accounts, and so on. We now face the sad reality, Canadian families are facing today, as now some of the most highly indebted in the world, with over half around $200 a month away from not being able to pay their bills! I believe that first of all, Canadians need better banking advice - as the place to start them on the path to financial success, especially considering the current debt statistics:
1) One-third of Canadians spend more than they earn every month! 2) Two-thirds thought a recession was imminent but have not prepared for one! 3) Over twenty percent will have to take money out of their investments now! 4) Forty percent admitted regretting the current amount of debt they have! 5) Twenty-five percent said they’re not making any progress in paying off debt!
This pandemic caused recession will devastate a large number of Canadian family’s finance, and many will take years to recover. The new reality after we get through this recession is that many people will be facing much harsher vetting from lenders to borrow money for a vehicle, to buy a home, etc. People need to understand these simple Banking Fundamentals going forward: 1) The cost of borrowing always increases with more risk 2) People will need higher credit scores to borrow money 3) There will be tighter debt service ratios imposed 4) More focus on collateral assignments to borrow money. 5) Higher-income qualifications to borrow money
Also, now consider that going forward, our conventional banks will be inundated with requests for mortgage or loan deferrals, for bigger loans with less security, and lower or zero interest for borrowing. All to be measured against tighter borrowing rules!
Our responsibility as advisors will be to help as many clients as we can - to get control of their debt, to manage their money, to set up a rainy day account to handle cash flow emergencies. Best of all - to consider switching to an innovative banking product that will give them much greater control of their day to day cash flow needs.
Many people borrow based on getting the cheapest interest rate, not understanding the cost difference between paying simple interest and compound interest. With most conventional mortgages, their paying compound interest, so their mortgage payments initially are mostly interest and very little principal. And, the cross over to pay more principal and less interest each month is usually more than halfway through their 25- year mortgage! Plus, few bank checking accounts pay any interest when in a positive balance! The reality for Manulife One clients, is even if they can’t make this month’s mortgage or interest payment, it doesn’t matter if they still have borrowing room with their M1’s associated line of credit, they don’t have to worry? Plus, they won’t have to go cap-in-hand to their banker to ask for a deferral of their mortgage payments!
Manulife bank also offers blended borrowing options with a fixed portion and a locked- in portion for clients with lower equity values to help them into the process. My advice is don’t wait in line at your bank – get online with a unique bank with no bricks and mortar buildings, just all of us Manulife licensed advisors referring our clients to their banking specialists. Because between us, we can help you tailor a customized banking solution for your individual or family needs. We offer greater cash flow efficiency, the flexibility to address those unforeseen circumstances that many, unfortunately, are experiencing today. Plus, an option for lower monthly payments with locked-in 30-year mortgages under exceptional circumstances, so why not give us a call to find out more!