What Would You Take Cash or Vacation?
A recent study of Canadians showed that over 52% did not use all of their vacation days. Also, these folks forfeited the cash associated with these vacation days.
Every year employees make their employers’ bottom line a little healthier by forfeiting vacation pay. Is this you?
Like a lot of decisions in life, people don’t prepare to think through this process and what it means; to their health.
If you are going to forfeit part of your health because you are working hard to pay down your mortgage, then how about a little trick for your financial health.
The Mortgage Cash Account or Mortgage Vacation Option
The challenge to you is regarding your principal residence or investment real estate, and should you have a mortgage cash account or a mortgage payment vacation process?
To answer this question, we need to have a precise definition of what a Mortgage Cash Account and a Mortgage Payment Vacation are?
My wife and I deal with two of Canada’s major banks for my investment real estate mortgages; BMO Bank of Montreal and TD Canada Trust.
All of our investment real estate mortgages with BMO Bank of Montreal have a Mortgage Cash Account (MCA) component, and all our TD Canada Trust investment real estate mortgages have a Mortgage Payment Vacation component.
BMO Mortgage Cash Account
At Bank of Montreal, once you have a standard mortgage, you automatically have an MCA. Initially, when your mortgage opens, the balance in your MCA is zero (0). Funds get ‘deposited’ to your MCA whenever you go above and beyond your mortgage payment plan, and pay additional to your regular amortized payments. This extra amount is a critical point to understand because it carries multiple meanings.
1. It means your MCA represents money you’ve put towards accelerating your mortgage payments. What this means any additional funds or additional principal payments contribute to your MCA. For example, BMO calculates our repayment plan based on semi-monthly payments, but I chose a bi-weekly plan to match up with my pay schedule. This payment option means every year we are making two additional payments (52 weeks + bi-weekly = 26 payments vs. 24 semi-monthly payments) and these additional funds are allocated to our MCA account.
2. It means your MCA isn’t a real account in the sense that there is no separate account number associated with it. It is merely a virtual account that keeps track of how much you’ve contributed (based on the original amortization plan) your mortgage.
Mortgage Payment Vacation (Definition)
Make lump-sum payments or pre-pay a little more each month towards the opportunity to take up to 4 months off from making your mortgage payment when it benefits you the most.
How it Works:
Flexible Mortgage Payment Features will result in interest capitalization. That means the interest adds back to the principal outstanding on your mortgage.
- Interest is added back on each mortgage payment due date.
- The amount of interest capitalized cannot cause your mortgage to exceed the lesser of a 90% loan-to-value ratio or exceed your original principal balance.
- The loan-to-value (LTV) ratio expresses the amount of a mortgage as a percentage of the total appraised value of a property, as determined by TD Canada Trust.
- If necessary, we will adjust the amortization period remaining at renewal so that the mortgage does not exceed the original amortization period remaining. This variation may increase the number of your regular payments after the renewal.
In the last two months, tenants in three of our investment real estate properties gave their notice, not a great feeling. We had a little lucky as one tenant left in May, one was June, and the last one tenant move out was in July.
We were able to take a deep breath and analysis the situation; two of the mortgages were with the Bank of Montreal, and the other was with TD Canada Trust. We utilized both the mortgage cash account and mortgage vacation strategy to lower our financial risk until we were able to find new tenants.
With the Mortage Cash Account, you can borrow up to the amount posted on your year-end mortgage statement plus whatever has accumulated over the timeframe you want to borrow the funds. You don’t need to take out all of the funds, but the minimum current is $2500.
By utilizing the mortgage cash account, we were able to cover operating costs, and we decided to do a few upgrades to our vacant investment properties as we search for a new tenant. A few minor updates helped us find a new tenant, and we were able to take a slight increase in our rents.
The mortgage vacation allowed us to defer our mortgage payments for a few months, but we still need to cover all other costs, (i.e. property taxes, condo fees, electricity, etc.)
Review of Main Factors for Funds; Mortgage Cash or Mortgage Vacation
- Vacant; no rent and no idea when we would see new tenants; mortgage payment.
- All three of these properties had the tenants for quite some time, which meant each unit needed a little TLC, Tender Loving Care. (Paint, Grout Bathroom, and Kitchen Tiles Fix Blinds and Baseboards)
- Monthly Bills that cannot defer; power, condo fees, property taxes.
Preference Mortage Cash Account or Mortgage Payment Vacation?
Mortgage Cash Account and Why?
- By using the Mortgage Cash Account, you have instant access to cash even if you have no rent received.
- With the cash, you can cover all monthly expenses, including renovations to make the property look more attractive.
- If you can rent properties promptly, any additional money left over can be applied back to the mortgage principal and helps build funds into your mortgage cash account.
- Remember, with a mortgage payment vacation; you are only deferring principal and interest; all other costs need to be covered.
- No rental income puts a ton of pressure on you, and you may need to add personal funds to the investment property’s bank account.
What was the most useful information for you?
Did I sway you one way or the other? I love to hear your thoughts.
Listen to the following guest podcast as we discuss mortgages and much more; EPISODE #38 – Guest Interview – Rick Harris – Ready, Set, Goal©; The Everyday Millionaire Podcast