What Would You Take, Cash or Vacation?
Which is a Better Mortgage Cash Account or Mortgage Payment Vacation? A recent study of Canadians showed that over 52% did not use all their vacation days. Also, these folks forfeited the cash associated with these vacation days.
Employees make their employers’ bottom line a little healthier by forfeiting vacation pay every year. Is this you?
Like many 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, how about a little trick for your financial health?
The Mortgage Cash Account or Mortgage Vacation Option
The challenge to you regards your principal residence or investment real estate. Moreover, 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 a Mortgage Cash Account, or a Mortgage Payment Vacation Account is?
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.
Our investment real estate mortgages with BMO Bank of Montreal have a Mortgage Cash Account (MCA) component. In addition, our TD Canada Trust investment real estate mortgages have a Mortgage Payment Vacation component.
BMO Mortgage Cash Account
At the Bank of Montreal, once you have a standard mortgage, you automatically have an MCA. Also, 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, including additional funds to your regular amortized payments. However, this extra amount is critical to understand because it carries multiple meanings.
1. It means your MCA represents the money you’ve put towards accelerating your mortgage payments. That means any additional funds or principal payments contribute to your MCA. for example, BMO calculates our repayment plan based on semi-monthly payments. However, I chose a bi-weekly plan to match my pay schedule. Every year, this payment option means we are making two additional payments (52 weeks + bi-weekly = 26 payments vs. 24 semi-monthly payments). These additional funds are allocated to our MCA account.
2. It means your MCA isn’t a real account because no separate account number is associated with it. t is merely a virtual account that keeps track of how much you’ve contributed (based on the original amortization plan) to 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. Also, this 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.
- As determined by TD Canada Trust, the loan-to-value (LTV) ratio expresses the mortgage amount as a percentage of a property’s total appraised value.
- 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, which is not a great feeling. e had a little luck as one tenant left in May, one was in June, and the last tenant moved out in July.
We were able to take a deep breath and analysis the situation. The Two mortgages were with the Bank of Montreal, and the other was with TD Canada Trust. We utilized the mortgage cash account and mortgage vacation strategy to lower our financial risk until we could 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. Of course, y don’t need to take out all the funds, but the minimum current is $2500.
By utilizing the mortgage cash account, we covered operating costs. Moreover, we decided to do a few upgrades to our vacant investment properties as we search for a new tenant. A w minor updates helped us find a new tenant. Also, 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. However, we still needed 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 tenants for quite some time, which meant each unit needed a little TLC, Tender Loving Care. (Pai t, Grout Bathroom, and Kitchen Tiles. Fix Blinds and Baseboards)
- Monthly Bills that cannot defer; power, condo fees, property taxes.
Preference Mortgage Cash Account or Mortgage Payment Vacation?
Mortgage Cash Account and Why?
- 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 only defer principal and interest; you must cover all other costs.
- No rental income puts much pressure on you, and you may need to add personal funds to the investment property’s bank account.
What was the most helpful 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