Cash or Vacation?
What is your answer; would you rather have cash or a vacation?
I heard this morning 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 holidays days. Every year employees make their employers just a little richer. Is this you?
Like a lot of decisions in life; people are not prepared to think through this process and what it means; to their wealth and health.
Am I not able to help you with your situation; cash or vacation? I would like to challenge you regarding your 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
Mortgage Cash Account (Definition)
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 an important 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 payments or additional principal payments contribute to your MCA. For example, BMO calculates my 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 I am making two additional payments (52 weeks + bi-weekly = 26 payments vs. 24 semi-monthly payments) into my MCA.
2. It means your MCA isn’t a physical account in the sense that there is no separate account number associated with it. It is simply a virtual account that keeps track of how much you’ve overpaid (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:
How do flexible payment features affect your mortgage?
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 may result in an increase to 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 were a little lucky as one notice was May, one was June and the last one July.
I was able to take a deep breath and analysis of the situation. Two of the mortgages were with the Bank of Montreal, and the other was with TD Canada Trust.
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.
Factors for Funds: (Keep Current)
- 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 we 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 will need to add 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?