Unfortunately, in Canada, our educational system has had large deficiencies when it comes to Financial Literacy. Financial Management, Debt Management and basically anything to do with what we do after we make our money and how to keep it, has been left for us to figure it out.
SO, Who Has Been Teaching Us?
For most of us that answer would be from our parents, but in actual fact, our educators have been the banks or other financial institutions. the problem with that tends to be the motive of who is teaching you, and who is the beneficial recipient of that advice.
I think most of us can agree that the answer to this question would be the Financial Institutions.
In an article from breach media.ca, Canada’s big six banks we’re raising fees to end-users despite hitting all-time high profits of $57 billion in 2021, and paying out $19 billion in bonuses to executives. While The Government of Canada was spending hundreds of billions of dollars in COVID relief, to those who were hit hardest during the pandemic, who by the way are the customers who are getting their fees raised.
when it comes to debt reduction the way the banks have taught us, to manage our debt has been detrimental in putting us in a position where Canadians owe $1.77 in debt for every $1.00 that they earn.
The Banks Solution Mortgages and debt resolution?
How many times has this happened to you, you go in and apply for your mortgage, renew your mortgage, or seek to get a consolidation loan, where in most cases, the banks will do an interim renewal to your mortgage, charging you fees for canceling your mortgage early.
During the same conversation they will give you extremely friendly advice on how to pay that mortgage off early:
- Make you Payments bi-weekly and make 2 extra payments per year
- Round up those payments to the next $100 mark in order to add more money to the principle am reduce the interest that you pay,
- make extra payments when possible, to pay your mortgage off even faster.
Let’s face it to someone who is untrained and understands debt management, this seems like a fantastic way to set yourself off financially so that you can retire early. We then meet with the mortgage consultant at the bank, an adjuster biweekly or weekly payments in order to pay our mortgage off early.
The Banks Financial Switch.
So with this in mind, we spend hours researching and jumping through all the hoops to get your mortgage at the lowest interest rate possible which as of the date of this Blog, would be 1.25% to 2.54% based on the length and terms of the Mortgage.
We then sit down with their mortgage consultant and plan on how we’re going to pay our mortgage off sooner, and not even notice it, as the extra money is taken out of your account immediately, so you won’t miss that extra payment. (Most times $100 – $500 per month). But once the papers are all signed, sometimes during the final mortgage signing, or often very shortly after the fact, We get phone calls and emails from the bank telling us that we have a fantastic credit rating and that as a valued client we now qualify for:
- a $10,000 to $50,000 Unsecured line of credit at a Rate of 5%-10%
- A pre-approved credit card with reduced interest rates of 12%-19% (vs the normal 29%
- Vehicle or Vacation Loans at a Fixed Rate of Prime (2.45%) plus 2% or higher (so 4.45% or more)
Now this sounds so good to us as we are cash strapped, we gladly take advantage of the bank’s generosity, so when we do see a shortfall of cash we have a backup plan.
The Bank equation 1+2= $Billion Dollar Profits
So let’s put these two financial lesson’s into context.
- $400,000 Mortgage @ 1.25% variable = Payments of $716.41
- The bank has Suggested we Make payments at the Fixed Rate of 2.54% to pay down the Mortgage ($830.36 rounded up to $850)
- This would Pay your house off almost 5 Years Earlier
- You would save $12,238 in interest (Regular interest $65,666 less actual interest $53,434)
- The Extra payment of $134 over 20 1/2 years is $71,422)
- This Has left us with Cash Shortfall of almost $300 per month or $3,500 per year
- We then Take out Their Line of Credit due to the cashflow shortage of $134 bi-weekly
- Because we are charged interest monthly, every 2 weeks we need to take out $134 plus the accumulated interest
- The Total Debt load including interest is $231,975 @ 5% (Including the $70,000 we took cash)
- The Total cost in interest is $160,533 at 5%
- That increases by $17,000 for every extra % we pay in Interest
= banks extra Profit of $148,295
So, the bank is making money off of me, tell me something I don’t know?
The truth is, banks provide many different options for mortgages, that when used properly can allow you to make money off the bank versus the bank making money off of you.
At OBS wealth management group, we help you custom tailor your mortgage The best suit your financial situation, based on income, expenses, equity, interest rates, and overall financial goals.
Depending on your personal situation, and Financial Lifecycle you may benefit, By changing your mortgage style by using one or more of the following mortgage strategies. For more information on choosing the right mortgage for you, Check out our article “Do you have the right Mortgage to suit your Lifecycle”