Many want to reduce their mortgage, but few are up to the task
WATERLOO, ON, May 13, 2004 – More than four out of five Canadians feel it is important that their mortgage gives them the opportunity to pay down their debt faster, but only about one-third of mortgage holders actually took advantage of that option in 2003, according to a survey conducted for Manulife Bank of Canada.
The study by Maritz: Thompson Lightstone found 82 per cent of Canadians want a feature that allows them to prepay their mortgage, but only 34 per cent of those with mortgages managed to do it last year.
“What this suggests to us”, says J. Roman Fedchyshyn, President and CEO of Manulife Bank of Canada, “is that while their heads are telling them that paying off their mortgage is the right thing to do, the hearts of many Canadians are telling them otherwise. It’s an indication that Canadians really are struggling with committing extra cash to their mortgage – because that extra cash is earmarked for other special needs, they want to maintain access to it.”
Among the 66 per cent of mortgage owners who did not make any additional payments against their mortgage, 34 per cent cited not having any extra money as the key reason for not paying it down. The majority (52 per cent) indicated they had the money but allocated it to other purposes.
In addition, of the 750 respondents who have a mortgage, exactly half keep additional money in special purpose accounts to save for emergencies, vacation, major purchases, etc.
Mr. Fedchyshyn indicated the problem might lie with traditional amortized mortgages, where additional money deposited against the mortgage cannot be retrieved by mortgage holders if needed in the future. The ideal scenario, he suggested, would be to automatically apply any extra money clients had against their mortgage – but still leave it accessible for alternative purposes.
Manulife Financial, a leading Canadian-based financial services company, introduced Manulife One, known as a ‘flexible mortgage account’, to the Canadian marketplace in October 1999.
In addition to using variable rates to help lower interest costs, Manulife One also uses income to pay down consumers’ total debt until they need to draw the money back out for their monthly expenses. They have the potential to pay down their mortgage much faster and pay considerably less in interest payments.
“What we’ve done is carried re-advanceable mortgages one step further. We recognized that Canadians would benefit from being able to deposit their incomes directly against their mortgage until they needed to use that money for their monthly expenses. Then, whatever additional dollars are left over at the end of the month would automatically pay down their principal – without the mortgage holder having to permanently lose access to that money.”
Mr. Fedchyshyn went on to explain that, while it was a recommended strategy in the past to make sure that you have a portion of your income available as an emergency fund, that strategy isn’t necessary with a product that combines your deposits with your mortgage – like Manulife One.
“The survey results showed that 50 per cent of mortgage holders continue to maintain separate ‘special purpose’ chequing and savings accounts while they still have a mortgage. If you work the numbers, you’d quickly realize that you could save considerably more in interest costs by paying down your mortgage than you’d ever earn in interest in a savings account. But equally
importantly, with a mortgage like Manulife One that operates like a chequing account, you can take that money back out whenever you need it.”
Manulife Bank has developed an interactive demo on their web site (manulifeone.ca/research) that enables viewers to see the impact of prepayments by having their income automatically applied against their mortgage. Their web site also boasts a “Satisfaction guarantee” that the Manulife One account delivers on its savings and convenience or they’ll cover
some of your costs to “go back to banking the way you were.”
About Manulife Financial
Manulife Financial is a leading Canadian-based financial services group serving millions of customers in 19 countries and territories worldwide. Operating as Manulife Financial in Canada and Asia, and primarily through John Hancock in the United States, the Company offers clients a diverse range of financial protection products and wealth management services through its extensive network of employees, agents and distribution partners.
Pro forma funds under management by Manulife Financial and its subsidiaries were Cdn$355.9 billion (US$271.6 billion) as at March 31, 2004.
Manulife Financial established Manulife Bank in 1993 as the first federally regulated bank to be opened by a life insurance company following Canada’s financial reform legislation of 1992. Manulife Bank provides innovative deposit and loan products to help individuals make the most of their financial plan.
Manulife Financial Corporation trades as ‘MFC’ on the TSX, NYSE and PSE, and under ‘0945’ on the SEHK. Manulife Financial can be found on the Internet at www.manulife.com.