Accelerating payments not always best option

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This article was published 31/03/2010 (5882 days ago), so information in it may no longer be current.

WHEN a 56-year-old client walked into financial planner Raffi Daghlian’s office recently with a severance package and questions about paying off his mortgage, he was one of many Canadians retiring before their mortgage had run its course.

"We’re seeing more and more retiring baby boomers at the tail end of their mortgage and they want to know what to do next," says Daghlian, who works at RBC Royal Bank in Newmarket, Ont. "Mortgage planning is becoming very important along with retirement planning."

In the downsized client’s case, he gained pension assets along with his severance after his employer closed the business.

"All of a sudden the decision becomes what to do with this money," says Daghlian.

Instead of paying a hefty penalty to close the mortgage seven years early, on Daghlian’s advice his client invested most of the money in his retirement savings — about a third in equities and two-thirds in fixed-income vehicles — and took advantage of prepayment options on the mortgage.

The client doubled up on payments and was able to pay an additional 10 per cent on his principal. It will take him just three years, instead of seven, to close the mortgage. Instead of retiring at 62 as he planned, he was able to retire early and still have enough time to invest and reach his revised goals.

It’s natural to want to pay off your mortgage as soon as possible, says Patricia Lovett-Reid, a senior vice-president with TD Waterhouse. "The closer you get to it in many cases, people will get more excited about it and they’ll try to accelerate it just that much faster."

But faster isn’t always the best option, depending on a client’s financial goals and objectives. It requires a carefully detailed evaluation of the client’s entire financial plan.

A recent Harris/Decima poll found 69 per cent of homeowners would consider a shorter amortization if it helped them reduce the overall cost — a key consideration with implications for long-term retirement planning.

In response, Bank of Montreal (BMO) launched a new low-interest mortgage with a maximum 25-year amortization.

Lovett-Reid often senses the emotional high people experience as they near the final payment.

"Then you hit the Holy Grail and … it’s very liberating," says Lovett-Reid. "When you have been saving to pay off your mortgage and putting your children through university and all of a sudden those things are behind you, (your) lifestyle becomes a little more relaxed."

 

— Canwest News Service