Using Mortgage Cash Account to buy new car?

[RZR]

Originally Posted by GeoTrekr

0% financing is a total marketing gimmick. Don't believe me? Get the cash price on a vehicle, then see if they'll finance it at that price for you with 0% interest.

Over a decade ago, I went out to check out a sale on Chevy Cavaliers at a local GM dealer. $12k cash out the door, or $16k was the "0% financing" price.

Bingo! I pay cash for my vehicles that way no interest rates are involved

[Big Grey Wolf]

Never, I mean Never use your home as security for a depreciating asset like a vehicle. If things really go bad in the future you do not want to loose your home for a truck/car that depreciates at -30% per year. eg; $70,000 truck is worth only $49,000 after one year or after you drive it off the car lot.

[Spidey]

Originally Posted by midgetwaiter

If I understand it right. the way this MCA thing works in a fixed mortgage is pretty simple. Those extra payments you make during the term don’t get applied to the principal until you renew or close it out, it’s kind of in limbo for now. That explains how they can give it back to you in this “cash account”.

There’s a strong argument to be made that you would have been better off stuffing that money in a TFSA earning a little interest and then making a lump sum payment at renewal time rather than doing so once a year. I started out increasing my payments as often as I could with my BMO Smart fixed but stopped doing that when I thought it through. This means I must have the discipline to keep my mits off the TFSA though which is kind of hit and miss, you might be better.

As EZM said it’s all about using the facility with the lowest rate. IMO, you have enough in the MCA to pay for the car outright do it. Make whatever the payment would have been back to a low risk investment in your TFSA every month and have that money earn some interest until renewal time rather than sit in the bank’s pocket. Your next best choice would be be a home owners line of credit like EZM outlined.

With the MCA, any $$ we put in to it automatically gets applied to the principle. For example, we put a few thousand on it last year and the "time to pay out mortage" graph immediately reduced by 2 years. That's why I'm a bit skeptical of the teller saying that the reverse wouldn't happen until we renew our mortgage.

Very good point about buying the car outright with MCA and putting the car payments $$ into a TFSA until the mortgage term renews. I will probably go this route, especially if the bank teller is correct that our mortgage payments won't change as soon as we pull $$ from the MCA.

Like EZM suggested, I'll also ask them what they can give me in terms of a homeowners line. We've banked with them for many years so maybe they'll play ball.

[Spidey]

Originally Posted by Big Grey Wolf

Never, I mean Never use your home as security for a depreciating asset like a vehicle. If things really go bad in the future you do not want to loose your home for a truck/car that depreciates at -30% per year. eg; $70,000 truck is worth only $49,000 after one year or after you drive it off the car lot.

Totally agree - that's not the way to go. I actually see that a lot where we live, where house prices keep rising and people keep refinancing or taking out loans based on the houses' newly appraised value. That's just scary....

With a MCA, this isn't the case. We wouldn't be refinancing or remortgaging our house - we would be pulling from the pool of accessible extra payment dollars that we've made over the years - so very worst case if we have to walk away from the vehicle, our mortgage is $20-25,000 higher come renewal time. In a way, playing out worst case scenario - this is actually better than defaulting on a car loan where your credit score would then be impacted.

[Iskra]

Originally Posted by Newview01

Dealers don't sell new vehicles for the profit from the sale. The service shop is what makes the money.

Long learning curve in front of you. I buy a vehicle at one dealer that does not make a profit and service it at another. Do you get it?

Originally Posted by RZR

Bingo! I pay cash for my vehicles that way no interest rates are involved

Watch out. You maybe called like I was "old cash is a king mentality". The only loan I have ever taken was my mortgage and it was at 14%. Asset have quadruple in value over the years.

[HyperMOA]

Originally Posted by ESOXangler

I always go “0%” and negotiate atleast 20% below msrp. Last trucks sticker was 55000, paid 42000 all in with a spray in liner too. It’s abput negotiating, and why tie up my savings.

Yep, I learned this when we bought the wife's last new vehicle back in 08. After negotiating our price in the end, I then told them to write it up as 0% There was like a $125 documentation fee for it, which I may have been able to argue with but it had been a 5 hour marathon at this point anyways. The $30,000 dollar down payment was invested instead and made us way more than the $125 cost me. I feel confident that nobody would've paid less than I did with 0% financing.

Now there are times when the dealer will offer a cash incentive OR 0% financing. In that situation you would have to do the math and see if the money saved outweighs the money earned from investing your down payment into something else. Some vehicles have 0% financing several times throughout the year.

I have a question for all the car buying experts. Can you negotiate lower than GM's preferred pricing plan, or Ford's X-Plan? This is new to me, and I'm curious, as I qualify for both and will be looking into a suburban or expedition max shortly. Will a half day of chiseling the salesman yield me more than walking in and telling them to give me X-Plan?

[jungleboy]

Taking money from your mortgage fund to buy a car that will be worth 30% less than you paid for it before you get it home is just a bad investment anyway you look at it . We never bought a new car until we had our mortgage paid off, after that I bought a new car twice and then went back to buying used. There is no winning when you have to drop 40 to 50 g on a vehicle up front

my opinion

[MyAlberta]

It appears that the mortgage cash account is simply a mortgage extension based on your prepayment value. An equity loan at simple interest may work better if you plan a more aggressive payback schedule.
I personally won’t borrow against equity for consumables. And as an investor, if I see it happening, I walk.

[RescueDiver]

Originally Posted by Spidey

I appreciate everyone's input. It's good to look at all angles.

The plan is to either pay 25% cash down and finance the rest via car loan or utilize the mortgage cash account right away for the remaining 75% to fully purchase the car off the hop. Then we'd have 2.5 years to pay what we took out to buy the car and bring the cash account back up to where it was by the time we have to renew.

I understand "debt culture" and we definitely don't want to go that route. We've been very disciplined around that and have been paying our mortgage down very aggressively over the past 10 years. We have two kids that are driving age and will inherit the current car, so we'd need another vehicle. This would be the first new car purchase for either of us and we've both been driving for 30 years.

I totally depends on how the mortgage cash account works. I am assuming you made extra payments on the mortgage? Did this cash lower your principal owed on the mortgage or does it just sit in an account until renewal or something like that? If it takes down the principle owed then it should be saving you overall interest paid over the term and life of the mortgage. You might have 2.5 years left on the term but how long do you have until the mortgage is paid off in full? Interest is front loaded, you pay more at the beginning of you amortization period vs the end.

Basically, take the 75% and see what extra interest over your amortization you end up paying vs the car loan at 4.99% 5 years. Essentially you are adding that cash to your mortgage over the amortized mortgage now so it might actually make a big difference.

[79ford]

You got to think how much interest you pay each time you are paying monthly mortgage vs lump sum. 20k or whatever in lump sum form is probably 40k or more in regular mortgage payments depending on how much down payment you got and term left. For the first 15 years or more of your mortgage only half or so is going to principle and the other 50% of those monthly payments is i terest.

Taking 20k lump sump out essentially adds 20k in interest on the mortgage side

[midgetwaiter]

Originally Posted by RescueDiver

I totally depends on how the mortgage cash account works. I am assuming you made extra payments on the mortgage? Did this cash lower your principal owed on the mortgage or does it just sit in an account until renewal or something like that? If it takes down the principle owed then it should be saving you overall interest paid over the term and life of the mortgage. You might have 2.5 years left on the term but how long do you have until the mortgage is paid off in full? Interest is front loaded, you pay more at the beginning of you amortization period vs the end.

That’s the key, I have no idea how it works and I have the mortgage. I’m not at home so I can’t check the contract and BMO has very little specific info online. As Diver says if that payment you make at the end of the year is deducted from the principal immediately then it changes things. Even if you are making the same monthly payment the lower principal amount means that you are having less of that monthly payment chewed up by interest.

If the teller that Spidey knew what he was taking about when he said it wouldn’t cost him anything then I assume the second scenario must be true and the money paid doesn’t go against the principal right away. That presumes the teller knew what he was talking about though, I’d want to confirm that before I made a decision.

[Trochu]

Originally Posted by Iskra

Long learning curve in front of you. I buy a vehicle at one dealer that does not make a profit and service it at another. Do you get it?

Are you suggest he's wrong and being somewhat belligerent about it?

If so, that's kinda funny, as he clearly isn't wrong.

[EZM]

Originally Posted by Big Grey Wolf

Never, I mean Never use your home as security for a depreciating asset like a vehicle. If things really go bad in the future you do not want to loose your home for a truck/car that depreciates at -30% per year. eg; $70,000 truck is worth only $49,000 after one year or after you drive it off the car lot.

From my perspective, a vehicle is an expense, not an asset. I think with anything that depreciates as quickly as a car - you just have to accept that.

Depreciation also doesn't give a rats behind if your car was bought cash, financed at 20% or financed at 3% - so the "taboo" of not using the lowest interest rate to purchase something you have decided to purchase isn't smart at all. Why would you want to pay more money for a longer term for the car (or anything else you have to fiance)?

Debt is liability and it's strictly indiscreet.


Keep in mind and trust me when I say this to you - The bank calculates your aggregate assets (equity) and deducts the liabilities (debt) when assessing your creditworthiness and subsequently working with you on future mortgages, loans, whatever .... having a ton of equity in your home you have "protected" is meaningless if your high interest debt exceeds your equity.

You just have to break that "train of thought" about what equity and debt really are, and accept it as it really is.

I do, however, accept the fact that you should always try and drive forward your net worth (and equity) you have. That's ultimately the money you have when you retire - so taking on debt should always be carefully considered.

[roper1]

Creating clumps of capital (this case your MCA) takes years, even decades of discipline, and is really hard for most people. Congrats for that, now don't turn around & shoot yourself in the foot on an asset that depreciates so quickly.

With your track record of paying down debt, I would go with a LOC, interest will still be very low, if you decide to pay aggressively, you could be vehicle payment free sooner.

Flip side if your investment returns are strong, let the vehicle commitment payout over the natural cycle & keep socking money away. Win, win.

[Spidey]

Originally Posted by midgetwaiter

That’s the key, I have no idea how it works and I have the mortgage. I’m not at home so I can’t check the contract and BMO has very little specific info online. As Diver says if that payment you make at the end of the year is deducted from the principal immediately then it changes things. Even if you are making the same monthly payment the lower principal amount means that you are having less of that monthly payment chewed up by interest.

If the teller that Spidey knew what he was taking about when he said it wouldn’t cost him anything then I assume the second scenario must be true and the money paid doesn’t go against the principal right away. That presumes the teller knew what he was talking about though, I’d want to confirm that before I made a decision.

The extra mortgage money we've paid (into the MCA) is applied directly to the principle as soon as it's deposited, and that's why I'm skeptical the monthly mortgage payments won't increase as soon as we pull $$ from the MCA - if we end up going that way. Our plan is to pay off the car in two to three years and we are disciplined enough to do it. We do have an investment portfolio but a large part of our retirement savings are coming from both of our public service pension plans and regular RRSP contributions. I'm not sure our investment portfolio would drastically outperform a car loan, so would rather pay the loan off sooner rather than let it ride.

I'll know a lot more after my meeting next week with the bank (at least I hope I will!) The car is a 3 month order from Japan so we've got some time.

Thanks for the discussion on this everyone - it's been very helpful. We haven't taken the decision to buy new lightly - but having crunched new mileage numbers and considering our projected length of owning the car, as well as the Toyota reliability factor - we feel good with the decision.

[Sneeze]

Originally Posted by Spidey

Thanks for the discussion on this everyone - it's been very helpful. .

The lousy part of AO is guys with no idea are eager to jump in and muddy the water.

Its pretty simple here to understand. Its a version of a re-advancable. The mortgage cash account is a bit different than a HELOC but not by much.

You have to qualify to draw from it and you access the same interest rate as your current mortgage. Your monthly payments will not go up but your principal owing will go up, the ratio of principal/interest you pay every month on your mortgage will go down. In the end if you do not accelerate the mortgage payments to reflect the draw you will add several years to your mortgage - or when you re-finance your payments will go up if you elect to keep the same amortization period.

There is no free lunch. This is borrowing from your house to buy a car. It's not a bad strategy depending on your situation. But have no illusions - this money will not be interest free.

Something to consider - 5 year fixed mortgages could be 5% by the end of this year.

[Spidey]

Originally Posted by Sneeze

The lousy part of AO is guys with no idea are eager to jump in and muddy the water.

Its pretty simple here to understand. Its a version of a re-advancable. The mortgage cash account is a bit different than a HELOC but not by much.

You have to qualify to draw from it and you access the same interest rate as your current mortgage. Your monthly payments will not go up but your principal owing will go up, the ratio of principal/interest you pay every month on your mortgage will go down. In the end if you do not accelerate the mortgage payments to reflect the draw you will add several years to your mortgage - or when you re-finance your payments will go up if you elect to keep the same amortization period.

There is no free lunch. This is borrowing from your house to buy a car. It's not a bad strategy depending on your situation. But have no illusions - this money will not be interest free.

Something to consider - 5 year fixed mortgages could be 5% by the end of this year.

Thanks for this. I think I'm on getting a decent sense of all options. We definitely plan on paying the car off as quickly as possible, now it depends what type of product will be the best with that strategy in mind.

[midgetwaiter]

Originally Posted by Spidey

The extra mortgage money we've paid (into the MCA) is applied directly to the principle as soon as it's deposited, and that's why I'm skeptical the monthly mortgage payments won't increase as soon as we pull $$ from the MCA - if we end up going that way.

The payment might not change but what could is the amount of that payment that goes to interest vs principle. IE, If it's 70/30 now it's going to go to 80/20 after the principle goes up. That makes way more sense.

I think it might come down to the exact wording the teller used. When I go back to your original post, did he tell you that your payment wouldn't change or that you wouldn't pay any additional interest? Did you put together the part about it being a "0% loan" yourself or did he say something like that? I bet if you ask very specific questions you'll discover that it's not quite what you assumed. If that's the case then you are paying interest on that money immediately and I would reconsider the idea of using it, your next renewal is going to be at a higher rate than you have now.

They don't make this easy to understand do they.

[Spidey]

Originally Posted by midgetwaiter

The payment might not change but what could is the amount of that payment that goes to interest vs principle. IE, If it's 70/30 now it's going to go to 80/20 after the principle goes up. That makes way more sense.

I think it might come down to the exact wording the teller used. When I go back to your original post, did he tell you that your payment wouldn't change or that you wouldn't pay any additional interest? Did you put together the part about it being a "0% loan" yourself or did he say something like that? I bet if you ask very specific questions you'll discover that it's not quite what you assumed. If that's the case then you are paying interest on that money immediately and I would reconsider the idea of using it, your next renewal is going to be at a higher rate than you have now.

They don't make this easy to understand do they.

You're right, they don't make it easy - especially if they aren't accurate. The teller said to me that I should be able to draw the full cost of the car out of my MCA but I would have until the mortgage renewed in 2.5 years before principle/interst would be adjusted. I'm skeptical of this, but if that is indeed the case then we could have 2.5 years to pay off the car to get back where we are at with current MCA without incurring any interest penalty. I still think this is too good to be true...

[Five]

There are two issues here, one asked and one unasked:

1. Is it prudent to use the cash account portion (actually a re-advanceable line of credit) on your BMO mortgage to purchase a vehicle if you are determined to purchase it and will otherwise finance at 4.99%?

YES (Assuming you need to make the purchase and the mortgage rate is less than 4.99%)

If the purchase price is $30,000 and you finance over 5 years, you would save $1,589.40 during that time, assuming a mortgage interest rate of 3.00%.

2. Is it prudent to purchase this vehicle if you can't get vendor financing of better than 4.99%?

That is something for the OP to decide. I personally don't like debt (ironic I know) and find that purchasing quality used vehicles that are 3 - 5 years old is a great way to go. When I do so I use cash or a line of credit secured to my home.

I'm a mortgage broker in BC with 10+ years of mortgage experience.

Hope that helps.

[warriorboy10]

Originally Posted by Iskra

There is nothing like 0% financing. It is only advertising gimmick. Cash in your hand and you are the boss in negotiations. I have never paid more then MSRP-20+%. Last weekend I have bought new 2018 truck for 59.5k with sticker price just under 71k. Mind you all my life I was buying Ford, GMC, or Dodge. If I do not get what I want, I walk away. Have 100% cash in your hand, no financing, no trade in. You will not ask them to sell you a vehicle, they will ask you to buy it. Be realistic, as every business, dealers have to make money but let them work for it.

Exactly!

Dealers do have 0% financing but there defiantly is a cost!!

Read the fine print and be cautious!!

[MyAlberta]

Originally Posted by Spidey

You're right, they don't make it easy - especially if they aren't accurate. The teller said to me that I should be able to draw the full cost of the car out of my MCA but I would have until the mortgage renewed in 2.5 years before principle/interst would be adjusted. I'm skeptical of this, but if that is indeed the case then we could have 2.5 years to pay off the car to get back where we are at with current MCA without incurring any interest penalty. I still think this is too good to be true...

Meaning that your regular payments would fall short for 2.5 years? Interest is payed first in a mortgage and any shortfall is reflected in the principal paydown. I'm not familiar with the plan, but it sounds like something that might be usefull at the very end of the mortgage term, where a quick payback offsets a reduction in principal repayment. I'd probe this aspect very carefully.

[Spidey]

Met with bank manager today - unfortunately, it turns out the teller I initially spoke with a couple weeks ago was talking out of his *****. Like many of you said, as soon as we draw on the dollars available in our MCA to buy the car outright, the principle/interest formula is readjusted and in our case the monthly mortgage payment would go up about $100/month. This isn't a lot (on the surface), but if we decide to pay the car off in say, 3 years, this would equate to $3600 in interest based on our current mortgage.

Conversely a 3 year car loan at 4.49%, the interest is $2500.

The bank would only offer a 5% LOC (said they cannot go lower), so we'll likely end up going the car loan route and pay it off in 2 years with regular extra payments.

Thanks again for everyone's input!

[Dean2]

Originally Posted by EZM

I'm not going to comment on how disciplined a person is or isn't when paying down debt or whatever - but, I recognise that the average person will incur debt so it makes sense to finance using whatever mechanism provides you the lowest interest rate and most flexible payment terms. A secured line of credit offers both of those.

Obviously a person who is undisciplined in their finances might not want to do this - but, quite frankly, that's a result of poor spending habits and behaviours and lack of fiscal discipline - and not the fault of the smartest facility (way of financing debt) to use - it's two completely unrelated issues related to someone who's an irresponsible loose cannon with their finances.

As far as equity is concerned - most people think exactly the way you guys do, and there is a level of "reluctance" a person might feel by not "eroding" any equity built up in your home to finance other stuff HOWEVER equity is basically a measurement of what you own (in value) minus what you (owe).

The reality is simple - At the end of the day, there is no distinction between owing an extra 50K on your home versus owing 50K to a loan (or credit card) except the amount of money you will end up paying back to discharge that loan. None whatsoever. And, when evaluating your net worth, credit rating, etc.. lenders and banks basically aggregates (adds up) the "whole picture" exactly like this.

The smart thing to do is to Always use the lowest interest, most flexible credit facility available to you.

Some people foolishly would rather put $50,000 on a high interest credit card (say 20%) than use their line of credit and the 17% difference is STAGGERING.

The difference in these two scenarios - let's say over the same 5 year period would SHOCK you.

Paying the same $1000/mo would have the following results after 5 years (60 months) ....

3% Line of Credit = you are discharged and Owe $0 and are free of debt after 60 months.

Using a credit card (keep in mind you are paying $1000 a month) paying for 109 months (almost twice as long) and paying a total amount of $ 108,400 in total (or MORE than twice the amount of the original loan).

There is no argument whatsoever what is the "smarter" thing to do.

Far and away the best advice on this thread and I was in Banking for over 35 years. If you are going to buy the new car, negotiate the very best price you can, THEN tell them you are paying cash, using your Line of Credit. Cash buyers do NOT get a better discount as the dealer counts on making some money on the financing and having the closer/finance guy sell you a bunch of up charges like under coating, diamond finish etc while filling out the financing paper work..

Just read your final post. There is something seriously wrong with what your manager is telling you. Most you should be paying on a home secured LOC with good credit is Prime, currently 3.45% at most banks, to Prime plus 1/2. I would be shopping for another bank, most will cover transfer costs on your mortgage as long as you have an open mortgage or are at maturity. If that isn't the case, go up the food chain from your manager and make it clear that if they won't give you a fair deal now you will move at maturity..

[muzzy]

Just checked the BMO website The mortgage cash account is a virtual account and not a physical separate account. Any time you pay a mortgage payment above what your original negotiated mortgage payment is ie double up a payt pay a extra lump sum payment then this " extra payment money is set aside in your "virtual mortgage cash account" It is not physically in a separate account. The extra payment was applied to your mortgage principle balance lowering it by the amount of the extra payments you made. What the BMO allows you to do is let you withdraw your extra payments made on the mortgage from this "Virtual "mortgage cash account however what that means is if you take this money out they are just adding whatever you take back onto your mortgage principle balance. You are also paying an interest rate exactly the same as your mortgage rate because basically you have just borrowed against your house again by increasing the mortgage balance. No such thing as bank giving you 0% interest rate they are giving you whatever your mortgage rate is

[muzzy]

Midgewater, not correct ,extra lump sum payments are applied on principle balance of mortgage right away and thereby lowering the mortgage balance and saving you interest cost. The Mortgage cash account allows you to " reborrow" up to the amount of all the extra prepayments and provides you the funds by immediately increasing the principle balance of the mortgage.

[Spidey]

Originally Posted by Dean2

Far and away the best advice on this thread and I was in Banking for over 35 years. If you are going to buy the new car, negotiate the very best price you can, THEN tell them you are paying cash, using your Line of Credit. Cash buyers do NOT get a better discount as the dealer counts on making some money on the financing and having the closer/finance guy sell you a bunch of up charges like under coating, diamond finish etc while filling out the financing paper work..

Just read your final post. There is something seriously wrong with what your manager is telling you. Most you should be paying on a home secured LOC with good credit is Prime, currently 3.45% at most banks, to Prime plus 1/2. I would be shopping for another bank, most will cover transfer costs on your mortgage as long as you have an open mortgage or are at maturity. If that isn't the case, go up the food chain from your manager and make it clear that if they won't give you a fair deal now you will move at maturity..

Thanks for the intel. I'll be calling the bank tomorrow. We've never had a LOC or any debt other than a mortgage (and student loans which were paid off 2 years after graduating) - so my borrowing IQ is very low . Our credit score is in the high 800s.

[midgetwaiter]

Originally Posted by muzzy

Midgewater, not correct ,extra lump sum payments are applied on principle balance of mortgage right away and thereby lowering the mortgage balance and saving you interest cost. The Mortgage cash account allows you to " reborrow" up to the amount of all the extra prepayments and provides you the funds by immediately increasing the principle balance of the mortgage.

If you read closer you'll notice I was trying to find an explanation for the teller's claim that borrowing from the MCA doesn't incur an interest penalty. Turns out that wasn't the case at all.