Using Mortgage Cash Account to buy new car?

[Spidey]

A question for the bankers/lender experts out there. We're looking at buying a new Toyota and putting 25% down and financing the rest over 5 years (we usually drive our vehicles a minimum of 10 years). The best rate the dealership could get us on 5 years is 4.99%.

However, we also have a "mortgage cash account" with our BMO mortgage. This is accrued whenever you make extra lump sum payments on the mortgage and it reduces the principal, but is still "set aside" so you are able to draw on it if needed without refinancing your home. I was talking to a teller at the bank today (not sure how much knowledge he had though), and he said it's way better to buy the vehicle outright with the dollars in the mortgage cash account (we have more than enough in there to buy the car) and then pay the car off that way. He also said our current monthly mortgage payment wouldn't increase until we renewed the mortgage, so we could be very aggressive paying off the car between now and then. Our mortgage has 2.5 more years before renewal and is sitting at a fixed rate of 2.59% However, if the teller is correct we'd essentially get a 0% interest loan until we renew the mortgage.

We're pretty disciplined with paying off debt. We have no loans or debt outside of our mortgage. However, the mortgage cash account idea seems a little too good to be true so I booked a meeting with BMO's mortgage/lending person for next week, but thought I'd check here to see if anyone else has done this, or if I've been given bad intel.

Thanks

[EZM]

It sounds like your credit facility is similar to, or in fact is, a secured line of credit. The leverage (collateral) of course, is the equity in your home.

If this facility costs you, for example 3% in interest (compared to the 5% offered through an auto financing facility), then there is zero point in using only 25% of that lower interest line of credit and financing the balance, 75%, at a higher rate.

You might as well pay (and finance) the entire loan of the car on your line of credit and save yourself the 2%.

At the end of the day when you look at your entire "financial picture" you will pay the loan off faster and show a lower total liability associated with debt when/if it comes time to refinance your home, purchase something else or whatever.

A line of credit is also very flexible compared to a structured loan agreement in a conventional loan allowing you to pay less (as long as you pay the minimum) or pay more as you desire.

Use the line of credit if you are going to finance the car. That's the smart thing to do if you must finance and pay interest.

[FishOutOfWater]

All this to save 2% over 5 yrs ? On $50,000 that's still only $1000, or $200/yr, or $4 per bi-weekly payment...

Just sayin.

[EZM]

Originally Posted by FishOutOfWater

All this to save 2% over 5 yrs ? On $50,000 that's still only $1000, or $200/yr, or $4 per bi-weekly payment...

Just sayin.

I think you are mistaken in your math.

Interest is calculated on an annualised basis. It is also compounded.

Not just you maybe - But most people don't realise how much a tiny little 1% or 2% really make. It's huge.

And, of course, the bigger the money and longer the term the BIGGER it hurts when you finally do the math properly and really see what you are getting yourself into. Banks commit the perfect crime everyday and get away with it ... lol.

Based on $50,000

Over a 60 year term at 5% you are paying $950/mo and a total of $6625 in interest ....

VERSUS

On a 3% interest rate on the same 60 month term you are paying $904/mo and $3950 in total interest over the term.

[CanuckShooter]

Buy a vehicle with dealer 0% interest.....just a thought.

[new2ab]

I don't think you get 0% interest on the new monies. More likely the same interest rate as your existing mortgage. If your payment doesn't increase, then a larger portion of that payment will be going to the interest, and smaller to the principal.

If you have options to increase your payment by the equivalent a car payment, that would be something to look into. No change in payments could be the equivalent of financing that car over 25 years. You may be able to increase payments (some may be temporary, others permanent, so check), or do an annual lump sum.

Contact your bank again and ask them to run you through the mechanics.

[Gray Wolf]

Some of this may also apply - https://www.bnn.ca/canadians-can-t-s...ingID=19038235

[Carriertxv]

I’m far from a financial wizard seeing as I always had issues balancing a chequebook from years ago but taking cash of any kind out of your house be it a line of credit with house as equity or anything else that is tied to the house to buy a vehicle just doesn’t make any sense to me.

[Gray Wolf]

Originally Posted by Carriertxv

I’m far from a financial wizard seeing as I always had issues balancing a chequebook from years ago but taking cash of any kind out of your house be it a line of credit with house as equity or anything else that is tied to the house to buy a vehicle just doesn’t make any sense to me.

X2

Too many people selling their souls to the bank (when their already deep in debt), to buy that Next New Thing. It's no wonder the average Canadian is in debt up to their eyeballs today!

We're living in a Debt Culture

[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.

[Wes_G]

Originally Posted by CanuckShooter

Buy a vehicle with dealer 0% interest.....just a thought.

Agreed. Toyota seems to the A-holes of the financing world on new vehicles though. But with pretty much any other brand there is some point in the year that you can get 0% financing. Wait it out or go somewhere else.

[Scott h]

Originally Posted by CanuckShooter

Buy a vehicle with dealer 0% interest.....just a thought.

I've never seen a Toyota dealership with 0% financing. If anybody ever does I may pick up a new truck.

[Tom Pullings]

If this money is already paid into your principal you might as well use it to pay for the car. As long as there’s no penalties and it’s not gonna take you any longer to pay off the mortgage it makes sense. Like already suggested just make sure you’re paying back into that mortgage rather than paying the 5 percent car loan.

[Iskra]

Originally Posted by CanuckShooter

Buy a vehicle with dealer 0% interest.....just a thought.

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.

[coastalhunter]

That's a stupid amount of interest from the dealer.

[Newview01]

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.

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

[EZM]

Originally Posted by Gray Wolf

X2

Too many people selling their souls to the bank (when their already deep in debt), to buy that Next New Thing. It's no wonder the average Canadian is in debt up to their eyeballs today!

We're living in a Debt Culture

Originally Posted by Carriertxv

I’m far from a financial wizard seeing as I always had issues balancing a chequebook from years ago but taking cash of any kind out of your house be it a line of credit with house as equity or anything else that is tied to the house to buy a vehicle just doesn’t make any sense to me.

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.

[Scott h]

Originally Posted by Newview01

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

That's why the OP was looking at buying a Toyota....he wants to avoid that

[blackonblackfx4]

My last Toyota was 1.99% but I know it’s been higher lately. Ask what your bank rate is on a car loan? I work for another bank and our rates start at 3.99%. Dealers do make some money of the financing

[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.

[camshaft]

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.

Ah yes the old “cash is king” mentality. Dealers could care less what method you pay with. They make way more on financing. MSRP is irrelevant. Negotiations should be invoice minus all rebates and possibly minus hold back (if u are a skilled negotiator).

[Sneeze]

I have never heard of borrowing from a re-advancable mortgage interest free.

Spidey I suggest you check the "cash account" and figure out what the interest rate is to draw from it. I'm going to guess around 3 points.

[Gray Wolf]

Originally Posted by CanuckShooter

Buy a vehicle with dealer 0% interest.....just a thought.

Or better yet, buy a two or three year old, good quality, well maintained vehicle FOR A WHOLE LOT LESS!!!

Been doing it for 30+ years now, and it's worked like a Charm!

[Gray Wolf]

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.

It's amazing how many people still don't know that, and get suckered in.

Sad

[FishOutOfWater]

Originally Posted by EZM

I think you are mistaken in your math...

You're right, I was off a bit... I think the difference would actually be less than the $1000 I originally thought.
That's based on the assumption he would pay either loan off within the 5yr term indicated.

[blackonblackfx4]

Originally Posted by Gray Wolf

Or better yet, buy a two or three year old, good quality, well maintained vehicle FOR A WHOLE LOT LESS!!!

Been doing it for 30+ years now, and it's worked like a Charm!

Ya I somehow doubt that’s a Toyota. A year or two one is almost the same price

[Tarmac]

Originally Posted by Spidey

A question for the bankers/lender experts out there. We're looking at buying a new Toyota and putting 25% down and financing the rest over 5 years (we usually drive our vehicles a minimum of 10 years). The best rate the dealership could get us on 5 years is 4.99%.

However, we also have a "mortgage cash account" with our BMO mortgage. This is accrued whenever you make extra lump sum payments on the mortgage and it reduces the principal, but is still "set aside" so you are able to draw on it if needed without refinancing your home. I was talking to a teller at the bank today (not sure how much knowledge he had though), and he said it's way better to buy the vehicle outright with the dollars in the mortgage cash account (we have more than enough in there to buy the car) and then pay the car off that way. He also said our current monthly mortgage payment wouldn't increase until we renewed the mortgage, so we could be very aggressive paying off the car between now and then. Our mortgage has 2.5 more years before renewal and is sitting at a fixed rate of 2.59% However, if the teller is correct we'd essentially get a 0% interest loan until we renew the mortgage.

We're pretty disciplined with paying off debt. We have no loans or debt outside of our mortgage. However, the mortgage cash account idea seems a little too good to be true so I booked a meeting with BMO's mortgage/lending person for next week, but thought I'd check here to see if anyone else has done this, or if I've been given bad intel.

Thanks

Hi Spidey,
I sent you a PM. Happy to offers some expert advice.

[ESOXangler]

Originally Posted by Gray Wolf

It's amazing how many people still don't know that, and get suckered in.

Sad

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.

[IL Bar]

Most dealerships deal with all of the banks as well. 4.99% must be Toyota’s own financing. With 25% down and excellent credit history I see no reason why you can’t get a bank to not offer you a loan for 3% or less. I would not link a car loan with a house mortgage personally.

[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.