To understand the Australian Mortgage Strategy, you first need to understand how our banks make money.
Service fees might be what first come to mind. But really these comprise only a small portion of their profits. Of far more importance to their bottom line is what is referred to as ‘the spread’ — which is the difference between what they pay when they borrow money, and what they charge when they lend it out.
The spread (and hence their profits) can be large. Consider this: much of what they ‘borrow’ is from you and me — when we deposit money into a bank account. Because once it is there, they can leverage it and lend it back out. In the case of bank accounts, they are effectively paying little if anything in interest to gain access to our money.
What they charge when they lend it back to us another story — ranging from a few percentage points on a mortgage, to 20 per cent or more on credit card balances.
It just doesn’t seem right. We lend them money for free, then borrow it back again at 20 per cent.
In fairness to our banks, they do provide many valuable services, including the safeguarding of our money, providing credit when we need it, as well as access to other important financial products. In exchange, they make a profit — something we should not begrudge them, as long as it is reasonable.
But is it reasonable? In my opinion the answer does vary from institution to institution. Some have acted more responsibly than others with respect to lending practices, and deserve credit. But the bottom line is: Canadian household debt has reached record levels, and in the opinion of some is at dangerous levels. Yet even with alarm bells sounding, some institutions continue to encourage and entice us to take on more debt — with scary new tactics such as the credit card cheque.
Canadians finally are concerned, and are looking for better ways to manage their debt — ways to get out of debt sooner.
The Australian Mortgage Strategy does just that. Among other things, it eliminates ‘the spread’, by eliminating a number of financial vehicles such as the traditional mortgage, the traditional bank account, the line of credit, and potentially even the credit card. In their place there is a single account that consolidates everything into one.
Using this approach helps to ensure the following:
All of your debt is at a low rate of interest.
You need never pay interest on anything more than the difference between what you owe and what you have in cash, and your deposits effectively earn you the same rate of interest as what you are charged on your debt.
Using this approach can not only help you to pay off your mortgage sooner, it can also free up cash flow for something else that Canadians seem to have gotten away from: saving for the future.
To learn more join us May 23 for our presentation entitled Peace of Mind through Debt Control. To register call (250) 594-1100 or email paige.renouf@raymondjames.ca.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member Canadian Investor Protection Fund. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member Canadian Investor Protection Fund. For more information feel free to call Jim at (250) 594-1100, or email at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.