As a recap, the Smith Manoeuvre is a wealth strategy that converts a non tax deductible Canadian mortgage into a tax deductible investment loan. As promised from Part 1 of this series, I will be going into more detail regarding the Smith Manoeuvre(SM) and some common questions that people have. I am by no means an expert in the SM where I’m not even using it myself. I do, however, plan on implementing this technique in the near future and I’m usually pretty analytical when it comes to big financial decisions.

One popular question I often read about is how a person is supposed to pay for both the mortgage AND the HELOC at the same time?

• This is a probably among the biggest concerns as the borrower will be responsible for BOTH payments while implementing the SM. This includes your primary mortgage (principle + interest) along with your HELOC (interest only). Seems a bit steep hey? Say you get a $100k HELOC @ 6% (prime), that’s an extra $500/month on top of your existing mortgage payment.
• I’ve actually emailed Fraser Smith about this issue and he said to “capitalize the interest” on the HELOC. Scratching your head yet? Capitalizing the interest simply means to withdraw the monthly interest due from the HELOC account and redeposit the amount as a payment. Apparently, most credit unions will allow this but some banks will not. You’ll have to check your specific lender for the details.
• If you capitalize the interest, you will never make the extra interest payments out of your own pocket while your primary mortgage exists.
• You will only start paying the HELOC interest out of pocket/cashflow when the primary non-deductible mortgage is paid off. So as you can see, using the Smith Manoeuvre, you will always have a payment. It never goes away. However, the payments are now tax deductible.

Another popular question is why would you need 25% 20% down to start the Smith Manoeuvre?

• The reason is that most of the re-advancable mortgages out there REQUIRE 25% 20% down. The mortgages that do NOT require 25% 20% down will charge an extra CMHC fee. The Canadian government has introduced legislation that will reduce the 25% down payment requirement to 20%.

What are some investment options for the Smith Manoeuvre?

• As you already know, I’m just some obsessive compulsive personal finance guy who is NOT a financial planner. So take my advice at your own risk. However, with that said, when I start using the Smith Manoeuvre I plan on using the money to purchase steadily growing dividend paying stocks/mutual funds/ETFs.

Why dividend stocks do you ask?

• I believe that investing in mostly Canadian dividend paying stocks/mutual funds/ETFs is the most efficient way to implement the SM. The reason being is that Canadian dividends of strong companies (like the big banks) have a history of increasing dividends that can be used to pay down the non-deductible mortgage. Why not just buy interest bearing bonds or GICs? Publicly traded companies that pay dividends in Canada are eligible for the enhanced dividend tax credit which results in a substantial tax break for dividends compared to interest bearing income.
• To summarize, the strong dividend company (if history is any guide), will increase their dividend on a regular basis AND you will receive a tax credit for any dividend income that you receive. Putting the dividend income and the annual tax refund towards the non-deductible mortgage will make the conversion from bad (non-deductible) to good (deductible) debt even quicker.

So that’s my strategy for my next home. Sell off my non-registered portfolio, put >20% down, obtain a re-advanceable mortgage, take the HELOC money and invest in dividend paying stocks (mostly Canadian).

If you are currently using the Smith Manoeuvre, I would appreciate any comments that you may have regarding your experiences and if my strategy is sound.

Other articles related to The Smith Manoeuvre Strategy:

• How to keep your investment loan tax deductible.
• Manulife One Mortgage Review
• Smith Manoeuvre Spreadsheet / Calculator
• Anti-Smith Manoeuvre?
• Smith Manoeuvre Strategy – The Rempel Maximum
• Re-Advancable Mortgage Comparison
• Using the Smith Manoeuvre – My Scenario

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After Kathryn’s post about financial pet peeves, I’ve gotten a lot of feedback and emails regarding bank fees. If you’re the type to read financial blogs, then chances are, you may get as annoyed by bank fees as I do.

Added fees are a huge source of income for the banks. You give them your hard earned money, they turn around and lend it out at a higher interest rate than they pay you, then charge you a fee on top of it. A brilliant business model if you ask me.

However, there are a few ways to avoid bank fees.  As some of the points below may be obvious to some of you, they may trigger some new ideas on how to eliminate or reduce bank fees and save a few dollars.

Use a Free Bank

There are not many banks that will offer their chequing account services (with cheques) for free without any minimum balance, however, they are out there.  From my experience, the bank that comes to mind that offers essential chequing account services for free is PC Financial.  They offer unlimited transactions and cheques for free with no minimum balance.  The disadvantage is that PC Financial does not have any bank branches, so no tellers to help you face to face.  This may not be a disadvantage to some, but if you need a bank draft (like for a down payment on a house), you’d have to phone them first to have a draft ready a day later at a CIBC branch.  They have bank machines for deposits/withdrawals at various Loblaws grocery stores along with free access to CIBC ATMs.

Keep a Minimum Balance

If you are set on having an account with a “bricks and mortar” bank most, if not all, of the big banks offer chequing accounts for free providing that you keep a minimum balance.  Although some may think that keeping a minimum balance is a waste of capital allocation, it really depends on the fees.  For example, if the TD Select Service Account seems to add value to your banking habits, you’re looking at a $25/month fee unless you keep a minimum balance of $5,000.  Although $5k seems like a large amount of money to have sitting around, on an annual basis it represents a 6% return by having the monthly fee waived.

Note though that with some bank accounts, obtaining a book of cheques will have a fee even if you keep a minimum balance so make sure to read the fine print.  I have a bank account with CIBC which charges for cheques.  To get around this, I use my line of credit cheques which are free.  This works for me as both accounts are connected online and I can transfer money back and forth instantly.  With a little research, I’m sure most banks have little savings tricks.

Do Your Research Up Front

There is no one bank that is best for everyone as banking needs vary widely depending on the person.  Some require more Interac transactions, others cheques while some require currency exchange options.  The best bet to reduce fees is to figure out what exactly your needs are and do your own due diligence.

To give you a head start, here are some articles from the past on banking comparisons that may help:

• High End Chequing Account  Comparison
• Unlimited Chequing Accounts in Canada
• High Interest Savings Account Comparison
• Comparing US Dollar Bank Accounts
• Canadian Bank Accounts for Kids
• Small Business Banking Account Comparison
• High Interest Tax Free Savings Accounts (TFSA)

Use One Bank

Generally speaking, the more business you do with one bank, the more you can save in fees.  For example, Royal Bank provides a multi-product discount.  As well, the more you use one particular account for your deposits, the easier it is to keep the minimum balance to avoid the fees.

What are your thoughts?  How do you get free banking?

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