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DIY Smith Manoeuvre II – The Readvanceable Mortgages





The Readvanceable Mortgage

Canadian Capitalist contacted me to write part 2 of his DIY Smith Manoeuvre 3 part series.

  • Part 1 more or less introduces The Smith Manoeuvre
  • Part 2, which is this article, is about the various readvanceable mortgages available in Canada and which ones are recommended,
  • and Part 3, discusses some investment options when implementing The Smith Manoeuvre.

If you’ve been following MDJ, you would have seen quite a few postings about The Smith Manoeuvre, tax implications, recommended readvanceable mortgages and investment strategies.  This article however will go over what I think are the best mortgages available for the Smith Manoeuvre.

In the article, Smith Manoeuvre Mortgage Comparison, Melanie from Canadian Mortgage Trends, created a large comparison table of most of the readvanceable mortgages available in Canada.  From this table, I did a bit of digging myself by phoning the mortgage brokers in the local area.

For me, the most important criteria are that it must:

  • Provide a great rate with better than average pre-payment privileges.
  • Be convenient (ie. online) for me to transfer money back and forth between the mortgage, HELOC, and my own bank account/investment account.
  • Readvance automatically.
  • Must not charge any extra appraisal/legal fees.

With this criteria in mind, the readvanceable mortgage candidates came down to:

RBC Homeline

  • The Good: The option of splitting your regular mortgage portion into a fixed and variable “sections” appealed to me b/c you’re basically diversifying your debt.  What I also liked was that the variable portion can be @ prime – 0.75 which is a decent bank rate (the variable rate might be reduced).
  • The Not So Good:  You need an RBC account to transfer money back and forth between a bank account and the HELOC/Mortgage.  Since I don’t bank with RBC, nor do I plan to, this was a big no-no for me.  However, if you do bank with RBC, then this may be a good option.  One other gripe, 5 year closed is the only option with the RBC Homeline.

BMO Readiline

  • The Good: With BMO, you can either have one of their fixed OR variable mortgage products attached to the HELOC.  Both fixed and variable rates are very competitive and the choice of 1-5 years for the fixed option.  What appealed to me most was the variable rate @ prime – 0.85% for 3 yr OPEN.  Note that this rate is only available to clients with decent income and credit (update, this rate may not be available anymore). What I also liked about the BMO product was that I can pay the HELOC via EFT transfer from any bank.
  • The Not So Good:  In order to get true convenience, you need a BMO bank account.  With a BMO bank account, not only can you pay down your HELOC through EFT, you can transfer money from your HELOC to your bank account.  If you don’t have a bank account with BMO and you need some HELOC cash, you need to write a HELOC cheque to yourself and go to an ATM.  Another downside is that the only way to pay down the mortgage portion is via branch locations.

Firstline Matrix Mortgage

  • The Good: Competitive 5 year fixed rates.  What I like best about this product is that whoever who you bank with (unlike the other options), you can transfer money back and forth electronically between your mortgage/HELOC and your bank account.  I’m not sure about the other mortgages, but the HELOC on this mortgage isn’t reported to the credit bureau.
  • The Not So Good: No 1 yr fixed rate and no variable rate option.

Conclusions:

The three readvanceable mortgages listed above are my top picks for the Smith Maneouvre.  Personally, I’m torn between 2 products, the BMO Readiline and the Firstline Matrix.  On one hand, I have the BMO Readiline which provides a great variable rate @ prime – 0.85% and it’s OPEN (this rate may not be available anymore).  On the other hand, the Firstline Matrix mortgage provides the most convenience as I can transfer money back and forth between the mortgage/HELOC and my bank accounts without leaving my chair.

Update:  I have since chosen the BMO readiline product for my SM.  Email me if you want the name of the experienced SM mortgage broker that I used.





59 Comments, Comment or Ping

  1. FT, why can’t you just call BMO instead of going to the branch to pay down your mtg?

  2. FB, I asked the same question. But apparently, if you don’t have a bank account with BMO, then they require that you come in to make mortgage pre payments.

  3. 3. Telly

    FT, we have our mortgage with BMO. One thing we’ve done is increase our payments by 20% at the start of each year (this can be done over the phone and can be cancelled anytime without a BMO account). I also bit the bullet and opened a basic BMO chequing account for further pre-payments because dropping a cheque off at the branch is just too inconvenient.

    I make email money transfers from my TD account to BMO to make extra payments every once in awhile.

  4. That’s a great idea Telly. The only thing I can’t stand about opening another account is keeping the minimum amount in there to prevent from paying any fees. In this case, i’ll need another $1500 floating there.

  5. 5. Mike

    FT do you have any documentation on the rate you quote for BMO (Prime -.85%)? I’m in the process of opening a BMO Readiline and the interest rate is a sticking point.

  6. Mike,

    I got that quote over the summer and i’m pretty sure that the rate now is higher. Most of the banks have reduced their variable rate discounts due to the mortgage fiasco in the U.S. You should be able to get Prime – 0.55% on your mortgage portion, but I believe that the heloc/readiline rate stays @ prime.

  7. Great overview FT! From all the good Smith Manoeuvre information being written these days it’s clear the strategy is becoming more mainstream.

    Here’s a few misc. tidbits to add:

    * BMO has eliminated it’s discount on the 3-year variable open mortgage. It’s now at prime rate (6.00% as of today). The P-.85% was a promotion that unfortunately expired.

    BMO’s next best thing is a 6-year variable at 5.547% APR. It’s closed for the first 3 years and open after 3 years.

    * RBC’s Homeline 5-year variable closed is a good deal at P-.75%. They have an open 5-year variable also at P-.25%. Their 5-year fixed is not so hot at 6.09%.

    * If you’re looking for a fixed-rate mortgage, FirstLine’s Matrix is the best bet by far. That’s because:

    1. It’s fixed rate is the lowest of the bunch
    2. The Matrix is the only SM mortgage that offers the potential of a discounted line of credit
    3. FirstLine compounds LOC interest semi-annually instead of monthly like all other lenders. Less compounding = less interest.
    4. Unlike the banks, FirstLine doesn’t report the LOC to the credit bureaus which is key if you need to apply for credit elsewhere.
    5. Since FirstLine is a division of CIBC they have a good online account management console. They also automatically debit your required mortgage and LOC payments each month from your bank account.
    6. The Matrix has among the best pre-payment privileges of any readvanceable product.

    These are some of the reasons why Fraser Smith himself uses the SM almost exclusively.

    * Based on what we’re hearing from lenders, a lot of new readvanceable mortgages are coming down the pipeline in the next 6 months. Readvanceables are the biggest trend in mortgages these days. Stay tuned!

    * As always, the above interest rates can change on a dime and are based on approved (good) credit. In addition, it’s important to remember that the risks of the SM cannot be understated. Always consult an advisor who’s an expert in the SM before even considering it.

    Have a wonderful day!
    Melanie

  8. 9. DAvid

    RE: RBC Homeline.
    When I transferred my mortgage to the Homeline product, the Loans Officer spoke to me about the opportunity to ladder my mortgage (1 yr & 2 yr &3 yr, etc.) so I believe that you are able to have mortgage choices other than 5 year closed. Melanie’s SM mortgage comparison spreadsheet affirms this with the comment that you can have a term from 6 months to 10 years.

    Since I choose not to have my banking scattered amongst many institutions, having other accounts at the bank that holds my mortgage is not a big deal. I’m also curious as to how quickly Firstline will transfer funds — I know ING is a day or so. I do like the ease of moving money around within the one banking interface — I can manage all my banking transactions from the one place.

    DAvid

  9. Hi David, You’re absolutely right. RBC can ladder your mortgage with multiple terms and amortizations. Merix offers this as well.

    Rob’s article on Smith Manoeuvre Maintenance touches on FirstLine’s fund transfer timelines. Hope it helps!

    Have a wonderful evening,
    Melanie

  10. 11. easypz

    Although BMO has reduced its discount on the 3 year variable open, we’ve recently obtained it for -.50, completely open from the start, no initial closed 3 year term.

  11. 15. Ed Rempel

    Been reading this blog and found a couple of inaccuracies:
    - Royal has all the major terms (1-5 year fixed and variable mortgages) in their Homeline – not just the 5-year fixed. It is their variable that only comes in a 5-year option.
    - The “discretion” that banks allow below prime in a variable mortgage was .85%-.9% for the last several years, but declined recently to .5% and now .4% because of the credit issue related to the US subprime mortgage problems. This has been true of all the major lenders’ variable mortgages – not just BMO (and BMO has always been well below prime). We expect this to be temporary and they will probably all be back to normal discounts in the .85%-.9% range sometime soon, although this may take a year or so.
    - Until about a year ago, mortgages did not show up on the Credit Bureau from basically anywhere – not just from Firstline. Equifax has been in the process of adding them for all the major lenders.

    A bit of advice for you DIYers – All indications are that rates will be dropping over the next year or so. The only question is how far. So don’t lock in at today’s high rates. Stick with variable rates. Studies show they would have saved you money 100% of the time over 5-year fixed.

    Ed

  12. 16. Cannon_fodder

    Ed,

    You stated that you believe the variable rate discount from prime should increase in about a year or so once confidence returns to the credit issuance market. Will this change affect those already in mortgages? I.E. take a mortgage today at .4% discount from prime but in a year it gradually begins working its way back up to .8% – will I see that benefit simultaneously or is the mortgage term ‘locked’ in at that discount rate?

  13. Hi Easypz, Here are BMO’s current rates. They’re currently at 6% for a 3-year open. BMO could possibly discount it but the big bank’s variable-rate margins have been really squeezed lately so it’s less likely than it once was.

    http://www4.bmo.com/popup/rates/0,4499,35649_3547784,00.html?pChannelId=0

    Cannon, While your question was addressed to Ed I’ll note briefly that variable rate discounts are fixed (apart from short-term “teaser” rates). So if you’re at P-.40 now then that’s the rate you’ll pay until your term is up.

    Cheers,
    Melanie

  14. 18. Ed Rempel

    Hi Cannon & Melanie,

    Melanie is right that if you are in a variable for a term, you keep that discount from prime for the term. The only exception is if you have an open variable mortgage, such as BMO, in which case you can renegotiate any time for no cost in order to get a higher discount.

    BMO may show 6% on their web site, but our BMO contacts are giving us prime -.4% right now, which is the same as the other banks. We expect it to go back to prime -.5% soon at all the banks, possibly within only a few weeks.

    Ed

  15. :) That’s the “beauty” of banks. You never know what you’re gonna get.

    As a side note, other options currently exist lower than P-.40.

    Also, it would be interesting if the banks changed their tune and got more aggressive with their variable-rate discounts. Their margins have been squeezed and now they’re seemingly reluctant to even match the Bank of Canada’s potential rate cut.

  16. 20. Investor X

    I’ve been looking at the Smith Manoeuvre for about a month now and I’m trying to jump in when I’m comfortable with a position. I’m getting some feedback on how to invest once everything falls into place.

    I understand the Plain Jane SM. I could start using it right away since I have a STEP mortgage with Scotia. I’ve been warned that the legal fees of getting out of this particular HELOC are high (though not a problem if I stick with Scotia).

    One presentation that I went to using the SM had one rep telling me that I should get out of my mortgage (3 yrs left at 4.95%), pay $550 in legal fees and $1,250 in set-up fees and sign up for a mortgage at Merix or TD (at no doubt a higher rate). They said I would be farther ahead if I do and though it is possible, I would rather go for a DYI solution. Accordingly, I value the info on this site.

    Aside from the Plain Jane SM, the 2 companies that I have heard do something like this:

    1. Get your HELOC loan set up (i.e. with $100,000 LOC)
    2. Buy $100,000 in income funds secured by your home equity.
    3. Go to another bank to borrow $100,000 (secured by the first $100,000 in income funds)and buy another $100,000 in income funds. You now have $200,000 in income funds and owe $100,000 to 2 different banks.
    4. The income fund sends you monthly distributions (supposedly tax-free) gauranteed at 8%.
    5. You apply these distributions against your mortgage to generate more space for your line of credit to start buying real investments.

    Can anyone confirm using this particular version of the SM? It is more aggressive than the Plain Jane version so I could pay off my mortgage faster but I question the non-taxable distributions from an income fund (or guarnteed 8% distribution).

  17. Investor X, be careful with those income fund distributions as they most likely distribute Return of Capital. If ROC distributions are withdrawn from an investment loan, the tax deductibility of the loan will be reduced. A safer bet would be to invest in strong dividend paying companies. You can withdraw dividend distributions without affecting the tax deductibility of the loan.

  18. 22. Investor X

    Thanks FT. I’m trying to get the biggest bang for my buck based on my existing mortgage payments. From everything that I’ve learned so far, this approach seems like a good one:

    1. Using the STEP mortgage, I currently have a chunk of money that could be used as a HELOC.
    2. Over the next year, I will divide my “chunk of money” into 12 and purchase investments evenly – once per month to achieve dollar cost averaging.
    3. At the end of one year I will have my original LOC invested and more available room to borrow (minus interest).
    4. I can then approach another bank, using my first year’s investments as collateral to get another investment loan to accelerate growth of investments and the investment loan making more interest tax deductible to pay down my mortgage faster. I understand the guerilla interest capitalization but would my bank allow me to pay interest on another bank’s line of credit?

    My goal is to pay down my mortgage as fast as possible with minimal risk of taxation problems (and hopefully not lose my shirt in the process).

    You had mentioned that I can invest in strong dividend paying companies which sounds good but are there any that pay regular, fixed dividend amounts? If I get the dividends I can pay them against the mortgage which is great but I will be taxed on the dividends (albeit a lesser rate) minus the interest write-off. In the end it looks like my mortgage gets paid down faster via dividends rather than the tax refund from the interest tax deductions. Its a variation on the SM but it sounds good if it works.

    This is a long message but I definitely appreciate your advice.

  19. 23. DAvid

    Investor X asks: “Over the next year, I will divide my “chunk of money” into 12 and purchase investments evenly – once per month to achieve dollar cost averaging.”

    Why would you do this? Lump sum is far more effective, unless you are in a falling market. If you realize you are in a falling market, just wait until you feel it is closer to bottom before you invest.

    He also states: “I can then approach another bank, using my first year’s investments as collateral to get another investment loan”

    Seems risky, as you might have to sell the home if either bank gets uncertain about either the HELOC or the LOC. You also have to be able to pay the increased interest costs.

    It would be more straight forward to simply implement the “Rempel Maximum” described elsewhere on this site.

    DAvid

  20. 24. Investor X

    David,

    I know an investor that has done very well with dollar cost averaging and with the sub-prime melt-down moving north from the States I don’t think Canada has bottomed out yet so DCA sounds prudent. When will it bottom-out? Who knows…

    I’m trying to understand the Rempel Maximum from the example using a $400,000 house and a $200,000 mortgage. Doing the math, there is immediately $100,000 for a HELOC using the old 75% CMHC rule(although I don’t see that as part of the process). In the process does one use the $100,000 HELOC to invest and then as more equity becomes available use those funds to pay interest on the HELOC as well as interest on another investment loan? If the “other investment loan” comes from another bank then it starts to look like what I suggested.
    Does the Rempel method use 2 banks or just the same one? It looks like it uses a bank for the HELOC and a trust company for the investment loan (secured against the original $100,000 in investments).

    My method doesn’t spend the $100,000 right away – just over a year.

  21. InvestorX, the Rempel maximum formula basically uses the largest investment loan that the principle mortgage payments can service. So if your principle payments are $500/month or $6000/yr, your mortgage payments can support an investment loan the size of $6000/5.75% = $104k. Which, if you used the 80% LTV formula, would work under your circumstances WITHOUT getting an additional investment loan.

  22. 28. Joe Gasparini

    Well, i have done a great deal of reading on the SM, i have discussed with my Scotia McLeod Advisor and i certainly am considering this option. I do have a homeline connected to my mortgage at prime. I have access to 100k on this line with Scotia Bank and i am set up to invest with Scotia as well. My credit is good – no problem. My advisor is suggesting that I implement half the strategy.
    Borrow against my step mortgage, pay the interest per month without borrowing to pay the interest. I will need approx 600 dollars a month to cover the monthly. Claim the interest expense then pay down mortgage. He also wants me to continue contributing to my RRSP and RESPs. My concerns are:

    Has the market dropped enough or is it getting worse. With the R word beng thrown around I am concerned.

    I would like feedback from those who have started this process in the last year. The markets have tumbled how has this impacted their view point of the SM.

    Will interest rates remain low over the next 5 year.

    Lot of questions i hope i get some answers!!!

    Joe

  23. 29. Ed Rempel

    Hi Joe,

    Your Scotia advisor is probably recommending only half the SM strategy because of the major disadvantages of the Scotia STEP mortgage. With the STEP, the credit line does not automatically increase as your mortgage is paid down. You have to go into the branch and sign to request the credit line be increased. Also, you cannot invest directly from the investment credit line. You need to transfer to a chequing account first.

    For these reasons, we find doing the SM properly is extremely difficult with a Scotia STEP – so difficult that most people don’t want to do all the manual work necessary to make it work.

    This is probably why your Scotia advisor is recommending only half the SM – it is too complicated for almost evey to do with a STEP.

    It is much easier with most other banks, but your Scotia advisor probably is not able to recommend all the better mortgages. This is why it is usually best to avoid any advisor that recommends their own company’s mortgages or investments – how do you ever know that their advice is unbiased?

    Using your own cash flow to pay the interest is not the best strategy. This results in you using your cash flow to pay tax deductible amounts, instead of paying it down on your mortgage (which is not deductible).

    If you compound the interest on the investment credit line, all the interest is still tax deductible. Then you can use the $600/month to pay your mortgage down more quickly. This is a guaranteed savings.

    To answer your questions, there is obviously no way to know for sure, but you should change your thinking entirely. Markets cannot be predicted short term – but can be predicted long term. Trying to time the bottom almost always results in missing the first 20% or more of the recovery. Studies consistently show that those that try to time markets have much lower returns than those that just buy low and stay invested.

    Recessions are nothing to fear. The markets have nearly always risen during recessions. They tend to fall before recessions as we realize we are going into a recession, but then the market rises once we are sure there is a recession and start to think about coming out of it. We can’t know for sure, but it looks like the market bottomed 6 weeks ago and is already up 10%. Most market timers will miss the first 20-30% of the recovery.

    Interest rates most likely will stay low for most of the next few decades, although there are risk factors. Demographics and globablization are very powerful anti-inflation forces. The Baby Boomers drove interest rates up in the 70s’ and 80′s and have essentially driven them down ever since. Japan is about 20 years ahead of us in demographics and has interest rates near zero. However, the “peak oil” and rising commodities prices could lead to higher inflation – that is unless they are in a cyclical bubble like every other commodity rise. “This time it might be different” though, since there is evidence we are near the peak of oil production globally.

    When you think long term, all these questions are irrelevant, however, and your returns will be higher. The markets are quite a bit lower, so this is a buying opportunity. The markets will almost definitely be way up in 10 years and you will have invested at a relatively good price. This is how great investors think.

    Your short term market thinking is dangerous with the SM. The SM is a very effective long term strategy, but can easily be messed up by market timing logic errors, such as selling after a decline, not investing when the markets are cheap or trying to time a market bottom or top. Studies such as the Dalbar Study consistently show that the average mutual fund investor only gets 1/3 of the return of the investments they own, with 2/3 of the return lost by market timing.

    Having confidence in your investments long term and sticking to your strategy in all markets is the frame of mind you need to be in to make the SM work properly.

    Our advice for you would be to avoid the SM or any leverage strategy unless you can feel confident in your investments in all markets. Remember, they only need to earn higher than your credit line interest rate after tax over the long term for the SM to work for you.

    There are exceptional fund managers (we call them “All-Star Fund Managers”) with great long term returns and low risk that have beaten their indexes by wide margins over the long term. Find the best fund managers and learn to think long term – and forget about all short term market timing.

    Ed

  24. 30. Joe Gasparini

    Ed – thanks for the advice – the advisor is not linked to Scotia Bank in other words he could manage with the use of another bank product – he just thought it would save on interest penalty and other costs. He has always been my advisor and my RRSP has performed quite well along with other investments. I agree that I want to avoid using my own money in order to continue taking advantage of the interest expense. Thanks again – i am ready – Joe

  25. 31. Investor X

    FT

    “InvestorX, the Rempel maximum formula basically uses the largest investment loan that the principle mortgage payments can service. So if your principle payments are $500/month or $6000/yr, your mortgage payments can support an investment loan the size of $6000/5.75% = $104k. Which, if you used the 80% LTV formula, would work under your circumstances WITHOUT getting an additional investment loan.”

    My HELOC will not provide $104K as they don’t have that much security against my house. This means that they will charge me prime plus 1% for an unsecured line of credit. I know that the interest cost is 60% after tax but you can’t turn a blind eye to interest rates. If you are a carefree investor, go borrow $300,000 (as long as your HELOC can make the interest payments)and invest in gold and we’ll see how well you sleep at night. This is a little cynical but I’m just trying to put across that it is very important that there is a margin between your after-tax interest cost and the return on your investments or you will lose money. I’ve been to a couple of SM seminars that sell the tax refund end of things but fail to emphasize the risk of not making enough return on your investment to make up for your mounting debt.

    ED

    “STEP Mortgage”
    Also, you cannot invest directly from the investment credit line. You need to transfer to a chequing account first.

    My banker at Scotia said that I need an extra chequing account to buy investments but you can invest by picking the investment firm and your investment account # and paying them the same way that you pay bills on-line (directly from your HELOC account). I’ve been doing this for a couple of months now and have not touched my chequing account. If you are a buy and hold investor, you don’t need an investment chequing account at Scotia.

    I acknowledge that the STEP account is not convenient because it does not immediately readvance but I have a couple of years worth of equity built up so as I buy investments over the next couple of years, I can increase the HELOC balance annually instead of every 2 weeks.

    I’m using a slightly modifed Plain Jane version of the SM that will pay off my mortgage 2 years sooner but at the end of that time I will be paying about $750 per month in interest (forever – adjusted for interest rates). That is considerably less than my mortgage payments but none of the seminars that i’ve been too emphasize that you will still be paying money once your mortgage is paid off. The investment growth should make it worthwhile in the end but the interest still requires cash flow.

    I’m not trying to talk people out of the SM but to take a very sober look at it. I’m obviously not against the SM or else I wouldn’t be doing it myself. It very easy (too easy) to borrow money and spend it – it takes time and research to come out ahead.

    Dollar Cost Averaging

    You cannot talk me out of this. It is very easy to say buy 100% of your investments when the market is low (1. What is low? 50% from peak 2. What if low goes to zero?Then you have nothing) This is an extreme example but a possibility.

    Rule #1 of investing should be to diversify investments so that you do not face too much exposure in one market.

    Rule #2 should be to diversfiy over time through dollar cost averaging. Investment planners will tell you to invest all of your money today so they collect all of their commissions today – that is not in my best interest if I lose money by trying to time the market. (No offence)

  26. 32. MS

    Excellent and very useful comments, especially about the STEP mortgage.

    1. I have previously been on Firstline’s Matrix mortgage and am about to switch out to STEP (the former I was locked in at 4.1% for the mortgage part for 3 years and P-0.4% for the LOC part: oh, the good old days!)
    2. I have negotiated the STEP as fully open variable at P-0.75% for the mortgage part and have the standard P for LOC). I go in with my eyes open to its drawbacks…but hopefully this will provide a benchmark for negotiations for some of you.

    It looks like credit conditions have a little more flexibility again with no clear vision for the 12 months on interest rates in Canada. Hence I can transfer out and lock in if things suddenly appear to be taking a turn for the worse.

    On a separate note, I recently built a model and Monte Carlo simulation based on 46 years worth of historical fixed and variable mortgage rates.

    Result for comparing a 5 years fixed (at published bank rate less 1.5%) vs. variable (at published bank rate less 0.6%) on a $500K property?

    (1) 19 times out of 20 you are better off with a variable rate mortgage
    (2) That 1 in 20 times you beat with fixed vs. variable you’re likely to save no more than $20K per year at the outside
    (3) Okay, so $20K per year sounds like a lot – but there is an 80% chance you could end up paying up to $20K per year more with a fixed
    (4) And horrendously, there is a 15% chance of paying over $20K and as much as $50K per year (the probability of the latter figure is just 0.2% though)

    Now, this doesn’t take into account whether you can “see” what rates will do, nor does it look at period when rates are very low. But you get my point.

    M.

    P.S. Yes, I am an uber-geek.

  27. 33. Ed Rempel

    Hi MS,

    Why would you switch to Scotia STEP knowing all the disadvantages when there are a bunch of readvanceable mortgages out there without all those disadvantages?

    Are you working with a mortgage broker? First Line and Scotia, the 2 you mentioned, are basically the only readvanceable mortgages available to mortgage brokers. But there are a at least 3 or 4 better choices.

    Interesting analysis. I don’t understand how you would lose $20K/year of interest. You would need a $1 million mortgage and a 2% difference in the interest rates to get $20K/year.

    Did you compare the rates each year, or track the 5-year fixed vs. the next 5 years of variable rates? I saw one similar study done by a mortgage broker comparing 1-year fixed to 5-year fixed in which the 1-year fixed saved money 100% of the time since 1950.

    In your analysis, I assume that the only time that 5-year fixed worked was in the early 1980′s when rates rose from 13% to 23% in 2 years. Is that right?

    In the study I saw comparing 1-year rates, they still saved money over 5-year fixed even in the early 80′s. They ended up being lower in 3 years and higher in 2.

    Ed

  28. 34. MS

    Ed

    Thanks for your post and comments. In reply:

    1. I am switching to STEP because I am looking for (a) a variable open (b) the best rate out there. Scotiabank is offering me P-0.75% on the mortgage portion.

    2. I compared the interest payable on a five year fixed rate mortgage (with “broker equivalent” discounts) vs. the equivalent 60 months of variable rate interest payments.

    3. I do not know when the fixed outperformed the variable – the simulation I am running is agnostic towards the year.

    MS

  29. 36. Tyler

    Hi,

    Can you explain to me what is the difference between 3 year Open Variable rate vs 3 Year Close variable rate?

    Thanks
    Tyler

  30. 37. Cannon_fodder

    Tyler,

    An open mortgage has no limit on prepayment. In fact, you could pay the mortgage off in full during your term and pay no penalty.

    A Closed Mortgage cannot be paid in full during the term. Many closed mortgages do have some accelerated prepayment privileges.

    Normally, a closed mortgage has a lower rate for the same term as a similar open mortgage (i.e. they are both fixed rates). I would imagine the same might be true with variable rate mortgages, too. Think of it this way – the Financial institutions want to keep you as a customer longer, i.e. guarantee you will be with them for a set period, and they are willing to give a little bit up on the interest rate. But, if you try to leave early, they will hit you up with a penalty.

    On the other hand, with the open mortgage, you could win the lottery tomorrow and pay it off without penalty. Or you could find a sweeter offer, and if all of the legal fees and such were waived or covered by your new mortgage provider, you could switch and save.

  31. 38. Tyler

    Thank you for your answer,CF. I am wondering why there is 3 year open variable rate. Would it be the same as open variable rate without term?

    Tyler

  32. 39. cannon_fodder

    Tyler,

    No, the 3 year term relieves you from the hassle of having to renew your mortgage until the 3 years are up. The longer the term, the less of a pain it would be but typically you would see a premium from the bank to give you that freedom – the interest rate discount from prime might be less if you are given a 5 year term open variable vs. a 3 year term open variable. After all, as you surmised, if it is open I can take it elsewhere or pay it off completely if I want, so a 5 year could be moved over in 3 years but if there is no compelling reason to leave early then it is nice not to have to go through the process for as long as possible.

  33. 40. cannon_fodder

    I’m a little closer to implementing the SM. I’m with BMO now and our 5 year closed mortgage ends in September. Since it is within a 90 day window, BMO would allow us to move into their ReadiLine product now.

    I went to Rob McLister (Melanie’s husband) and they provided me a contact at RBC. They are running a promotion until October where they are waiving some of the setup fees (title insurance, discharge and registration fees) as long as the Mortgage is over $100k. Because my mortgage is relatively small (less than $150k) I was only offered P – 0.7 from RBC.

    Rob agreed that the ReadiLine would be a very good product for me (since we already have a bank account and our mortgage with them) and I also could move into the SM now versus waiting 3 months (unless I wanted to pay an unjustifiable penalty).

    So, I went to Ed Rempel and spoke with Harvinder who works with Ed. Harvinder was very nice and helpful and gave me a contact at BMO. I spoke with her just before she left for vacation and the application process was pretty simple – over the phone, sign an application that she emailed to me, scan it, email it back. They initially offered P – 0.6 which, when Ed found out, completely sympathized with me that this isn’t good enough.

    The fact of the matter is, in 3 years, my mortgage is going to be zero (that’s my plan). But, the HELOC will continue to generate interest payments for the bank, without touching the principal, for a long time. And, there really is no reason to move your HELOC from one bank to another because there aren’t any advantages – I’ve not seen concrete evidence of anyone being offered a HELOC at less than prime right now. So, from a bank’s perspective, why wouldn’t you want to get on this gravy train and entice people with attractive mortgage rates if you determined the person was really going to borrow some decent equity from their HELOC?

    Anyway, Ed said that he’d speak to a higher level contact at BMO and got me a P -0.75 mortgage – thank you, Ed!

    I thought I was all set… until I went to Rob and Melanie’s website where they were extolling the virtues of the FirstLine Matrix due to a recent change to make it more attractive http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2008/05/firstline-matri.html#comments . What was of particular interest is the fact that the Matrix’ HELOC compounds semi-annually vs. monthly. And, considering that I will be have a HELOC balance greatly in excess of my mortgage, this could be a real cost saver. But, how do I compare the two?

    Fortunately, some weeks ago, I created a calculator that allowed me to see the costs of various loans, factoring in inflation and tax deductability, interest only payments, etc. When it came down to it, the difference in payments for the first year, factoring in tax deductability, represents only a 0.55% savings of my annual payments or about $79. But, there would be additional fees, and delay, to wait until my mortgage is up with BMO and switch. In the end, it just wasn’t compelling enough.

    By the way, for those concerned about variable vs. fixed rate mortgages, Dr. Moshe Milevsky has recently done a study and Rob/Melanie spoke with him on his findings. They posted it in a 2 part entry at http://www.canadianmortgagetrends.com/. (I believe that Milevsky is a respected financial strategist from York University near Toronto.)

  34. 41. Tyler

    Hi CF,
    Thanks for sharing your story. I am not so lucky to find a good rate on my upcoming mortgage. Harvinder send me an email to contact with BMO mortgage specialist. I contacted her but never got any response. Anyway, I applied with a local BMO mortgage specialise and i only get prime – .5 for 3 year open. I am in Calgary btw.

    Tyler

  35. 42. cannon_fodder

    Tyler,

    Perhaps you should look at CTFS. In person, there are only a few cities in Canada apparently that they are offering mortgages but online they seem to be able to offer them to anyone. The last time I checked they were at P – 0.9 although the balance is compounded monthly. You could also go for a fixed at 4.99% for a 5 year term which seems that it could work out better than a 3 year variable at P – 0.5.

  36. 43. DAvid

    Cannon_fodder said: “I’m a little closer to implementing the SM. I’m with BMO now and our 5 year closed mortgage ends in September. Since it is within a 90 day window, BMO would allow us to move into their ReadiLine product now.”

    Interesting; RBC allowed me to move my closed mortgage to their Homeline product without penalty.

    Of further interest is Moshe Milevsky, the York University professor who earlier published the document praising variable rates over fixed rates. He now promotes a very different strategy: “Mortal minds cannot predict the credit markets. We don’t know what the yield curve will do next month. The sensible approach is therefore to have some fixed-rate debt, some variable-rate debt, some long-term and some-short term. Assets are commonly diversified, so why not debt?”

    How many mortgages allow product diversification where you can have a number of mortgages & terms & rates in the one account?

    DAvid

  37. Hello David,

    I actually wrote a post on new features offered on HELOC earlier today:
    http://www.thefinancialblogger.com/special-features-on-home-equity-line-of-credit-heloc/

    One of the feature is to allow the client having more than 1 product included within his HELOC. Therefore, you are now able to have a fixed, a variable rate and a line of credit attached to your house.

  38. 45. cannon_fodder

    DAvid,

    If I was a bank and you had a 5 year closed mortgage at an interest rate that was pretty close to prime, it looked like prime was close to its trough and about to resume an upward movement again, I would have no problem (i.e. no penalty) with moving you to another CLOSED variable rate mortgage of at least the length of time left in your current mortgage.

    Is that what happened in your scenario?

  39. 46. DAvid

    Cannon_fodder,
    Quite the opposite, actually. We were just over 2 years into our 4.99% mortgage; both prime and 5 year rates had climbed with Prime at about 5.75% and 5 year rates at about 6.5%. Rates were clearly continuing to climb at that time (Prime plateaued at 6% shortly after). The bank simply transferred our current mortgage into the Homeline product. We did have to pay notary fees to register the HELOC. RBC Product seems more like a wrap account — you can hold ANY of their mortgage products on the mortgage side. So I guess they don’t consider the Homeline a mortgage in the normal sense, but rather a ‘package’ or packaging of products.

    I would not have entered into the Homeline if there were any penalties or other costs that would not have been charged at renewal. Since I would have had to register the Homeline in any case, it was not an additional cost (though I would have liked the bank to absorb it!)

    DAvid

  40. 47. Scott

    I am a first time home buyer looking closely at the BMO Readiline. I am looking to purchase a home around 240,000. 20% of this is 48k but I only have 38k to put down. Is it wise to borrow the extra 10k now and enter the readiline or should I start with a different mortgage plan and make payments on the mortgage until I own 20% and then convert to the readiline?

  41. Scott, here’s something to think about. Even if you manage to get 20% down, there will be $0 available in the HELOC anyways. If you can get a better rate elsewhere, go with that. Then, when you have more equity, switch to a readvanceable mortgage.

    That’s my opinion anyways.

    FT

  42. 49. Ed Rempel

    Scott,

    If you don’t have the 20% down, you will probably have to pay a large CMHC fee to get the mortgage. If you can avoid that, you should borrow the $10K elsewhere and then you may as well also get the Readiline.

    Ed

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