Ed Rempel has put together an article for us indicating his favorite Smith Manoeuvre Mortgage(s). This is part 1 of a 3 part series. I will be staggering the articles, so make sure to stay tuned. Also note that Ed Rempel's mortgage picks are in the perspective of an advisor, which may or may not be the best pick for the "Do it Yourselfer". Sometime in the near future I will do a follow up post soon on the best readvanceable mortgage for the "Do it Yourselfer".
"It was impossible to get a conversation going; everybody was talking too much." – Yogi Berra
The Smith Manoeuvre is a simple concept, but fairly technical to set up. It is easy to do, but also easy to mess up.
The first step is to get the right mortgage, which is why one of the most common questions we are asked is what mortgage is best.
The mortgage industry is really like the investment industry and the insurance industry – lots of people selling all kinds of product with all kinds of sales pitches – but very few unbiased people giving real advice.
We have a unique perspective in that we are not mortgage brokers or bank mortgage reps. But we’ve implemented the Smith Manoeuvre with hundreds of clients using many different variations – and we have actual experience with clients at almost every financial institution that offers a Smith Manoeuvreable (is that a word?) mortgage.
We have found from experience that mortgage reps are not always right about details of their SM mortgage. For example, we originally asked all the major banks whether their mortgage allowed investing directly from the credit line. We eventually found that what ALL of them had told us was wrong – with those that said it would work it didn’t, and with those that said it would not work it did!
We don’t sell mortgages. We are the ones figuring out the best SM strategy for each of our clients, setting it up, making sure we follow all the tax rules and making sure every step works. So, we know which mortgages really work.
We use a number of mortgage contacts, because nobody has access to even ½ of the best SM mortgages. Of the 7 SM mortgages available, 3 are available from mortgage brokers, one from financial planners, and 5 directly from a bank. Nobody provides more than 3 of the 7.
A mortgage professional can, of course, refer you to a bank for the best SM mortgage, but would not be paid anything for that. Mortgages are their business, so you can’t expect them to refer you to a bank that won’t pay them. We have not been paid by any financial institution, so we are not biased by compensation.
To do the SM, you need a readvanceable mortgage – a mortgage that is linked with a credit line so that the credit line increases as the mortgage is paid down.
There are 7 SM mortgages available in Canada that readvance every dollar paid down on the mortgage. We have been told about many others, but only these 7 checked out. There are 4 main ones we would recommend and 3 that we essentially would not use (if we have the option):
SM Mortgages we recommend (depending on the client situation):
- BMO Readiline or HOLC – From BMO only.
- Merix HELOC – From mortgage brokers.
- Royal Homeline – From Royal only.
- TD HELOC – From TD only.
SM mortgages we do not recommend:
- Firstline Matrix – From mortgage brokers.
- Manulife One – From financial advisors or Manulife.
- Scotia STEP – From Scotiabank or mortgage brokers.
I’ve discussed our concern with Firstline Matrix at length on MDJ. They do not offer variable or 1-year mortgages which studies have shown save money over longer term fixed mortgages. And more manual transactions would be required at Firstline. You can’t invest directly from the credit line and need to transfer manually to a chequing account. There are also usually legal fees to set it up, plus there is the strange point scheme they offer to mortgage brokers that we are not sure is good for our clients. We would not recommend Firstline Matrix for the SM since there are better options.
Manulife One can work for someone with little or no mortgage, that tends to have high bank account balances and that does not mind the $14/month fee. But we would not recommend it generally. Manulife ONE is a completely different animal. It is an Australian mortgage that is your chequing, savings, mortgage and credit line all in one. It is a concept so simple that it is hard to understand for us Canadians used to having many different accounts. When you take $100 cash, it says your chequing account balance is $-247,000!
By way of full disclosure, I have a Manulife One myself, but have not recommended it for any clients. With no mortgage, we use it as an investment credit line so we get high daily interest on our chequing accounts. As an advisor, I get a break on the 14/month fee.
Manulife does not negotiate their mortgage rates and tends to not be competitive with the other banks fully discounted rates. They also do not offer a variable below prime rate. You set it up quite differently from other SM mortgages. Your main mortgage is a credit line, but you can lock in a fixed rate for much of it or for the deductible part.
Scotiabank STEP is much more complicated as an SM mortgage because it does not advance automatically. You need to go to the branch to have them increase the credit line. Nobody wants to go into the branch every 2 weeks to request an increase to their credit line. You also cannot invest directly from the credit line, so you need to manually transfer to a separate chequing account.
Our clients there have essentially found it too complex to do the SM, so we just fake it as best we can until their STEP is due and we can move it to an automatic readvanceable mortgage.
This leaves 4 SM mortgages. One of these 4 is generally the best for every client. In Part 2 of this article, we will look at them.
The best SM mortgage, of course, is not the same for everyone but depends on your specific situation. We’ve found that the best SM mortgage, for any situation we can think of is one of:
- BMO Readiline or HOLC
- Merix HELOC
- Royal Homeline
- TD HELOC
In part 2, we'll look at the criteria when evaluating a mortgage for The Smith Manoeuvre.