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Ed Rempel’s Picks for The Best Smith Manoeuvre Mortgage I



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):

  1. BMO Readiline or HOLC – From BMO only.
  2. Merix HELOC – From mortgage brokers.
  3. Royal Homeline – From Royal only.
  4. TD HELOC – From TD only.

SM mortgages we do not recommend:

  1. Firstline Matrix – From mortgage brokers.
  2. Manulife One – From financial advisors or Manulife.
  3. 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:

  1. BMO Readiline or HOLC
  2. Merix HELOC
  3. Royal Homeline
  4. TD HELOC

In part 2, we'll look at the criteria when evaluating a mortgage for The Smith Manoeuvre.





86 Comments, Comment or Ping

  1. hmm, I was thinking that the Manulife One was a great idea. Have it all bundled up nicely; loc, chequing, savings… However, I suppose that it would actually be far more difficult to track. A person would have to be very careful to track everything that they spend to be sure they know what is tax deductible and what’s not.

    In that way a simple HELOC would be easier, if you only spent the HELOC on investments it would track easier.

  2. WC, from various opinions on this blog, it seems that the m1 mortgage is a bit expensive. The reason being is that getting a discounted variable rate is much cheaper than the prime rate that they give you. Here is the manulife one review that I wrote a little while back.

  3. 3. Warren

    I agree that M1 seems great in theory, but the importance of a good interest rate with a SM is just as important as any mortgage. It doesn’t take a big % difference to add up to big $$$ when you are borrowing hundreds of thousands.

  4. The FirstLine may work better than you think it does, unless I’m missing something. I use them, and each month, my LOC/chequing increases in direct correlation to my mtg principle paid. I gave Credential Direct a void cheque, and each month transfer the funds over and use it to invest. It’s working like a charm. I’m somewhat unnerved by your post: anything I’m missing here?

  5. ps – my loc floats at prime; mtg is locked in (which I did for my own reasons — at 4.2%)

  6. I use FirstLine as well – but not for the SM. I didn’t pay any legal fees to set it up which I mentioned the last time this issue was brought up. They gave me $500 cashback to pay for legal plus they paid $270 for my exit fees at TD.

    I’m not saying it’s perfect or the best product for SM but the information given in the post is not accurate.

    The lack of a floating or 1 year mortgage is a good point. I wonder what their reasoning is for that?

    Mike

  7. I misunderstood, I thought the LOC rate was prime (which isn’t that uncommon) but looked closer and see that the M1:
    “First position borrowing rate is the Manulife One base rate of prime”
    “Second position borrowing rate is the Manulife One base rate of prime plus 1%”

    Yes that that is expensive (plus monthly fees).

  8. 8. Frank

    I use the Scotia STEP for the SM, and have a relatively easy time with the 2 issues that you mention:

    1. My personal banker gave me a stack of “re-advance request” forms that I just sign every two months or so and send in to her.

    2. I can transfer money online directly from the LOC to my ScotiaMcLeod direct investing account for making investments (I invest in solid dividend payers with a long record of increasing dividends).

    So with a good personal banker it can work OK.
    - Frank

  9. 9. Daniel M,

    I started reading articles and this blog after I signed up for Manulife One. The difference between how my finances are now to what they where prior is a big difference.

    I had money in a ING savings account. at 3% $2000
    Money on my credit cards at 18% between $3000 and $5000. $12 000 on credit lines @ 9% plus a floating balance of $3000 average in my checking account that had $7.00 fees monthly

    Now everything is in my M1 account I estimate I save about $80 to $100 a month in interest fees because of the lower rates and no interest fees when we deposit our paychecks. So I like the saving and ease of use, so I’m not too concerned with the $14 fees.

    The SM aspect of it has two parts. The first one is automatic and we re-borrow the amount equal to the old principal portion of the mortgage and invest it in mutual funds. For the second part we re-borrow any surplus in a month (if any)
    and invest those also in mutual funds.

    So far it has been working great. We have cleared the $12 000 Credit lines and do not carry any balance on our card. I estimate to be able to build our investment portfolio by about $18 000 a year.

    I know that a small savings on the interest rate will save us more money that we can use to buy more investment, and the more I read and learn about personal finance and investing the easier it will become for us to accomplish this. We’ll see when we get ready to get a mortgage in the near future when we build our dream house.

    Thanks for the advice and keep sharing your successes.

  10. I Like the NBC all-in-one. However, it is true that I pay too much on the “mortgage” part of it as it is at prime and I could get a 1yr mortgage for much less than that. However, the investment part is fairly easy.

  11. 12. Legacy

    I am a advisor and use the M1 myself and for quite a few clients, with the nature of the account, I have seen a vast improvements in quite a few clients alot like Daniel M, at the same time i have also used Merix, and it has been very cumbersome for the clients and has more manual transactions as oppossed to the automation of the M1, from an advisors stand point I would not recommend the merix, from a do it yourselfer I would recomend the M1.

  12. 13. Ed Rempel

    Hi Nancy & Mike,

    Nancy, are you actually able to invest directly from the credit line by giving out a void cheque from the credit line? Firstline tells us it will not work and the odd client we have there has also told us they believe it will not work.

    With the 4 major banks with SM mortgages, we used a void cheque from a client to test each one, regardless of what the banks said, and found all 4 were wrong! We only have the odd client with Firstline (since we don’t recommend it) and all believed it would not work, so we have not actually tested it.

    Are you saying you can invest directly from the credit line with a void cheque, despite Firstline saying it won’t work, Nancy? If this is true, then why does M-Link charge $480/year to do this?

    Mike, did Firstline pay your legal fees or did the mortgage broker cover them? Any time we have worked with them, the broker has insisted that legal and appraisal fees will be charged.

    Nancy, it is good to see you do what you recommend in taking 5-year mortgages. If your rate is 4.2%, that must have been about 2-3 years ago – is that right? We were getting 3.3% for our clients at that time, since we only recommend variable or 1-year mortgages. About a year after that, we were getting 4.1% and it has been 5.4% for the last year or so.

    Since the 1-year has beaten the 5-year 100% of the time over 5 years since 1950, it will be interesting to see whether you ends up saving money with your 5-year at 4.2% once the 5 years are up.

    Ed

  13. 14. Ed Rempel

    Hi Frank,

    You are right – Scotia STEP can be okay with a good personal banker. You are still doing more work then you would have to at other banks – manually transferring money from your credit line and sending in the credit limit increase forms – but at least it basically will work.

    We have one client that managed to get his Scotia branch manager to do all the credit line increases for him and also to transfer a fixed amount from the credit line to his chequing every month.

    We asked him to get this in writing (which he did), since there is the risk that the manager changes or your personal banker changes, and the replacement may refuse to provide the extra service. We find the good bank employees are often promoted quickly (which leaves the other ones).

    Scotia STEP variable is a 5-year lock-in, so getting this extra service in writing is a very good idea. If your personal banker is transferred and the replacement won’t do this for you, then you are stuck there for 5 years.

    You are right though. With the right service in writing, Scotia generally can be made to work and can work close to as well as the other banks (except for several extra manual steps each month).

    Ed

  14. 15. Ed Rempel

    Hi FB,

    You would find that the investment part is at least as easy at several other banks, and you won’t have to pay prime on your mortgage. National Bank All-in-One has a big rate disadvantage (if you only use credit lines which is the only way it will readvance automatically), but no actual advantages over most of the other banks.

    Ed

  15. 16. Ed Rempel

    Hi Daniel & Legacy,

    Interesting post, Daniel. The M1 is interesting in that it can save you money by combining all your debts. You could save this amount by combining all your debts in a mortgage at any bank, so there is little technical advantage. But for those not getting advice, people often don’t combine all their debts when their mortgage is at a bank, but often do at M1.

    We have not tended to recommend M1, since we would look at our client’s entire debt situation and restructure it to the best possible way anyway. However, for do-it-yourselfers, M1 can often end up saving them quite a bit of money.

    Legacy, your post reminded me that I forgot to mention that us advisors do get paid a finders fee from Manulife. I forgot to mention this in my fee disclosure in the articles, since I have not recommended it for any clients.

    M1 advances automatically, but requires that the client is very careful in tracking all their tax-decutible transactions. You can only invest automatically from the main account (which is your main mortgage at prime), but then need to make manual transfers to a sub-account used for the SM. The interest can also be compounded manually. Investing additional amounts like Daniel has done will also mean you have to do a manual transfer from the sub-account.

    It works, but can easily be messed up by the client (plus rates tend to be higher than other banks discounted rates and there is the $14/month fee). How do you make sure your clients do all the manual transactions correctly each month?

    We’ve had similar issues with Merix. Readvancing the principal requires manual faxes to Merix, or you get the mortgage broker to do the servicing.

    The few clients we have there have had servicing issues and confusion about the amounts and timing of the readvances. There have also been problems with the statements. The interest transactions did not all print on the statements, so when you add all the transactions, you don’t get the month-end balance. It was quite confusing trying to figure out what was happening.

    Once the readvance is done by transferring manually by fax from the credit line to the chequing, Merix is the only place that will automatically compound the interest by charging it to the same account it just advanced to. They also have competitive variable rates.

    If you can tolerate all the manual work and servicing & statement issues, Merix is not a bad choice.

    Ed

  16. Ed, in fact, the best option with the National Bank’s all-in-one would be to get it 2nd rank combined with a Investors Group regular mortgage. Investors Group offers National Bank’s product through their own label and they offer 2nd rank at Prime for the all-in-one. In this situation, you could get a smaller rate on the mortgage portion and get an all-in-one for the SM.

    Unfortunately, the process needs to be done each time you want to decrease your mortgage and increase your line of credit…

  17. 18. To Ed Rempel

    To Ed Rempel:

    I don’t usually stir up trouble and it is rare that I get this worked up about anything. Nevertheless, as a mortgage professional I have read your posts these past weeks and I have to vent.

    I don’t mean to be personal, but from a purely objective standpoint you are the most biased financial advisor I have ever seen in my 10 years in finance.

    It seems you have a clear vendetta for the mortgage industry. You seem to stop at nothing to protect your own turf. Every comment you make with the words “mortgage broker” has some kind of insult attached, indirect or otherwise. These motives could not be more transparent in my view.

    On the topic of motive, I find it interesting that you market on Google so heavily for the Smith Manoeuvre. What if mortgage agents or insurance reps started eating into your business? That would be pretty bad for you eh? My point is that every last one of your “reviews” feel tainted with a bias to keep your own business on track.

    You tend to say absolutely ridiculous things, like: “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.” This is patently absurd. You are throwing mud at an entire industry of hard working honest people. Moreover, your very own industry is absolutely no more virtuous than any other. You REALLY have to stop throwing stones…or you too will get stoned.

    You say “we know which mortgages really work.” You’re not even close. While BMO’s Readiline and Merix’s HELOC are solid, your trashing of FirstLine shows your complete ignorance. FirstLine is a CIBC company that is respected by anyone who knows it. It has among the best rates, features, and service of any lender in Canada. In the case of the Smith Manoeuvre, the only thing of note that it doesn’t have is a variable rate option—which ¾ of Canadian’s don’t want anyway. All the other stuff (auto-investing, points, yadayadayada) is absolutely meaningless.

    I take personal offense to many of your flagrant exaggerations. I work way too hard to hear someone outside our business try to tear down the value and integrity of our profession. You have got to get some professionalism and cut down on the hyperbole.

  18. 19. Legacy

    To Ed,

    I should also mention that i use the National Bank, all-in-one, which also operates almost entirely like the M1, but doesnt’t have a $14 monthly fee, but has a $2.50 per additional sub account fee, which also needs to be set-up manually.
    The hassle of having the mortgage being readvanced by way of sending merix a fax or email every month almost makes their product almost too maintenance heavy for most people, and as you stated the statement issues are another thing. What exactly is the positive item besides tracking compounding interest? we have not found their variable rates to be that comptetive to deal with all the headaches!
    Only have limited people with BMO and Royal which have been fairly clean. Yes i do get paid a finders fee as an advisor for the M1 which is why i offer alternatives, you can not tell me you do not get any kick backs from referring people to Royal, BMO, or TD, i sure do! it may not come directly as cash but they make it worth our while (lunches, events, etc) sounds the same as a finders fee to me.

  19. Mike, did Firstline pay your legal fees or did the mortgage broker cover them? Any time we have worked with them, the broker has insisted that legal and appraisal fees will be charged.

    Ed – the mortgage broker paid for both of the legal fees. There was no appraisal done, probably because I was only borrowing less than half the value of the house. FYI – the mortgage amount was a bit more than $200k

    Mike

  20. 21. Jack

    Hi Ed:

    I too must disagree with your top mortgage picks.
    We use Firstline’s Matrix exclusively for clients who want a fixed rate solution because their privileges are better and their LOC is so much cheaper than any of the mortgages you mentioned.
    You should also know that the inventor of the Smith Manoeuvre himself (Fraser Smith for those who don’t know) uses Firstline’s Matrix almost exclusively for all his SM clients. That point alone lends more credibility to the Matrix than anything I’ve read on this site so far.

    Jack

  21. 22. Ed Rempel

    Hi To Ed,

    You’ve named yourself after me? I’m flattered.

    My comments about mortgage brokers are mainly not personal – they are just because most of the best SM mortgages are not available through them.

    Now that you mention it, I do have some biases, though. My general views are, I think, very common among professionals in your industry and mine that are generally dismayed by the large numbers of people in both our industries that are just salesmen – not financial professionals. So if you are a financial professional and not just a salesperson, you should not feel offended by my comments. And you are right that my industry is not much better.

    I think people working with financial planners, mortgage brokers, stock brokers or insurance people should always consider whether they are working with a financial professional or just a salesperson – don’t you?

    What do you call a financial planner that does not plan finances??? I’ve met many that don’t actually do written financial plans for their clients (although they all claim they do).

    Should you not also expect to get comprehensive written plans from a mortgage professional or mortgage planner? Or is it good enough that they just sell you a mortgage?

    Part of my concern is that I’ve talked to many people that came to us after being pitched a bad implementation of the SM by a mortgage broker or a financial planner. For example, we’ve talked to many that were recommended by a financial planner or mortgage broker to:

    1. Buy a ROC fund but not told about how this converts their investment loan to non-deductible.
    2. Buy a fund with a distribution over 12% and implied that the fund will actually earn enough to pay the distribution (your own money back) instead of the far more likely plunge in value.

    Do you think these people received comprehensive unbiased financial advice – or did they meet a salesperson?

    You say that 3/4 of Canadians don’t want variable mortgages, but we’ve found that 98% DO want variable mortgages once they are clearly explained that it almost always saves lots of money over 5-year fixed mortgages and the risk of a huge rate increase is extremely low. We have no trouble at all explaining to our clients how to save money on mortgages.

    If a mortgage broker or bank is unable to explain the advantages of variable or short term mortgages to clients, is it because they are not aware of the advantages or that they don’t know how to explain it effectively?

    Once clients are clear on the advantages of variable and 1-year mortgages, why recommend a financial institution that does not even offer variable or 1-year mortgages? What is up with Firstline not even offering all these mortgages that save clients money???

    And why does nobody want to post here how their points system works?

    If you can get passed the lack or variable or 1-year mortgages (which we can’t), then there are still better choices available for the SM. And we’ve found that simplicity is important. Most of our clients have only one manual transaction to do each month, but we still have to carefully explain how to do it multiple times, including a detailed description in their written financial plan. If the SM is too complex, many people will mess it up or give up on it – so the more manual steps we can afford, the more likely the SM will be a success.

    We do run a small Google ad, but competition is not really an issue for us. We strictly screen all prospects and only meet with those few that are really serious about achieving what they want from their financial life and willing to work with us 100%. We refuse to meet with 2/3 of people that want to meet with us. We could easily double our volume by accepting everyone, but it is far more fulfilling to just work with people that really want to work with us.

    My articles and comments on MDJ are mainly just because I enjoy blogging and am passionate about what I believe in – and because I am planning to compile it into a book. We do get some clients from the internet, but the vast majority are do-it-yourselfers. However, I have had quite a few people thank me and tell me how my posts have helped them, which I find very rewarding.

    Ed

  22. 23. Ed Rempel

    Hi Legacy,

    You make some good points. Merix can involve a lot of maintenance that can be too much for many people to do. If you can get passed this and their statement problems, it is occassionally useful since Merix is one of very few SM mortgages that work with less than 20% down.

    You get kickbacks from referring people to BMO, Royal or TD? We get one lunch and one evening event a year from BMO, nothing from Royal, and points for merchandise from TD. However, the value of these is minimal, especially compared to the $400+/mortgage that Manulife would pay us if we recommended them.

    Have you been offered referral fees from mortgage brokers? We’ve had a few offer them, or offer to refer lots of people back.

    Ed

  23. 24. Ed Rempel

    Hi FP,

    So Firstline did charge legal fees – just your broker paid them. There would also have been an appraisal, but they can do a cheap appraisal from the office that would cost less than $200. Your broker probably paid this too.

    How did you manage to negotiate this, FP? We’ve found this to be the exception. We almost always get these fees absorbed by the banks, but rarely have them absorbed with any broker mortgages.

    Ed

  24. 25. Ed Rempel

    Hi Jack,

    So do you mainly just do fixed rate mortgages then? How are their priveledges better than a fully open mortgage? Do all of your clients get the better than prime credit line, or is it the exception?

    I know Fraser quite well. He was very helpful in getting me started with the SM a few years ago, but we do disagree on the best mortgage. I think you are right that he works almost exclusively with mortgage brokers.

    I don’t know why you would find that convincing though. Wouldn’t you rather look at the facts about each mortgage? Wouldn’t you prefer to see what will actually save your clients the most money and work best for them and the SM?

    Ed

  25. To “To Ed Rempel” I think Ed mirrors many of our feelings about the financial industry. i.e., There are many salespeople and we have a general feeling of distrust. That is not to say there aren’t very professional folks out there who do perform diligent work for their clients.

    To Ed & MDJ: Thanks for all the great info. The SM is always good at stirring up debate.

  26. 27. sam

    hi all,

    “My articles and comments on MDJ are mainly just because I enjoy blogging and am passionate about what I believe in”..

    with my limited contact with Ed ..i realise the enormous service he does to the investing community..may he continue in his services..

    though i am not an investor at the present…i have learnt a lot from his blogs..thanks again to MDJ for providing the platform…

  27. Ed – a very belated response: yes. I gave a First-Line void cheque to Credential Direct, and transfer the available funds each month over to credential. And yes, I got the mtg in 2005 – for only 3 years, which I may regret.

  28. 31. Legacy

    Ed,
    you asked if i had been offered referral fees from mortgage brokers? then answer is yes and they bring it up almost immediately, they all most all the time offer a cross – referral system instead of money which i find can be a lot better for the clients, as long as they thoroughly understand the implementation and maintenance of the SM, ehich i have found most do not, or they are not around at their backs long enough if they do understand, so the client is left wallowing in the wind, that is the main reason i use the m1, they are able to control everything themselves, and i find thagt this is best for the long run.

  29. 32. Ed Rempel

    Hi Legacy,

    Are you not concerned about your clients messing up the SM when they use M1? With M1 every single SM transaction must be done manually by the client.

    We find the same thing as you, that most of our clients don’t fully understand all the implementation. We have to explain even the interest capitalization transaction a few times with each client.

    So, are you not concerned that they will mess up the transactions and corrupt the tax-deductibility of the investment credit line?

    Ed

  30. Ed, Legacy,
    I think the SM should be implemented with the help of an accountant that could track down the transactions at the end of the year. Knowing how Revenue Canada works, you certainly don’t want to mess with them!

    I don’t think that most clients are able to fully understand the Smith Manoeuvre and how it works. Therefore, professional supervision should be required.

    Cheers,

    FB.

  31. 34. Legacy

    FB, Ed

    My sentiments exactly Fb, I have several accountants that have a complete understanding of how the sm works, and for lots of clients we can find many other ways to lower there taxes not just with the sm. I believe ed would agree with this as i think he has a accounting background.

  32. 36. Ed Rempel

    Hi FB & Legacy,

    I agree completely. Having good tax advice is important with the SM. I’ve talked to quite a few people that thought they were doing the SM, but had actually messed up their tax deductions.

    This is my biggest fear with the SM – someone will implement it badly, lose a tax audit, and then it can hit the papers that the SM is not legal.

    The most common errors are doing non-deductible transactions in the tax-deductible credit line and taking a distribution from the investments.

    The SM is relatively easy to do, but also very easy to mess up. I hope that all of our posts can help some people avoid bad implementations of the SM.

    Ed

  33. Hi Ed, You’ve contributed a lot of insights and food for thought. In the spirit of adding to this discussion in a constructive way, here are some additional viewpoints on some of your comments.

    1. You note: 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.

    Another perspective: As noted in my July 30, 2007 article on MDJ, professional unbiased mortgage planners and financial advisors are almost always able and willing to refer clients to ANY lender who has the best products for that client, regardless of if or how they get paid.

    ( Article Link: http://www.milliondollarjourney.com/smith-manoeuvre-maneuver-mortgage-comparison.htm )

    Mortgage planning is primarily a reputation business and reputations are built on honesty and service. Nothing builds our business more than by doing the right thing for our clients. That’s how we generate referrals, which are the most critical component of our business.

    In sum, this isn’t really the issue. The issue is HOW to find advisors that think like this.

    2. You note: SM Mortgages we recommend (depending on the client situation):

    1. BMO Readiline or HOLC – From BMO only.
    2. Merix HELOC – From mortgage brokers.
    3. Royal Homeline – From Royal only.
    4. TD HELOC – From TD only.

    Another perspective: Some of these are indeed solid products but we would respectfully disagree with the rankings. Other mortgage options exist that can offer superior economic benefits for most clients.

    3. You note: SM mortgages we do not recommend:

    1. Firstline Matrix – From mortgage brokers.
    2. Manulife One – From financial advisors or Manulife.
    3. Scotia STEP – From Scotiabank or mortgage brokers.

    Another perspective: I must strongly disagree with this point because FirstLine’s (CIBC’s) Matrix offers benefits that no other mortgage can match. These benefits are all noted in my September 11, 2007 MDJ article:

    http://www.milliondollarjourney.com/smith-manoeuvre-mortgage-comparison-part-2.htm

    In sum, with the Matrix:

    • There are no ongoing fees and, with many planners, no appraisal fees.
    • The “mortgage” interest rate is often the lowest available for this type of product.
    • The LOC interest rate may be below prime in certain cases. This is a benefit unavailable with most other lenders, including BMO, Royal Bank, and TD.
    • The LOC interest compounds semi-annually instead of monthly. This is not the case with BMO, Royal Bank, or TD.
    • FirstLine’s pre-payment privileges are among the best in the industry.
    • The “mortgage” and LOC portions are together considered one charge term. That means, unlike most lenders, FirstLine’s LOC is not reported on your credit bureau. As a result, your credit score is generally unaffected by this debt. This too is not the case with BMO, Royal Bank, or TD.

    It’s also interesting to note, as Jack does above, that Fraser Smith’s team (Fraser is founder of the “Smith Manoeuvre”) recommends FirstLine’s Matrix almost exclusively for the SM.

    4. You note: 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.

    Another perspective: We too, wish FirstLine offered a variable or 1-year. Rumour is, they will. Until they do, we obviously would not recommend the Matrix for people who are happy with a variable rate. For these clients there are much better alternatives, like Merix or BMO. The Matrix is beneficial only for clients that prefer the certainty of a fixed rate.

    5. You note: 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.

    Another perspective: The Matrix supports automated debits, which means you can automatically move funds to your investment account every month. If you’re using a financial advisor he can then invest these funds for you with virtually no intervention on your part. If you’re a do-it yourselfer than you’ll probably want to spend at least 5 minutes a month monitoring your investments “manually” anyhow.

    6. You note: 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.

    Another perspective: Until mortgages start registering themselves there will be legal or notary fees with most lenders. However, because the Matrix offers an excellent rate, a uniquely discounted line of credit, semi-annual LOC compounding, and excellent pre-payment privileges, the interest savings enjoyed by Matrix clients will easily offset any legal fees, if they in fact apply.

    Ed, It’s clear that you are unclear about FirstLine’s basisPOINTs system. It’s a poor horse that keeps getting beaten. Perhaps it would be wise for you to contact FirstLine directly to understand exactly how their system works before further comments?

    The fact is, FirstLine’s basisPOINTS system, as we’ve noted, is a positive benefit. It is in no way an adverse incentive for a professional mortgage planner. In addition, it allows mortgage planners to offer clients interest-saving and/or closing cost benefits we wouldn’t other wise be able to.

    Anyways, that’s enough pecking at the keyboard for a Saturday night! Time to curl up with the dog and watch a good movie… :-)

    All the best,
    Melanie

  34. 40. Ed Rempel

    Hi Melanie,

    You make some good point. Our big issue, I guess, comes down to not having a variable or 1-year rate. Once we explain the history, we find virtually 100% of clients want these rates that almost always will save them money. We’ve only had one insist on more than 1-year in the last few years. (He went with 2-year). We also recommend this for every client. After this point alone, FirstLine is not even a consideration for us.

    You sound like you have a lot of integrity, Melanie. Do you really refer a lot of clients to the banks when they want a variable SM mortgage, even though you don’t get paid by them?

    I’m curious about what you reommend for your clients, Melanie. Do you recommend variable or 1-year mortgages for all your clients? What percentage of your clients want them after your explanations?

    Before the last 2 years with our wierd rate environment, longer term mortgages have usually had significantly higher rates than shorter term or variable. Did you recommend any longer term mortgages then?

    With the sub-prime mortgage issue in the US and based on demographics, we expect rates to drop quite a bit over the next year. We’ve been told another 1% drop in the US mortgage rates is current concensus (which is why our dollar jumped to $1.10 briefly.) This is part of why we recommend variable rates, even now in a relatively flat market.

    What is your current rate expectation over the next year or so?

    Have you done any SM’s with Merix? How do you arrange the monthly advances? Do you find your clients understand their statements?

    You are right that I don’t know the details of FirstLine’s basisPOINTS system. I’ve had a couple mortgage brokers explain it that they can give one customer a smaller discount or persuade them to take a longer term, then they get more points. They can use these extra points for a different customer who is more rate sensitive.

    Are you saying this is not true? You don’t get more points for longer term mortgages or for smaller discounts?

    Ed

  35. Ed,

    In my experience most mortgage planners do in fact explain the historic benefits of variable rates to their clients. It’s generally standard operating procedure among professionals in our industry.

    Nonetheless, the majority of clients hear the arguments but side with the perceived benefits of fixed rates. I have a feeling your clients and ours might generally be different. Most homeowners we talk with are risk adverse and come to us already requesting fixed mortgages. This parallels nationwide trends because 72% of Canadians do in fact choose fixed rates.

    You asked, “Do you really refer a lot of clients to the banks.” Yes, and it’s funny how this surprises people. What type of fiduciary would not refer clients elsewhere if they could be knowingly better served by another party—regardless of compensation?

    Notwithstanding the above, what I recommend to people depends entirely on the client’s unique circumstances. The percentages of our clients choosing one product over another probably mirror the national averages.

    As for rate predictions, readers of Canadian Mortgage Trends know that we do not predict rates. It’s largely futile. Canada’s economy is influenced by infinite random variables that no supercomputer, let alone human being, could ever properly weigh or predict. Even the best paid economists are typically no better than chance at predicting rates beyond the very short term.

    With Merix’s HELOC, client’s send emails requesting readvances each month. Their statements could be better and we’re working to have them make the readvance and LOC withdrawal process much more seamless.

    Last but not least, as previously requested, please give FirstLine a call directly for their BP info. They’ll be able to clear up your misconceptions firsthand.

    Have a wonderful evening,
    Melanie

  36. 42. alex

    hello all,
    i am a mortgage consultant that has read this entire blog after article 1, and have a few comments at this point.

    firstly, as an advocate of the smith manoeuvre & user myself, i appreciate ed’s breakdown of available options for the common consumer & professionals like myself.

    now, that being said, it seems to me that most of the ‘negatives’ ed mentions in this 1st article (namely all the manual work required by clients on the merix product etc.) is really getting a bit picky. most mortgage products historically will never give you the best of everything.
    if you get a great rate, you’re often tied to other catches, like longer lock-in terms, higher penalties, etc.let’s face it- banks/lenders are here to make money, not do the consumer favors.

    also, as brokers, we DO refer deals to banks AND
    get paid. Currently TD, Scotia & National Bank all do business directly with brokers, the latter 2 of which DO offer products related to this discussion (STEP & All In One, respectively)

    i echo melanie’s comments about offering different products for different people/needs.

    i think National Bank’s All in One is good for the client who is looking for a good discounted fixed rate mortgage, then have their investing portion at prime. more of a half/half type, as most people will still have that non-deductable portion outstanding…whereas i feel that MCAP’s flexstar mortgage (not mentioned here) offer’s a potential discount on prime on the ENTIRE amount of the mortgage, as low as interest-only payments, and a portability feature that comes without being a collaterally charged mortgage-as most others are.
    this would serve as a better fit for the pure investor that has, or will have, a higher percentage of the mortgage used for investing & take advantage of that portion/cost being less than prime. point is- there are pros and cons to every product- it really boils down to the individual’s needs.

    i think most users would be smartly advised to invest into mutual funds periodically as opposed to day trading, so the ‘manual’ problems wouldn’t seem to be much of a frequent annoyance anyway.
    i don’t think the average investor is re-advancing the amount gained by every principal pay down daily or monthly. using a $1000 P&I payment- say $400 is principal- with $50-$60K already invested- would i be rushing to unlock that $400 to invest? i could probably stand to wait until a reasonable amount of equity was built again to proceed (if it wasn’t an automatic increase).

    let’s agree that all should be well advised re: the investments made (financial advisor) the proper use of tax deduction (accountant) as well as proper legal advice by a lawyer well versed in this specific area. mortgage brokers/banks should determine the individual needs of the client & only at that time, advise of which lender/product fits best.

    p.s. ed, i do agree with melanie re: her comments on future rate prediction and short term (1 yr, variable) options…but i do agree with you on 1stline’s points system as i have seen it used as a way to ‘screw’ one to ‘benefit’ the next…however, i’m sure that example is (hopefully) the minority in the industry!

    i’m off to read parts 2 and 3!

  37. Hi Alex, MCAP’s FlexStar is an excellent product (we gave it “Mortgage of the Year”) but since its mortgage and LOC are combined, tracking interest seems like a nightmare. According to our MCAP rep there’s no seperate accounting or statement. What’s been your experience with this?
    Cheers,
    Melanie

  38. 44. Frank

    I’m looking for a Mortgage broker or Financial Analyst in the Calgary area who is familiar and *experienced* with implementing the SM. If someone knows of one, please post their contact info.

  39. 45. Frank

    What I need to do is the Following.

    I have 150K in my RRSP

    I own a house valued at 520K with 120K left on the Mortgage with TD

    Step 1:

    I want my RRSP to pay off my TD mortagage. Now my RRSP is holding my mortgage ( adminstered independently). Every Mortgage payment on the 120K mortgage balance I now make will go to my RRSP ( since my RRSP is now the mortgage holder)

    Step 2:

    I will need a HELOC on the balance of 400K to implement the SM.

    Desired outcome:

    I am paying my RRSP the mortgage payment and interest.

    I am deducting the interest paid on the HELOC and using that to fund additional assets.

    Please advise.

  40. 46. Alex

    hi melanie,
    yes, for flexstar, tracking the interest may be a task best left with the accountant for the ‘newby’ investor- as mcap just gives the total interest cost. this product may be more suited for a more advanced investor?

  41. 47. Paolo

    Ed: I just signed up with Scotia STEP in December and the version I received automatically advances the LOC. Perhaps they changed this feature recently due to the negative feedback you mentioned. You may want to revisit this point. You are correct about not being able to invest directly though, unless you have a Scotia brokerage account.

  42. 48. Ed Rempel

    Hi Alex,

    Thanks for your kind comments and your honesty about how the Firstline mortgage is sometimes used.

    The 2 mortgages your mentioned, National Bank All-in-One and MCAP’s Flexstar are both not readvanceable mortgages and don’t really work for the SM. National Bank’s mortgage only readvances if you leave it all as 2 credit lines, but that means you are paying a higher interest rate.

    Readvancing the principal from each mortgage payment is a critical part of the SM, in most cases. This allows you to reborrow to cover the interest, so that the entire strategy uses none of your cash flow.

    In fact, the difference between ordinary leverage and the SM is the readvancing of each mortgage payment. You can get a secured credit line anywhere and use it for ordinary leverage, but if you want to do the SM, you really need a proper readvanceable mortgage.

    Ed

  43. 49. Ed Rempel

    Hi Frank,

    That’s a creative idea, but it will be difficult to accomplish. I am not aware of any readvanceable mortgage available when your mortgage is held by your RRSP.

    I am not a fan of having your mortgage hold your RRSP anyway. It sounds good at first. It sounds like you are mortgage-free, since you only owe money to your own RRSP.

    However, the rules are that your mortgage must be administered independently. This means that if you don’t pay your mortgage, your RRSP must foreclose on your house and force a sale. The trust company that administers your mortgage will make sure this happens.

    Therefore, its not like being mortgage free. It is like your RRSP invested in someone else’s mortgage and your own mortgage happens to be the same size.

    The other reason I don’t like having a mortgage in your RRSP is because it is a lowreturn for an RRSP investment and an expensive mortgage.

    For example, when we invest, we focus on equities and expect to make 8%-10% or more long term. In the mean time, a good mortgage rate is between 5-6%. Therefore, we can benefit by 3-5% or more over time.

    If your mortgage is held by your RRSP, you lose all of this benefit and end up with your mortgage rate and RRSP return being the same.

    There are also setup and admin costs that are not insignificant.

    I would suggest to invest your mortgage properly in good investments and then get an inexpensive, readvanceable mortgage to do the SM.

    Ed

  44. 50. Ed Rempel

    Hi Paolo,

    Thanks for the tip. I’ll check it out. Perhaps they just made a change.

    Are you sure it readvances, though? When you pay down your mortgage, it shows you on-line and on your statement that you have more credit available, but you have to go into the branch in order to increase your credit line to take advantage of this extra credit available.

    Does your credit line limit automatically increase without you doing anything?

    Ed

  45. 51. Paolo

    Ed: I apologize, I was wrong. I had a look online again and I misread my statement. The “total credit available” increases as my mortgage is being paid off, which was the amount I was looking at. However, the “available credit” has remained fixed at the original LOC amount, which is how much I can actually use. There is a footnote saying seeing the branch, call an 800 number or make an online request to increase the available credit. The online request would seem convinient enough, but I got an invalid request error when I tried in now (Sunday morning). I’ll have to try again another time.

  46. 52. Ed Rempel

    Hi Paolo,

    So they have not changed. They’ve been saying they are changing it any time for about 5 years now. The 800 number is new and may be more efficient. The on-line request works for some of our clients and not others. They tell me it has something to do with whether or not there is a credit card included in your STEP plan, but we have not been able to confirm that.

    The on-line request does not happen right away. It sends a note to Scotia who then do a check on you and respond in a few days.

    Since you are stuck at Scotia for a while, we have a couple of clients that have a sympathetic bank manager at Scotia that increases their credit line limits for them manually every month. Most won’t do this, but you can ask your bank manager.

    Unfortunately, it is all quite inconvenient, which is why we avoid Scotia for the SM if possible. There are a bunch of good choices that automatically readvance with every payment.

    Ed

  47. 53. alex

    hi ed,
    here is a quote directly from mcap flexstar product sheet:

    “Redraw funds at any time — As the mortgage balance is paid down, those funds can be
    redrawn at any time — over the phone, via email or using the MCAP Access Card.
    BENEFITS
    • Security of knowing funds can be accessed immediately
    • For any purpose — unexpected emergencies, investments, high interest credit-card
    debt, renovations, a vacation, the options are endless …
    • No need to refinance or apply for another loan when extra funds are needed”

    is this not a true readvanceable mortgage??

    just to be clear- re: the ‘accounting ‘ issue with tracking the interest within flexstar- is it just more of a nightmare attempting to correlate your investment purchases drawn from the credit line? or are you saying the complication outright disqualifies you from doing the SM with the product- as per rev can or an accountant??

    thanks, alex.

  48. 54. SM

    Hi Ed,

    Are you familiar with the court case currently scheduled to be heard this year at the Supreme Court (Lipson v. The Queen). The party in question did not use the SM, however used another tax “planning” strategy. Just curious as to the thoughts surrounding the outcome of this case as it might relate to the Smith Manouvre. They’re using the over-arching net in the tax code namely GAAR (General anti-avoidance rule) The way I understand it, the SM doesn’t “avoid” taxes or abuse the rules. Mortgage interest is clearly separate from the HELOC and is not tax deductible, only that portion of the interest on the LOC used for investments is used for the tax deduction. Any thoughts welcome…

  49. 55. Ed Rempel

    Hi Alex,

    No, this my understanding about Flexstar is that it is not a readvanceable mortgage. It is just an ordinary secured credit line.

    The difference is that with a readvanceable mortgage, you need to be able to immediately reborrow in a DIFFERENT ACCOUNT, not in the same account.

    If you have your mortgage as an ordinary credit line and then borrow part of it to invest, you will run into a lot of trouble claiming the deduction. This is because it is all comingled. When you make your regular mortgage payment, are you paying off the deductible or non-deductible amount?

    We would recommend always borrowing to invest from a separate account, not from your main mortgage account.

    Ed

    Ed

  50. 56. Ed Rempel

    Hi SM,

    Are you named after the Smith Manoeuvre? If so, what is your connection or interest in it?

    I read up on the Lipson case nearly a year ago. I don’t remember all the details, but they had a complicated series of transactions that were ruled a sham when taken all together.

    This does not apply to the SM. You are correct in your comments about it. The SM is ordinary borrowing to invest. Almost every company in Canada and thousands of individuals borrow to invest in their own or other businesses every day. This is not a sham series of transactions. It just follows the existing tax rules on borrowing to invest.

    Ed

  51. 57. alex

    ed,
    i believe the flexstar is, in fact, classified as a re-advanceable mortgage? it is not a credit line because it is not a collateral charge- it just ACTS as a credit line with respect to their re-borrowing allowances, features. it is too bad they don’t offer a separate account, though.
    you can actually port the mortgage from one home to the next- which is not allowed in a collateral charge (as you’d have to break the mortgage then refinance- incurring legal fees, etc.)
    i guess if someone still owes on their mortgage (non-deductible) this wouldn’t be for them. maybe more for the free & clear investor who can allocate ALL the allowable limit towards investments??
    it seems based on your info that, for SM, there is a certain type of readvanceable mtg required to implement properly v.s what the banks CLAIM is readvanceable & should work?? maybe that’s where all the confusion is??
    you’re right- for something so simple, it can be quite complicated!

  52. Hi Alex!

    Flexstar does let you readvance (redraw) your paid down principle, so in that sense your right. It is a “readvanceable mortgage.”

    However, Ed is totally correct that FlexStar has a huge potential flaw for investors. MCAP’s monthly statements do not segregate the interest on readvances in a way that creates a straightforward paper trail. When you make your monthly payments, it can be onerous to track if you’re paying deductible or non-deductible interest.

    We’re hoping MCAP adds a sub-account for the readvances later this year. Apart from this issue, FlexStar is an extremely flexible product.

    Cheers,
    Robert

  53. 59. alex

    hi robert,
    yes, i’ve spoken to a few lenders and they all seem to tell me ‘later this year’ & ‘we’re working on it’ or ‘hmmm, maybe we should consider this’. it seems to me that if you’re going to market product as a leveraging tool for investment- then u should really sit down for a few minutes on the development side, & get it right. i think flexstar needs to have a) the sub-account & possibly multiple sub-accounts b) ability to split into a fixed or variable rate & leave the heloc alone…the problem with ‘b’ is that they potentially allow us to offer a ‘below prime’ heloc on the entire amount- so if you split them, they probably wouldn’t allow you the rate discount (which is fine by me, provided everything else was in place).
    of course i think we all know it is the administration cost & time the banks want to avoid by doing this…however, if one has it, we know it’s doable.

    do u hear the same? any other lenders stepping up to provide the product we’d need to market SM properly?? national bank is also in ‘talks’ come april or so…none of these ‘sheep’ seems to want to lead, do they??

  54. I hear you Alex. There really isn’t a segment killer yet in the readvanceable mortgage space. It’s partly due to lender’s back-end limitations (i.e. technical or financing hurdles), and partly because lenders haven’t sufficiently analyzed borrowers’ needs.

    Some lenders have come close (e.g. Firstline, BMO, Merix, CT, MCAP, etc.) but have fallen short with a few glaring omissions. Someone will get it right though…perhaps later this year.

    As for other readvanceables on the horizon, MyNext, People’s Trust, and National Bank are all developing new ones. Not much word yet on the features. National Bank’s revamped product is due in April as you note.

    Cheers…
    Robert

  55. 61. alex

    robert/ed,
    apparently, the change with national bank (around april 21st) is that it will be an ‘automatic’ re-advance once their fixed or variable component is paid down- as opposed to the current ‘manual’ request.
    still, for 1 or more sub-accounts, a $2.50 monthly charge will apply ($30/yr for admin cost, labour?) ehhh, i guess that makes sense- would be nice if it was all free though :)

  56. I’m with you Alex. For some, $2.50/mo is a pittance in the big scheme of things. Nonetheless, account fees like this are so nickel and dimey!!!

    Cheers,
    Rob

  57. 63. alex

    FYI,
    MCAP has, effective immediately, discontinued their flexstar mortgage product! apparently the ‘appetite was not there’, or so they say? i’m sure more info, as to why, will be leaking over the next while. they are going back to the drawing board to see if they can tweak the product for a possible re-launch down the road- no news on when, or even IF, it will resurface.

    so much for ‘mortgage of the year’- eh melanie? too bad…i thought their the annuity structure was fantastic!

    alex

  58. 64. Ed Rempel

    Hi Alex & Rob,

    We’ve learned to not believe any of these promises until the product is out. Every financial institution that has a readvanceable has been promising improvements. Scotia has been promising a better product for more than 5 years.

    I guess the readvanceable is still not a mainstream product, since a reletively small number of people do the SM. Readvanceables are mainly sold as a product to finanace additional spending, in which any product is fine.

    Maybe that is why it is just not priority for them.

    So National says they will make it automatic? Will they also eliminate their high minimum advancement ($5-10,000)?

    We have one client at National with an All-In-One that has been itching to do the SM, which he obviously cannot do at National. His is finally due this year and we will move it so he can start the SM – unless they finally have a good product. Why would they have to charge a fee – is this not automatic involving no labour?

    Ed

  59. Hi Alex, Re: Flexstar. Yes it’s pretty sad they shelved it so soon. But it was still a great product and justified the all the accolades it received. Hopefully it will be back sooner than later!

  60. Hi Ed!

    That’s true to a large extent. It’s always good to take lender promises with a grain of salt. Firstline, for example, has been planning a variable for a few years on their Matrix.

    I do think readvanceables are catching on though. A lot of our clients take them for reasons apart from the Smith Manoeuvre. Some, for example, will use them as a source of funds for down payments on future investment properties. Others like the peace of mind the built-in credit line affords–especially self-employed/commissioned individuals.

    Readvanceables are better than other options for these purposes because clients don’t have to reapply to get the credit. Plus the readvanceable LOCs are often offered at preferential rates to standalone credit lines and often not reported to credit bureaus.

    Re: NBC. We’re hearing they’ll drop the $5000 readvance minimum for clients who lock-in fixed portions. (Note: for people who just use NBC’s All-in-One at prime, there is no minimum–but the rate isn’t so great obviously). I’m also not sure why they charge that tiny fee. Like with Manulife, it seems somewhat ridiculous given the profit made from interest.

    Enjoy the Superbowl!
    -Melanie

  61. 67. alex

    ed,
    i would assume that national would waive their fees for readvancing this time around (we’ll see). because if they reduce the minimum from $5000 to say $100 or even $1- any avid investor would be hammered by service charges/fees making it not even worth the change in the 1st place! and yes, i don’t think developing their mortgages to cater to SM is a priority for the reasons you mentioned. most lenders push to use them for shopping, etc..though, if i were a bank, wouldn’t i be better served by encouraging clients to invest back with them? instead of spending the money on shoes? this way, they get the constant credit line interest AND the investments- wrapping their clients for life…isn’t that the bank’s mandate??? bank’s improve retention, constant interest revenue & constant growing investment asset base- client’s portfolio grows with no money out of pocket (and even better WITH extra money out of pocket!) its’ a win-win for everyone!…so what are we missing here??? it’s one meeting in a room with product developers, one pen, one piece of paper & a short time frame to implement??
    hmmm, sounds difficult.

  62. 68. MadMex

    Hello,

    I have been reading many of these blogs on MDJ with great interest. I have plans to implement the Smith Manoeuvre at some point and I am researching the options available.

    The HELOC product offered by TD is recommended by Ed but I do not see many details or comments in the blogs or comments.

    Does anyone have any stories, caveats or suggestions that relate to the TD HELOC?

    Thank you in advance.

  63. 70. Gill

    I have a 5 year fixed mortgage, and researched the SM after I bought my house. We’re very tight on funds so I can’t afford to break my mortgage. I chose M1 second position to start my SM for several reasons.
    1. multiple accounts. One for investments, one non-deductible and for one for business cash flow. I plan to pay off the fixed mortgage $5000 at a time and use the cash flow and dividends to pay off the “chequing non-deductable.”

    2. M1 doesn’t require interest payback – I can let the investment loan to accumulate while I pay off the non-deductable.

    lesser reasons:
    3. Because manualife is an insurance company the loan doesn’t appear on my credit report (can anyone confirm?)

    4. RBC Homeline has strict rules – make it difficult to move away even after the term is up (can anyone confirm?)

  64. 71. Ed Rempel

    Hi Gill,

    I just noticed your post. Are you tight on cash flow or equity? You don’t have to pay the penalty from cash. It can be rolled into your mortgage.

    You don’t want to break your mortgage because you are short of funds? Will it save you money when you compare the interest rate savings to the penalty? Rates tend to be quite a bit higher at Manulife. We are getting 4.0% now on the fixed portion and it sounds like interest rates may decline even further this year. If it saves you money, then there should be a way to be able to find the money.

    It sounds like you are using the main Manulife One account as the investment portion. That may work as a second mortgage, buth would be difficult as a first. It does compound the interest automatically, but this can easily be done manually at any bank with one manual transaction each month.

    Many mortgages still don’t appear on the credit report. They announced last year that they were going to start putting them all on, but it does not seem to have happened yet.

    RBC is no more difficult to transfer out than any other bank. Scotia is the one that we have sometimes had more difficulty transferring out from.

    Ed

  65. 72. pete

    hello all i have been reading a lot about the sm on this wonderful site for about 6 mos and i am taking the plunge at the end of this month. looks like my timing may be ideal as the markets have pretty much hit rock bottom already. I was going to go with the tdmp out of toronto but they have increased all there costs for setting it up but the guys who were going to do it (mortgage broker and investor) will help us do it by ourselves. The mortgage man is suggesting national bank b/c they seem to have the best variable(5%) and 5yr fixed (5.69%) and heloc is at prime.I know this bank is not on this list so i was wondering if any body has experiences with them or any thoughts. I was planning on going variable but the 5yr fixed is close so i might change my mind as my bad debt would be converted in approx 6 yrs do u think i should lock in or will rates go down further any input would be great. another bonus i guess of national bank i was told that all the accounts i would need would be just with them making it easier.

  66. 73. wx_junkie

    So… I heard rumor, and have since received confirmation from Scotiabank that they now have implemented this week, automatic HELOC increases on their STEP.

  67. 74. shane

    Hi Ed,

    Good articles by the way, i’m enjoying them. I’m curious though as to how you “capitalize the interest” from the HELOC’s on the bank products? I know it can be automated with BMO’s product and with the National bank we just set up a second small line of credit (as per the smithmanoeuvre book) and make the interest payments back and forth each month from the HELOC and the 2nd small line of credit. (interest only of course). What other products (ie. TD/Scotia/Royal/Merix) can you do this with or better yet, which are the easiest to set up the capitalization of the interest in your opinion?

    Thanks,
    Shane

  68. 75. Ed Rempel

    Hi Shane,

    I just noticed your post. Automating the capitalization by having 2 credit lines pay each other’s interst payments does not really work with most institutions. Many don’t allow preauthorized payments to be paid directly from the credit line, and quite a few don’t have unsecured credit lines with interest only payments.

    You also need to have the 2 credit lines be at different banks to make it work.

    However, capitalizing is easy anyway. It is only one manual transaction each month (2 if you are at a less convenient institution). Just pay the interest payment and then withdraw the exact amount from the credit line to repay yourself.

    For example, if you are charged $100.01 interest, take that exact amount back from the SM credit line, either with an on-line transfer or by writing your self a cheque.

    This requires that you keep accurate records, but is easily done.

    To simplify your record-keeping, you could open a separate bank account just for SM transaction, but it is not really necessary.

    Ed

  69. 76. Engineer

    What do people think about National Bank All in One Right Now?
    I have read the posts that follow and some of them are older, it seems the product has changed somewhat.

    I am able to get the LOC portion at prime+0% because I am an engineer so that part is attractive (haven’t been able to get this low anywhere else).

    We are also able to put the entire mortgage under the LOC portion and only pay prime+0 on that too. Option to lock in at any time.

    What do people think of the product currently? We are looking at it in terms of the Smith Manouvre

  70. 77. Ken

    My choice for the Smith Manoeuvre is the RBC Homeline plan. I highly recommend the RBC homeline plan. Here is a brief summary why it’s my choice and why I chose the Homeline over the Merix Heloc. I didn’t consider Scotiabank as they report their mortgages to the Credit Bureau. I consider that on par with the bank faxing your balance sheet around town, which I completely disagree with. I didn’t go with Firstline as they seem gun shy about HELOC’s this past few years and my other choice was National Bank, which lost my business as they didn’t have the courtesy of responding to my application.
    I now have two Homeline Plans. One for my principal residence and one for my Rental property. My mortgage principal is instantly readvanced as soon as the mortgage payment is made. It can then be invested through RBC direct investing on the same day, transferred as an internet bill payment (no charge but takes 2 days), or you can set up a PAD from your RBC chequing account (you will have to manually transfer the funds from your LOC to chequing). You are required to set up an RBC chequing account with a Homeline but you don’t have to use it or bank with RBC as your mortgage payment can be debited from your own bank. RBC will waive the chequing account fee but expect a sales pitch as they try to earn your day to day banking business.
    As far as interest rates go, RBC posted rates are in line with the big banks, but when it’s time to negotiate, they will match or beat the discounted rates of any competitor. They currently blow Merix out of the water. My new Homeline LOC is P +.5 compared to Merix at P +1 and I have one mortgage segment at P -.7, compared to Merix’s variable rate of P -.5. Also, this mortgage is complely conventional with no CMHC involvement. My understanding is that Merix insures it’s mortgages and pays the premium, which keeps CMHC in the loop and in your business. I prefer a completely conventional mortgage with no CMHC or Genworth involvement. My original Homeline was negotiated prior to the financial meltdown in 2008 and RBC did not do what TD did to their clients and bump up the rate of my LOC. I have a friend with a TD Heloc and he is still fired up that TD increased his secured LOC from P to P +1. RBC did not do that to their Homeline clients! My 1st homeline was set up with a LOC at Prime and it has remained at prime since inception. I have two mortgage segments with my orignial homeline. One open and one closed. Both variable at P -.4
    RBC loves Homeline plan customers. They make lots of interest and you hopefully make more interest from your investments. It’s a win win relationship. The Homeline can have 5 mortgage segments, which makes it very manageable and should meet most people’s needs. The statements are clear and concise and all transactions are instantly updated online.
    One negative with the Homeline is that RBC reports your LOC balance to the Credit Bureau and a maxed out revolving credit line is the worst thing possible in the FICO credit scoring formula. It absolutely kills your beacon score. I had decided to lease a new compact car last year (a 12,000 Hyundai) for 200/month and with a net worth of 250K and perfect credit, I was declined because the maxed out Homeline LOC was like a huge gorilla sitting on my credit report. Other lenders you deal with don’t care if your LOC is a fully secured investment loan. To the lender, they see you as a person with a huge maxed out LOC and a big risk. My beacon went from 760+ down to 680 just by carrying a maxed out 40,000 LOC. The solution is easy. Once you accumulate a large LOC balance, convert it back into a mortgage segment. RBC resets your LOC back to nil and that is the LOC balance reported to the bureau. By doing that, my beacon jumped back up to 730 in one month and I was able to easily obtain my lease.

    I’m only a few years into my Smith Manoeuvre Journey and so far I’d say I’ve broken even but this is a 10 – 15 year plan and I’m confident that I will pay my mortgages off sooner than with two 25 year conventional mortgages. I also like that I’m taking an active role in my own finances.

    Best of luck to everyone out there!

  71. 78. Jamkomo

    My Institution has a mortgage similar to Scotiabank’s STEP. While you might not recommend it since one needs to increase the HELOC manually, the mortgage itself gives me a special interest rate that is really good (2.6% – this is posted Jan 2011), plus it’s open.

    So, I’m going to be doing it manually.

  72. 79. Jungle

    This post is old and outdated.

    We have been doing the SM with the Scotia STEP for a while. Scotia made some changes in the last few years, now allowing “auto limit increase” to the HELOC as you pay down the principal.

    However please note, you must have title insurance only from a company called “First Canadian Title” on your property. I do not know why this is a requirement by Scotia, probably from teird selling. Also the minimum size of HELOC must be $5000.

    Also you can sent bill payments (no fees) from the HELOC to your brokerage. I believe any brokerage will accept bill payments as a way to fund your stocks. The HELOC can be set up as interest only payment too.

    Scotia also offers 1 year fixed rate mortgages, with option to early renew any time 6 months before term expiry.

  73. 80. Ed Rempel

    Hi Jungle,

    Yes, the Scotia STEP is not bad for the SM now that they have improved it. We find that these improvements are not the same everywhere (we think they have been releasing them branch by branch). You may or may not get all the options, depending on obscure options you take when signing up.

    For example, we have some clients that don’t have the $5,000 minimum and some that are not offered the automatic readvancing yet.

    Scotia still does not allow investing directly from the credit line automatically. We often use automatic monthly investments. Plus for clients with an investment loan, the interest payments can come directly from a credit line for tax purposes, but this does not work at Scotia.

    We find that their rates are usually relatively competitive, but not usually the lowest.

    Ed

  74. 81. Ed Rempel

    Hi Everyone,

    The best rate we are getting on a Smith Manoeuvre mortgage today is 2.69% on a 2-year fixed mortgage. This is the first time we have ever thought that a fixed mortgage more than one year was the best option.

    Ed

  75. 82. Jared

    Hello,

    What are the best SM mortgages available today? I currently have BMO Readiline and our renewal comes up in the near future. Wondering if I should be considering something else or if there is something that I should use to at least get a good rate out of BMO

  76. I believe the options are still similar today. Check with TD, RBC and BNS.

  77. 84. Ed Rempel

    Hi Jared,

    The mechanics of the various mortgages have mostly not changed, except that Merix is gone, Scotia is somewhat better but still not on our recommended list, and National now has a decent product.

    Among the best options, the deciding factor is the specific rates and what fees they absorb.

    Mortgage rates are a bit weird right now. They are rising in a competitive market. Some banks can only initially quote high, but have room to match after you apply. You don’t want to apply to many, though, because it can reduce your credit rating.

    The best rate is still 2-year fixed. Shop around for rates and absorbing fees. We have a free referral service from our web site, if you want help.

    Ed

  78. 85. Jared

    Hello Ed,

    Our mortgage isn’t up for another 10 months or so, but we are considering whether breaking the mortgage might make sense to lock in a lower rate instead of waiting for that time to see where rates are next year.

    Extend and Blend seems like a possible option instead of out right breaking the current mortgage

  79. 86. Ed Rempel

    Hi Jared,

    “Blend & extend” is almost never in your best interest. It almost always essentially means that the longer period or larger mortgage is at the posted rate. Nobody should pay the posted rate!

    You may calculate a savings in that your current rate is lower, but it is probably higher than it will be after the next time your mortgage renews.

    I would suggest to either pay the penalty and get a new mortgage at the lowest possible rate, or wait until your mortgage comes due.

    Ed

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