Welcome to Million Dollar Journey! If you're new here, you can learn about me and even follow my net worth updates. A great place to start reading is with the popular articles located in the right side bar. If you would like to join thousands of others and keep up with the free daily updates, you can subscribe to the RSS feed via reader or E-mail.

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

Written by FrugalTrader on Oct 18, 2007 filed under Ed Rempel

Ed Rempel has put together a lengthy article for us indicating his favorite Smith Manoeuvre Mortgage(s). This is part 2 of 3. If you haven't already, check out Part 1 which listed Ed Rempel's 3 favorite readvanceable mortgages. This article will help you determine what to look for in a Smith Manoeuvre mortgage so you can do your own research.

What should you look for in an SM mortgage? We prefer to use a readvanceable mortgage that:

Readvances automatically (not manually).
Variable rate at prime -.5% to -.6% or better (at today's rates - recently reduced).
Fully open. (Flexibility can be extremely useful in future years.)
Allows investing directly from the credit line.
No fees at all - no legal, appraisal, broker, or administration fee.
Allows multiple credit lines (add one for emergencies or for the Cash Dam).

While you would think mortgage brokers would have the big advantage here because they are independent and have access to many mortgages, none of the mortgages available to mortgage brokers have more than 2 of these 6 features. And only one mortgage available to mortgage brokers is in our top 4.

We’ve found that in every situation we have encountered or can think of (except for the odd case where Manulife One might be best), one of these 4 is the best. However, working out the best choice among them can be somewhat complex and depends on quite a few variables.

I started to write down all the details of these 4 and exactly when we would use each one, but ended up with pages of detail. Here is what it depends on:

Do you have the 20% down (to avoid CMHC)? What is your existing mortgage balance and the value of your home?)
When is your mortgage due?
How quickly are you paying your mortgage down? (What is your payment and amortization?)
Where do you do all your regular banking?
How good is your credit rating?
Are you good at details? Would you take a mortgage that required more manual transactions each month if it saved you money?
How long do you expect to be in your existing home?
Is your mortgage paid off or almost paid off? (If so, then is your cash flow relatively even or does it come in large lumps?)
Is the mortgage on your home, a rental property or a cottage?
Are you stuck in an existing non-SM mortgage? (More on this in Part 3.)

FT has been asking us how we can help his readers figure out which mortgage is really the best mortgage in your situation. Since the answer can be somewhat complex, we are offering “Ed’s Mortgage Referral Service” only to Million Dollar Journey readers.

For MDJ readers, if you call or email us or FT with answers to the 10 questions above, and leave your email address and phone number, one of our advisors will contact you to tell you which SM mortgage is best for you and why, tell you what terms you should expect and give you our contact person to get that mortgage. Ask for “Ed’s Mortgage Referral Service” when you call or in the subject of your email.

Because we refer a high volume of mortgages and try to negotiate with our contacts the best possible deal, people we refer often get a better deal than if they contact the bank themselves. We have not been paid anything by any of our mortgage suppliers (except TD has a points for merchandise program), so our advice is completely objective. By contacting us, you can be confident that you have the best SM mortgage for your situation.

Please do not use this service unless you are serious about implementing the SM in some form (either with us or by yourself). We recently had someone call us for an SM mortgage referral, started the mortgage process and then changed his mind – so he will now have to pay the bank’s legal and appraisal fees. We usually get all fees absorbed – but only if you actually take the mortgage.

FT has been very generous in publishing my articles, which is why we are willing to offer this service. It is for MDJ readers only. We are asking all the questions and for your email and phone so that only those serious about implementing a Tax Deductible Mortgage strategy will request it and so this free service does not take more than 5-10 minutes of our time.

There you have it folks. Ed Rempel is willing to take some of his time and offer you advice on which Smith Manoeuvre/readvanceable mortgage would be best in your case. If you are curious about which readvanceable mortgage would suit your situation, please include answers to the 10 questions above in the email that you send to either Ed Rempel or me.

27 Comments, Comment or Ping

1. The Financial Blogger

Another quick point I would like to bring; when you buy your house or refinance it, make sure you register for the full amount (the purchase price or the appraisal value). Your property will grow in value and therefore, you will save registration fees (which are about $1,000) when you will increase the amount of your SM mortgage.

I feel great after this post; NBC all-in-one offers #1, #3-4-5-6. There is only the rate where it is stuck at prime since it is only a HELOC. The solution? work for NBC and get a rebate on the rate so you can have the 6 points in your pocket ;-D

Oct 18th, 2007 @ 8:24 am
2. dayLateDollarShort

Great Article.

Your Quote:
“We’ve found that in every situation we have encountered or can think of (except for the odd case where Manulife One might be best)”

I am interested in hearing what the one case where M1 might be the best.

I have been looking into ManulifeOne. I know the general feeling on this site is that M1 is a bit pricey, but I am still considering it because it may work well given my own situation.

Thanks.

Oct 18th, 2007 @ 1:46 pm
3. Never Stop Buying

If anyone’s considering M1, you might as well consider Canadian Tire’s M1 product, without the $14/month fee (limited to some areas for now)

I have TD’s HELOC @ Prime, it has been lovely (I don’t use it for SM though). Can’t beat the instant transfer within EasyWeb, and see the HELOC balance instantly drop by $100K :-p
FYI: I have 3 CC, 1 PLOC, 1 HELOC, 2 Chequing, 1 USD Chequing with TD, and TDW/TD MF

Oct 18th, 2007 @ 4:15 pm
4. Mortgage Confused

Day Late, look into Canadian Tire Financial Services, they now have the exact same all in one as M1, but no monthly fees, no 14/month. I’m not 100% positive, but, I believe they are identical. Check it out!

Oct 18th, 2007 @ 4:22 pm
5. Bean Counter

Good article! Thanks Ed for the information.

Mortgage Confused - The all in one offered by Canadian Tire looks pretty attractive. I wonder if it allows “sub-account” or not. Any comments from other readers? Thanks.

Oct 18th, 2007 @ 5:28 pm
6. dayLateDollarShort

Thanks,

I had noticed the Canadian Tire All-in-one as well. It appears that it is not available in Manitoba yet.
I will be making my decision before Dec so I am left with Manulife for all-in-one accounts.

Oct 18th, 2007 @ 6:37 pm
7. Ed Rempel

Hi FB,

I don’t mean to burst your good feeling, but you can get all those features from other banks without having to have your entire mortgage at a very high rate of prime (6.25%). Why would you want to pay all this extra interest, when National Bank All-in-One does not have any advantages over other banks?

By the way, does it really allow automatic investing from the credit line (#4)? We have not actually tested this, but National says it does not work.

Good point about registering 100% of your purchase price or appraised value. It’s a good idea to set it up so that you can increase your credit line and invest the difference every year or 2 without having to pay any legal or appraisal fees.

Ed

Oct 19th, 2007 @ 12:04 am
8. Ed Rempel

Hi Day Late,

You’re in Manitoba? I’m originally from Manitoba, as well - Winnipeg.

The odd case where Manulife One may work is where there is little or no mortgage, where the client is very accurate and tends to carry high chequing and savings account balances.

If there is little or no mortgage (like mine) then the SM is entirely in a credit line at prime, just like anywhere else. It is the fixed mortgage rates (and lack of a variable below prime) where Manulife One tends to not be competitive with the fully discounted rates at other banks.

I forgot to mention in my fee disclosure in the articles that financial advisors would get paid a finder’s fee from Manulife. Financial advisors often recommend it for that reason, but we have not recommended it for any clients (although I have one myself).

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 in the last blog) 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, so only a very accurate person should use M1 for the SM.

There is also the $14/month fee. There is usually some saving, because you essentially get daily interest on your chequing account. This is a plus for those that normally carry high chequing & saving account balances. You generally should have average balances in your chequing and savings accounts of at least $4-5,000 in order for this interest savings to cover the $14/month fee.

Ed

Oct 19th, 2007 @ 12:24 am
9. The Financial Blogger

ED,
Don’t worry about my bubble, it can not be burst ;-) The main reason being as I work for them, I benefit from a reduction of 2% on my mortgage. Therefore, I pay a variable P-2% (4.25%) right now. Unfortunately, I can not combine my HELOC with a regular mortgage with National Bank, it is not offered yet. As I can find any better mortgage rate elsewhere, I am still better off with the all-in-one.

In regards to invest directly from one sub-account, I do have monthly withdrawal that take money from one sub-account and deposit it into my brokerage account. I hope this is what you mean by “Allows investing directly from the credit line.”. If not, I don’t know what you are referring too. Can you confirm?

Oct 19th, 2007 @ 12:56 am
10. Ed Rempel

Hi FB,

I see why you like it. The 2% subsidy is a taxable benefit, though. So if you are in a 40% tax bracket, you only get a 1.2% effective reduction from prime. That is still a great rate though. Can you get it for anyone else???

Is the monthly withdrawal automatic, or do you have to do it your self (on-line or with a cheque)?

Ed

Oct 19th, 2007 @ 9:14 pm
11. The Financial Blogger

Hey Ed,

in fact, it is a taxable benefit starting when it is lower than the prescribed rate. For year or so, it was not taxable (the prescribed rate was 3% something). Since last year, the rate went up to 5%, which means that I’m only taxed on .75%. In the end, I still get 1.7% off prime :-D

The monhtly withdrawal is automatic. I provided a void cheque for the first time and everything is automatic since then. In fact, the all-in-one could be used as a regular account, I don’t know why they told you the opposite at the bank.. strange :-S!

Oct 19th, 2007 @ 9:27 pm
13. Ed Rempel

Hi All,

There were quite a few posts about the new Canadian Tire All-In-One. We checked it out and it does NOT work for the SM.

It is only launched as a trial in 3 cities so far and is almost exactly like Manulife ONE. It is a complete chequing account and also a mortgage and the rates are .05% better than Manulife ONE across the board. And it does not have the $14 fee.

However, the one problem is that it does not allow sub-accounts - it is just one big account. Therefore, there is no way to keep the tax-deductible interest separate from the main non-deductible mortgage.

Perhaps they will improve it once the trial is over, but so far it will not work for the SM.

Ed

Oct 25th, 2007 @ 7:39 pm
15. Mike-TWA

These are some great suggestions. Thank you very much

Nov 5th, 2007 @ 10:33 am
16. alex

ed,
i’m curious- if you have a secured credit line against your home and you use that for the SM, in addition to some other purchases- as long as you can correlate the specific investment purchase to specific investment statements of the same amount and same date- does that allow/qualify for tax deductability and use of the SM?? or do you require an actual ’sub-account’ used to distinguish a pattern of investment??

Jan 8th, 2008 @ 11:44 pm
17. Ed Rempel

Alex,

Interesting question. The answer is - maybe, at best. Assuming you can track it exactly and prove it, you should be fine, but that will be much harder than you think.

You may be able to track the original purchase, but what happens with all future transactions? When you pay down the credit line, did you pay down the deductible or non-deductible part? CRA might take a different position and claim that all payments were applied to the deductible part.

With the SM, you end up with many transactions, including purchases every few weeks, perhaps of multiple investments. If you capitalize the interest, that is another bunch of transactions, and it takes detailed tracking to trace how much interest capitalization was the deductible vs non-deductible interest.

It is possible to do, but having a separate credit line is much better and safer. That also allows you to capitalize the interest properly.

If you have them together, you should try to separate them if possible at your bank. Is there a problem separating them? Where is your mortgage and credit line, Alex?

Ed

Jan 20th, 2008 @ 1:04 am
18. Four Pillars

Alex - you shouldn’t commingle your deductible accounts with non-deductible. I had a similar situation with my leveraged plan where due to a bank error, things got commingled. I talked to the CRA and they were pretty clear that for deductible borrowing there has to be a “clear path” from the loan to the investment and they said I had to clear up my commingling - this was done by selling the equities - paying off the commingled loan and then reborrowing and rebuying securities. Keep in mind the 30 day rule about selling/buying securities for tax reasons.

Mike

Jan 20th, 2008 @ 11:03 am
19. alex

ed,
i currently have a non-deductible mortgage with RBC (in the 4.50% range) and a secured credit line at prime (now 5.75%) with RBC as well. so they are, in fact, separate. the reason i opted against the ‘homeline’ option at RBC- which grows as i pay my 1st mtg down- is that i’d have the ability to switch my 1st mtg to another lender if a better deal came along on renewal- instead of getting stuck with a potentially higher rate, in exchange for the luxury of the automatic credit line increase. since there are only a few stock purchases on the credit line- i’d hope it would be easy to claim.

mike,
i don’t believe i have any non- deductible purchases on my credit line? it is currently used somewhat infrequently.
but i can see, if used more often, how confusing it can get.

Jan 24th, 2008 @ 6:25 pm
20. tomw

What is the:
“30 day rule about selling/buying securities for tax reasons.”

I can only find a reference online in a web search to the Wash Out Rule in the US specific to the IRS.

What Canadian tax rule specifies 30 days?

Thanks to all the contributors this is a VERY informative thread, (i.e. Don’t cross or revenue and borrowing streams!)

thanks

Jan 25th, 2008 @ 2:46 pm
21. FrugalTrader

Tomw, it’s called the superficial loss rule. You can read more about it here:
http://www.milliondollarjourney.com/how-investing-taxes-work-part-1.htm

Jan 25th, 2008 @ 2:48 pm
22. tomw

thank-you
that makes sense now
:)

Jan 26th, 2008 @ 12:15 pm
23. Ed Rempel

Hi Alex,

I may have some good news for you. Royal is one of the banks that will convert a mortgage and credit line into a Homeline plan and allow you to keep your great rate and the same maturity date.

You will probably have to pay legal and appraisal fees in this case, but you can convert to a readvanceable mortgage and do the SM more fully.

I don’t quite understand your other point, but when the mortgage comes due, you can move the mortgage and credit line together to wherever you want.

Ed

Feb 3rd, 2008 @ 1:00 am
24. alex

ed,
what i meant is that, upon renewal, royal may offer, say, based on todays rates, 5.99% on another 5 yr fixed mtg- but, if i can get, say, 5.79% at scotia- i would obviously switch & take the better deal, right?
problem is- if i switched my 1st mortgage out of royal (on maturity)- i don’t think they’d allow me to keep the ‘homeline’ product with them, being in 2nd position behind another financial institution. they’d want to be the lender in 1st position also. so i’d have to break royal’s homeline & obtain something similar, or a readvanceable mortgage, with another lender- incurring legals, etc because it would not be deemed as a straight switch/transfer- but a refinance. does that make sense?

on your 1st point, i think all i’d have to do is change my secured credit line to a homeline (in royal’s case) which is basically what u suggest. i don’t think it has anything to do with the actual 1st mortgage…does it??

ed, i’m still a bit unclear as to how SM works with ‘no money out of your pocket’?? if i’m borrowing from the credit line- i have to pay that interest owed monthly (eg. $500 per month) but if my investments are not producing enough of a dividend- (or i choose to reinvest into a DRIP) & my tax refund is not coming for a whole year- where is this money coming from??? do you draw funds from your credit line & transfer to your bank account to be debited for what you owe? also, if i’m on a straight commission or self-employed- i’d basically just be reducing my taxable income- not receiving any refund- how does SM affect me specifically???

thanks!

Feb 3rd, 2008 @ 3:26 pm
25. Ed Rempel

Hi Alex,

Where is everyone getting the idea that the SM involves the investments paying the loan interest? That would be just ordinary leverage.

Once you get the right mortgage, this will be clearer. Royal is one bank that will convert your existing 1st mortgage and your credit line into a Homeline. Within the Homeline, they will let you keep your great mortgage rate and existing mortgage due date, and it will now be in one mortgage product combined with your investment credit line.

Then, as you make each ordinary mortgage payment, you automatically gain more credit available in the credit line. You can use this additional credit to both pay the interest on your existing tax deductible balance and then you can invest the remainder.

In the future if you move your mortgage, then move the entire readvanceable mortgage (mortgage and credit line) to your new bank.

If your Royal mortgage person won’t do this conversion, then we can refer you to our contact at Royal.

The SM is about borrowing back the additional principal gained by each mortgage payment. It may or may not involve a lump sum.

The investments don’t need to pay out a penny of income. The large long term benefit comes when you can leave your investments to compound over many years.

The key to doing the SM without using any of your cash flow is capitalizing the interest. For example, if your bi-weekly mortgage payment of $1,000 includes $500 of principal, then you gain $500 available credit in your credit line automatically. If the interest on your existing investment credit line is $200, then borrow $200 to pay this interest. That leaves you $300 that you can invest every 2 weeks.

Does that make it clearer, Alex?

Ed

Feb 3rd, 2008 @ 4:51 pm
26. alex

hi ed,
yes, your last paragraph made it clear- so you DO borrow from the credit line to pay the interest, effectively leaving less of a credit availability to invest- but still, enough of a good portion to make the SM worth it.
so out of a $500 monthly example- you only pay about $2.40 from the credit line to cover the interest- the other $497.60 is invested…right? now, is this capitalization a manual effort on my part to cover the interest owed? or would a bank allow any interest payment owed to be automatically drawn again from the credit line??

Feb 4th, 2008 @ 11:16 am