The 10 questions for “Ed’s Mortgage Referral Service” are in the article above. We are still offering it. If you send us the answers to those questions, we will refer you to our contact at whichever bank that offers a Smith Manoeuvre mortgage will be the best choice in your situation.

It is fine to wait, since you are starting with zero. However, there are options to get going sooner. You can automatically invest the principal portion of every mortgage payment, or you can use that amount to pay the interest on a larger investment loan.

Ed

I don’t understand any or your comments about the Firstline Matrix. Why would you want to pay more to Firstline when you can get a cheaper mortgage elsewhere? You can save a lot of money with other options.

Sorry to say this, but it sounds like a mortgage broker is trying to persuade you of something. The arguments you state are the classic arguments used by banks and mortgage brokers to such you into longer term fixed rates.

Firstline does not offer variable or 1-year rates – so you can only lock yourself into longer terms at higher rates. Studies consistently show that you can save money with variable or 1-year rates.

The last thing you should do is fall into the “5-Year Fixed Mortgage Trap”. Banks and mortgage brokers try to suck you into them, because they make way more money on them, but you will almost definitely pay more – plus you lose all your flexibility and negotiating power for 5 years.

5-year fixed mortgage are a jail sentence!

Moshe Milevsky, prof. at York University showed that the average Canadian wastes $23,000 after tax in their life because they got sucked into 5-year fixed mortgages, rather than variable. In short, one entire working year for the average Canadian is wasted only because they got sucked into 5-year fixed mortgages.

I saw one study from a mortgage broker that compared five 1-year mortgages to one 5-year mortgage since 1950. It showed that 1-year mortgages saved money 100% of the time. In other words, probably every last Canadian that every took out a 5-year fixed mortgage wasted money on interest.

You mentioned $2,500/year savings as though it is nothing. Multiply by 25 years that you may have mortgages in your life and you get $62,500 savings over your life – after tax. Don’t you want to save all this money?

You are right that rates are low today and will likely rise, but the 5-year rate is close to 2% above the 1-year rate. If rates rise by 2.5% and stay there, five 1-year mortgages still win over taking a 5-year today.

Today, we are recommending 1-year fixed, not variable. The best variable rates are prime -.3%, but we expect that the prime -.85% rates will be back in a year or 2, so why lock in for 5 years at a small discount?

We are recommending to stick with the 1-year fixed and are getting 1.99% today.

I don’t mind worrying about the small chance of a huge rise in interest rates. I’ll keep the 2%/year savings and nearly 100% chance of saving thousands of dollars. :)

The other important factor is that, whenever your mortgage comes due, you have all kinds of opportunities – you can refinance other debt, you can restructure for investment or other strategies, or you an negotiate other goodies from the bank.

During your term, you have zero negotiating power with the bank, plus the odds of you having to pay a penalty sometime during your term are high. You generally cannot sell your home or refinance without paying a penalty.

Until recently, mortgages from every institution did not show on the Credit Bureau. Most still don’t but they are moving them all onto it.

This should not be a major factor, since you need to declare all your existing mortgages anyway when you apply for a new one. If you are applying for a mortgage and don’t declare existing mortgages you have because they don’t show on the Credit Bureau – that is fraud. You can get sued for that.

I would suggest to ignore the fear of higher rates you are being told to worry about and stick with saving money, Raj.

I hope you find this helpful.

Ed

Reasons:
– Rates are historical low and can not be any lower.
– Much higher return can be obtained if one puts his mind
into right investment as opposed worrying about variable rates.
– Leveraging itself is a risk, home owner does not need
another head ache regarding mortgage payment going up.
- Maximum that can be saved in a typical average mortgage is roughly $2500 / year

All this points to firstline Matrix as number one product.
I am surprised that these positive factors totally ignored.

I think firstline matrix is also a good product for SM.
Here are the reasons:
a. They do not report to credit beau.
b. Hence your credit remains clean.

After 5 years let’s say you have borrowed roughly 100K
then use that money and your excellent credit rating to
buy one rental property.

Bank’s care about their payment.
That’s it. Bank’s leverage 10 times legally.
You can leverage too if you are smart.

Sounds like a good plan.

Why it can not be done with Banks ?
– Banks attack your credit right away and credit rating goes
to zero and no one will lend you again.

That’s my 2 cents.

Thanks,
Raj

I am interested to avail of your recommendations. I want to know
where do I get 10 questions so that I can send my answers to you.

I wanted to wait for 2 years because, credit line to build up.
Initially with 20% down payment, credit line is $0 anyway.

regards,
Raj

You can do both. Normally, you can get exactly the same rates in a readvanceable that you get in an ordinary mortgage. So, your best bet is to get a readvanceable mortgage now, so that you have it ready whenever you are ready to invest?

Having one readvanceable is much more flexible than having a mortgage with a 2nd credit line from a different bank.

You can only get a readvanceable mortgage up to 80% of your home value. Above that, you need CMHC, which can be large fees. None of the readvanceable mortgage are available above 80% any longer.

The SM is an aggressive strategy, since it is borrowing to invest. You need to have the right type of temperament to be successful. Investments will go down sometimes, but the markets have always gone up and made good returns long term. You need to be the type of person that can remain confident and stay invested (or even add more) through the inevitable downturns.

The SM is a great way to build wealth and save for your retirement without using your cash flow, but it is not for everybody.

We are recommending 1-year rates today. Studies show that 1-year and variable rates nearly always save money over 5-year fixed mortgages. By going with 1-year or variable only, we have been between 3.5-5% nearly all of the last 15 years. Today’s 5-year rate of 3.59% is slightly below the average rate of the last 15 years, but not much of a savings.

The best rate we are getting is 1.99% today on a 1-year with prime+.5% (2.75%) on the credit line. This is a great opportunity to have a really low rate for at least a year.

We are still offering Ed’s Mortgage Referral Service. If you send us answers to the 10 questions, we will be able to recommend the mortgage that suits you best and refer you to our contact. There is no charge for this service.

Why are you waiting 2 years to start, Raj?

Ed

Capitalization is usually a manual transaction. The bank won’t automatically compound it. They will want to take the payment from your chequing account. Then all you do is take exactly the same amount out of the credit line to repay your chequing account.

If you take exactly the same amount (to the penny) shortly after they charge you, then tracking for CRA is relatively easy.

With Royal, you might want to open up a separate chequing account just for the SM. Royal does not allow investing directly from the credit line, so you need to transfer from the credit line to a chequing account in order to invest. Once you have a separate chequing account, you can just have all your interest payments come out of that same account. That way, you just transfer enough into the SM chequing to avoid anything bouncing, but you don’t need to worry about capitalizing the exact amount.

Does that make sense?

Ed

Another question is will one Bank offer me both of the following as of today’s rates:
1. Fixed rate of 3.7 % (comaprable) for 5 years closed
2. revolving readvancable rate of 2.8% (comparable)

I want to know more on BMO scheme “when you said I can do both”
How ??

Lets us say my home is worth 260K
80% of that is roughly 200K
I owe one Bank 150K on first mortgage.

Is it possible to borrow 50K from another Bank at competing rate
as a second lien on the property ?
Why I have to go with one Bank only mortgage and readvancing of equity?

Here is my situation. I get low fixed rate of 3.59% for 5 years.
I can get HELOC of 2.8 something % variable.
Reference: valueland.ca

What if I go for 3.59% fixed now with 20% down and
then after 2 years tap into Credit line for reinvesting ?

Another interesting question: What happens to your investments in a down market ?

I have 20% down for a 260K mortgage.
I have a dialemma as to go for readvancable mortgage
or go for low fixed rate mortgage and then after few years
tap into home equity to invest.

what is your suggestion ?

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

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

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!

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