This environment has made it much more likely to be beneficial to pay the penalty to get out of your current mortgage. We are finding a far higher proportion are worth breaking now than a year ago.

We are finding quite a few people with high fixed rates where there is a big benefit to break it. Today, we are getting 1.99% to 2.3% on a 1-year fixed, which we believe is the smartest strategy now.

Also, quite a few people are locking in for 5 years now at prime + 1% or prime plus .8%. These might also be worth breaking, as well. We believe that things will eventually return to normal, which would mean that mortgages with significant discounts below prime will probably become available again, perhaps in a year or 2.

Therefore, a long term variable that is not prime LESS .5% or more will probably end up being quite expensive as rate normalize. 1-year rates are lower today and will probably still be lower in a few years.

Ed

Good questions.

1. Historically, the best times to invest have been when the markets are low and volatile. The reason that many people have trouble figuring out what to do in today’s volatile markets is because they think too short term. The market is at a historically low level now. Nobody knows whether or not it will go lower or when it will recover, and the truth is that it does not matter much. The markets always recover eventually and studies have shown that investing at points when it is low and volatile have tended to result in considerably higher returns going forward.

It is obviously difficult to invest in this kind of environment, but when you think about it logically and long term, now may well be the single best time in your entire life to invest.

2. The rate of return to expect cannot be answered except as a long term expectation. Itr depends completely on how you invest. Short term returns are not predictable any time and vary widely. However, when you get to 10 or 20 years or longer, the expected returns tend to get more predictable. The stock markets have average 10-12%/year long term and higher when you invest at low points. This would of course be lower if you invest partly in bonds or balanced funds.

3. Regarding your question about dividend funds, let’s be clear about this. The Smith Maneouvre does not involve dividend funds at all. In fact, the “dividend fund” you are referring to is probably really a “return of capital fund”, which results in your investment loan becoming non-deductible. This is a significant tax problem, especially after a few years.

In almost every case, not using a “dividend” fund is the best advice. They are more risky, since the monthly payment makes it very difficult for the fund to recover from any significant downturn. The long term expected return is usually lower, as well, since few of the best best funds are available as “dividend” funds.

The best advice in most cases is to invest based on the best risk/return and avoid getting any “dividends”.

Index funds would be fine. We don’t use them ourselves or with our clients, but they would work fine. We spend our time investigating the world’s best fund managers, which we call “All-star fund managers”. There are fund managers with long term exceptional track records that have beaten their indexes by wide margins over long periods of time, often with less volatility at the same time.

4. There is no minimum HELOC. The “Plain Jane” Smith Manoeuvre involves reborrowing each mortgage payment to invest, which can start with a HELOC of zero. After your first mortgage payment, you gain equity available in the HELOC from the principal portion, and you can invest that amount.

Ed

I have just learned about SM, and reading blog(s) here to learn more about it. Yes, I am going to get the book. But my question(s) is(are):
1. Is this the good time to start SM (looking at the financial situation around).
2. What is the rate of return we should expect.
3. Do we “have to” invest in divident funds. Can’t we just get index funds; as this is for long term growth.
4. What is the minimum HELOC amount we can start with.

Thanks for any feedback

We are generally getting between prime -.65 to -.85% now, depending on various issues. The mortgage market is much more challenging in the last 6 months since the subprime issues. Getting larger discounts from prime takes more effort now. As Cannon mentioned, your credit rating, the size of the mortgage and how much business you have with BMO are all factors, but the main factor is still negotiation. They will still usually match competitors rates.

We get the better rates for our clients because of a high referral volume, which is why we do Ed’s Mortgage Referral Service.

Get some good competitie rates and see if BMO will match. If you can’t get a better rate, then email me and we’ll refer you to our BMO contact.

We have not heard of First Calgary, but they are a credit union and we are not aware of any credit union with a proper readvanceable mortgage. We have become quite skeptical of various mortgage reps making all kinds of claims. Most mortgage reps don’t know how to do the SM, so they don’t know what a good readvanceable mortgage looks like.

Ed

I just noticed your post here. No, your scenario is not correct. In the example in the article, the Parkers set up a 2nd readvanceable mortgage for $120K. They used $20K to pay off debt and $100K to invest. Therefore, the interst on the $100K portion would be tax deductible.

They would also be able to do a Smith Manoeuvre on this 2nd readvanceable as well, so they could use the principal portion of the mortgage payment on the 2nd to cover the interest on the $100K investment.

After 4 years, they can roll it into their main mortgage.

Getting just a HELOC for $120K to invest would provide a tax deduction on all the interest, but they would have to pay from their cash flow both their existing $20K debt and the interest on this $120K HELOC. This is why the 2nd readvanceable with the SM is preferable.

Ed

You may find that what you are offered is also dependent on the size of the mortgage. People at RedFlagDeals have reported that it requires a certain minimum amount (I think $300,000) to get the bank’s most aggressive rates. Perhaps CU’s operate differently in that the mortgage amount is immaterial.

I called BMO mortgage specialist and she offers me Prime – .4 for 3 year open variable rate. I am in Calgary, anyone else has any better deal?

Cheers
Tyler

Do you have any experience with First Calgary? I just talked to a mortgage specialist and she said she can set up exactly like BMO ReadiLine with fully open at prime. And I can do all transaction online.

Does anyone here has any experiences with First Calgary? Really appreciate any help.

Thanks
Tyler

If the Parkers get a 2nd readvanceable mortgage for $120K, at the initial phase will they have $320K of total mortgage, $120K of money (investment or not) and $0 of HELOC? If this is the case, since they did not get any investment loan (HELOC = $0), they cannot get any tax refund from $120K. Is this correct?

In reverse if they get a HELOC of $120K and do not get the 2nd readvanceable mortgage, they can get tax refund from that investment. They can implement this strategy for 4 years until their original mortgage is due. Afterwards, they can start a new readvanceable mortgage and if possible (not sure) combine that existing HELOC with the readvanceable mortgage.

Does it make sense?

Thanks,
Ahmet

[...] Should you cancel your closed mortgage to switch to a  readvanceable mortgage? (Ed Rempel) [...]

I just noticed your post here. In answer to your questions:
1. tthe SM still works fine in Quebec. You won’t get tax refunds, but if you invest tax-effiently anyway, I am almost positive that you can carry forward your interest deductions to claim them in future years. This essentially means you may never have to pay tax on the investment gains.
2. The CIBC Home Power LOC does not work for the SM. It is just a credit line and does not allow a mortgage within the same product. CIBC is still the only one of the big 5 banks that does not have a readvanceable mortgage.

Ed

After reading numerous pages on numerous websites and analyzing my mortgage/financial situation, I’m considering the SM.

But I still have 2 questions.

1- Living in Quebec, is the SM still a good option (Interest deduction issue).
1- Is the CIBC Home Power LOC any good for the SM?

Thank you for the info.

[...] KristinK428 wrote an interesting post today onHere’s a quick excerptToday, with interest rates having risen in the last several years, if your existing mortgage interest rate is much below today’s rates, getting a 2nd readvanceable mortgage is most likely the best choice. Why? … [...]

[...] KristinK428 wrote an interesting post today onHere’s a quick excerptToday, with interest rates having risen in the last several years, if your existing mortgage interest rate is much below today’s rates, getting a 2nd readvanceable mortgage is most likely the best choice. Why? … [...]

It’s hard to answer your question without knowing the details of your situation. The general answer, however, is that the SM properly implemented is a very effective long term strategy, but can be very risky short term.

My suggestion would be to figure out how you would implement the SM on this home and then figure out how you would implement it on your new home. Whatever part can be done both times, do it now and then just transfer it to your new home.

Most of the time, you can transfer the SM to your next home. Just make sure you set it up without fees and with an open SM mortgage.

Ed

[...] kathrynv wrote an interesting post today onHere’s a quick excerptToday, with interest rates having risen in the last several years, if your existing mortgage interest rate is much below today’s rates, getting a 2nd readvanceable mortgage is most likely the best choice. Why? … [...]

I won’t be trying to time the market. However, we are planning to move by spring of next year. I’m just not sure if we should start the SM now or after we move.

It’s not double-dipping because you deduct different interest. You deduct the main mortgage interest against the rent and then interest from the credit line against with the SM.

As for your other question, I guess both are correct. You can get in and out whenever you want, but it it not recommended. This is a strategy of borrowing to invest, which is theoretically more risky than just investing your own hard-earned money. The investment returns are more predictable long term. We would not advise it as a short term strategy.

Why are you asking this? If you think you can market time by going in and out, I would not recommend that either. Studies show most market timers lose money and under-perform less active investors.

If you are moving and may be without a mortgage for periods of time, there are alternatives that can allow you to keep your investments in between.

Ed

Mike

Is the SM designed to be followed throughout the life of a mortgage or can someone get in and out when they need to?