I have teamed up with a mortgage broker, Melanie McLister from Canadian Mortgage Trends, to bring you a HUGE Smith Manoeuvre Mortgage comparison to help with your mortgage shopping. Here is the article that Melanie wrote:
The Smith Manoeuvre is nothing new to readers of this site. Many of you now know that it’s a popular tactic to make your mortgage tax deductible. Today we’ll discuss a key component of the Smith Manoeuvre—the readvanceable mortgage.
First, in case you’re unfamiliar, the Smith Manoeuvre works like this:
- Get a re-advanceable mortgage (more on this below)
- Liquidate non-registered assets (like stocks held outside of an RRSP) into cash
- Use this cash as a down payment on your mortgage
- Make mortgage payments like normal
- Re-borrow $1 for every $1 of mortgage principle you pay each month
- Invest that borrowed money at a higher rate of return than the loan interest you pay
- Deduct your investment loan interest and use the tax savings (refund) to pre-pay your mortgage
- Repeat steps 3-7 until your mortgage is paid off.
There are a few twists so consult a good financial planner—and make sure the Smith Manoeuvre is actually right for you. Once you’ve done that, the next step is to find a good readvanceable mortgage.
A readvanceable mortgage has two parts: 1) a mortgage; and, 2) a line of credit. In reality, both parts can be termed a “mortgage” because they’re secured against your house, but let’s not complicate things. It’s confusing enough that some lenders call their readvanceable mortgages “lines of credit.”
In a readvanceable mortgage, the lender basically gives you a new $1 loan for every $1 of mortgage principle you pay off. In other words, every time you make a payment you reduce your mortgage principle owing and your line of credit limit gets raised accordingly.
Included in the table above are the following Lenders:
- BMO – ReadiLine
- Citizens Bank – Readvanceable Mortgage
- Envision – Redfrog Line of Credit
- FirstLine – Matrix Mortgage
- HSBC – Equity Power Mortgage
- Manulife – Manulife One Mortgage (read my m1 review here)
- Merix – HELOC
- National Bank – All in One
- RBC – Homeline
- Scotiabank – Scotia Total Equity Plan (STEP)
- Vancity – Readvanceable Mortgage
This list is a work in progress. It is not all-inclusive and its contents may change. As other lenders make their readvanceable mortgages known, we’ll add them to the list.
Also, keep in mind that some of these mortgages are not “optimal” Smith-Manoeuvre choices. Those mortgages are listed here simply for comparison purposes.
Each mortgage has unique quirks and each has varying rates and terms. This is where a professional mortgage planner can save you time and money.
Note that, while some of these mortgages can only be obtained through a mortgage planner, some can only be obtained directly through the lender. A reputable mortgage planner will always recommend the best product for you—even if it means steering you to a lender where he/she doesn’t get paid. We commonly refer people to banks that don’t have broker channels. We refer clients to contacts at these institutions simply as a courtesy to both the client and bank. In any case, we make sure that any banking representatives we deal with are highly experienced in the Smith Manoeuvre.
In addition, and contrary to what is sometimes written on the web, reputable mortgage planners generally do not charge fees to secure Smith Manoeuvre mortgages.
Yet another big question revolves around term and rate type. Homeowners often ask which term is best: a 1-year fixed, 3-year fixed, 5-year fixed, or 5-year variable. Clients typically want a 5-year fixed mortgage for peace of mind. However, as research suggests, 1-year fixed and variable-rate mortgages can give you the best lifetime interest savings. Ed Rempel, for example, notes that 1-year mortgages have performed better in every 5-year period since 1950. In the end, it’s your choice based on your risk tolerance.
Next week—in part 2 of this article–we’ll discuss various features specific to readvanceable mortgages. By the end of our review, you’ll know exactly what to look for in your next Smith Manoeuvre mortgage.
Melanie put in a LOT of work into getting this table together. Great job Melanie and thanks for all the effort that you put into it.
Melanie R. McLister is Editor of Canadian Mortgage Trends and a professional Mortgage Planner at Mortgage Architects. Melanie specializes in online mortgage planning for clients across Canada. You can read her mortgage commentary daily at www.CanadianMortgageTrends.com and reach her at www.MyVirtualMortgageBroker.com.
This article is for general informational purposes only and is not financial advice. Please talk to a qualified financial planner to ensure the Smith Manoeuvre is suitable for you. The opinions here represent those solely of the author. The author and her company are unaffiliated with Smith Manoeuvre Financial Corporation and Fraser Smith.If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).