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Smith Manoeuvre (Maneuver) Mortgage Comparison – Part 1

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:

  1. Get a re-advanceable mortgage (more on this below)
  2. Liquidate non-registered assets (like stocks held outside of an RRSP) into cash
  3. Use this cash as a down payment on your mortgage
  4. Make mortgage payments like normal
  5. Re-borrow $1 for every $1 of mortgage principle you pay each month
  6. Invest that borrowed money at a higher rate of return than the loan interest you pay
  7. Deduct your investment loan interest and use the tax savings (refund) to pre-pay your mortgage
  8. 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.

Here is a table that compares several “Smith Manoeuvre mortgages”

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. 

About Melanie 

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.

Important Notes

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).

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 29 comments… add one }

  • The Financial Blogger May 15, 2008, 9:58 pm

    it sure doesn’t sound like a lot of money now, but over the years, it becomes more and more important.

    The first year I did mine, I got a tax deduction big enough to buy a trio a McD’s ;-)

  • Tyler May 15, 2008, 10:13 pm

    Hi FT, thank you for your response. Then I must be missing something this is what i calculated

    1) if i do mortgage then after 25 years, my net worth is 420K (because i paid off my mortgage)

    2) if i do SM at 7% return , my net worth after 25 years is 600,843 (Gross of investment) – 222,213 (LOC) – 420,000(mortgage principle) = -41,369.

    So I lost 41K by doing SM.

    Please point out what i am missing.


  • DAvid May 16, 2008, 1:32 am

    If you use the numbers you have provided in a Smith Manoeuvre calculator, you get the following results:

    Mortgage = $420,000 @ 4.75% for 25 years reduces to 22 years
    Tax refunds = $91,682 @ 40% tax bracket
    Investment portfolio = $739,741
    LOC = $420,000
    Profit = $319,741

    You would not have an LOC of $222,213 + the $420,000, as you invest the principal payment LESS the interest cost, so your first month investment is not $732, it’s actually $729.10.

    The use of cannon_fodder’s excellent spreadsheet (elsewhere on this site) will show this clearly, as it shows each month’s costs.


  • DAvid May 16, 2008, 1:35 am

    Financial Blogger said: “The first year I did mine, I got a tax deduction big enough to buy a trio a McD’s ”

    That’s a multi-million dollar purchase — a great first year return! ;-)

    Or did you just treat two friends to lunch…….


  • Tyler May 16, 2008, 2:41 am

    Thank you for helping me out, David.

    I really want to learn this kind of calculation so sorry for all my questions to make sure i can calculate correctly.

    I run the calculation again.
    The first month, interest i paid for LOC is $2.9 and following months $5.81, $8.73,$11.66 . Are they correct? if they are, I sum up 300 months, the total is 202,064. Multiply by 40% only gives me $80,825. What am I missing?


  • Tyler May 16, 2008, 2:55 am

    Further more, i got these numbers on LOC investment side

    1st month, $729.10 available to be invested for 300 months generates $4174.38 at 7%

    2nd month, $729.08 generates $4174.31

    3rd month, $729.07 generates $4174.24

    and so on

    at the end of 25 years, i got the lump sump of $1,247,771.17

    Is this correct, I can’t get the number $739,741 like David said. Where did my calculation goes wrong?

    Again, really appreciate your help.

  • FrugalTrader FrugalTrader May 16, 2008, 3:06 am

    Tyler, check out our smith manoeuvre calculator.

  • The Financial Blogger May 16, 2008, 8:10 am

    Fortunately, this was only the tax deduction. I also made a few hundred bucks of profit (so enough to bring all my friend to McD’s) ;-)

    This is obviously a long term strategy. The first years results are far from being impressive!

  • DAvid May 16, 2008, 12:31 pm

    You also reinvest your tax returns, so your total interest cost is a bit more than $230,300.

    Have a look at the Calculator I mentioned earlier, it will explain the steps far better then I.


  • Tyler May 16, 2008, 6:27 pm

    Thank you, I will give it a try. You guys are very helpful!

  • Cannon_fodder September 2, 2008, 11:32 am

    Here’s a warning to those of you set up with automatic mortgage payments of any kind (regardless of implementing the SM or not).

    We just set up our BMO Readiline in July to have semi-monthly payments – supposed to be on the 15th and last days of the month. Well, in the month of August, the payments came out on the 18th and, somewhat unsurprisingly, today (the first business day after the 31st).

    I contacted BMO and have to wait until the branch that holds our mortgage calls us up but with everything electronic, this is inexcusable. Even though we have a payroll system which can automatically deposit money on the last business day before the 15th and the last business day before the end of the month, apparently BMO’s system couldn’t do this for us. The net result? Almost an extra $100 in interest charges going into their pockets.

    Please do yourself a favour and look over your banking statement carefully for this kind of behaviour which is to the bank’s advantage, not your own.

    I’ll post back with how BMO resolves this matter.

  • Tyler September 3, 2008, 4:49 pm

    I got the same thing too. BMO screwed it up and I got charge of 250 dollars for unknown fee. I call the branch manager and after investigating, he apologized and refund back the money.

    Please Watch your statement closely.


  • Cannon_fodder September 9, 2008, 9:17 pm

    A follow up on my previous post with BMO.

    I contacted BMO through the customer service line and was told that the branch (that holds our mortgage) would get back to me that day. They never did. However, the financial investment representative who got our great rate on the Readiline did contact us this week after my wife called her (the BMO rep was on vacation and wasn’t aware of this issue).

    The net of it is that I made a mistake in my assumptions on how they accrued interest and, while there was some additional interest charges because the money wasn’t taken out as we had expected, the total was less than $1.00. Our first two mortgage payments didn’t come out during a normal pattern, but we are now where we should be.

    So, while I understand why they took the money out after the expected dates, I still don’t like it. Regardless, the additional interest was not enough to be a bother.

    And, to show how much BMO was willing to accommodate, they offered to return the additional interest charges and add 100 Airmiles to our Airmiles account.

    Nice job handling this situation which I unfairly made bigger than it should have been.

    Now, I shall go have a nice cold drink to wash down the crow I just ate.

  • Brenda January 23, 2010, 6:07 pm

    If I already have a homeline of credit can I not just use that?

  • FrugalTrader FrugalTrader January 23, 2010, 6:13 pm

    Brenda, yes you can, but it’s best not to have any personal loans on the HELOC that you invest with. If you can create a sub account, that would be ideal.

  • Mark April 12, 2010, 2:43 pm

    Anyone familiar with ScotiaBank’s STEP mortgage? Is it similar to TD Banks HELOC? Which is better if I want to do Smith Maneuver?

    a rookie still learning….

  • Ed Rempel April 15, 2010, 10:50 pm

    Hi Mark,

    TD HELOC generally works better for the SM than Scotia STEP. The downside for TD is that they don’t offer variable rates, but they are very competitive on 1-year fixed, which is what we are recommending right now. The upside is that they allow investing directly from the credit line, which Scotia does not allow.

    Also, the Scotia STEP is inconsistent from branch to branch. It seems that every one of our clients with the STEP has a different product – some readvance automatically & some don’t, some have a minimum before they can readvance and some don’t, some can be converted to automatically readvanceable with one form and some don’t, some branches will manually readvance and transfer to a chequing account for no charge in order to match other SM mortgages and some don’t.

    Generally, Scotia STEP is okay, but you have to check out all details carefully. There are several better options for SM mortgages.

    If you want a referral to a good contact at the best SM mortgage for you, we are still offering a free Ed’s Mortgage Referral Service. Just send us the answers to the 10 questions at: http://www.milliondollarjourney.com/ed-rempels-picks-for-the-best-smith-manoeuvre-mortgage-ii.htm , and we’ll figure out which SM mortgage is best for you today and refer you to our contact with that bank.


  • Robert McLister April 16, 2010, 11:05 pm

    Hi Ed,

    Hope you’re doing well.

    Just a few clarifications here on the Scotiabank STEP mortgage.

    * Scotiabank does, in fact, allow direct investing from the STEP. Maybe that has changed since the last time you tried the STEP? If, for example, you have a ScotiaMcLeod account you can move money instantly from the line of credit to your investment account online. Scotia will also be adding the ability to instantly move funds from the LOC to a Scotia iTrade account. We hear this should be done later this year and it will be great for people who want a self-managed solution with low transaction fees.

    * We use the Scotia STEP for many of our Smith Manoeuvre clients and they prefer it over the TD HELOC for various reasons:

    —> The STEP has an open or closed variable-rate mortgage option whereas TD does not
    —> The STEP has a hybrid mortgage option (part fixed/part variable) for interest rate diversification
    —> The STEP allows for different fixed and variable terms in the same mortgage. (e.g. part 1-year fixed, part 5-year fixed, part variable, etc.)
    —> The STEP has higher lump-sum pre-payment options (you can often get 20% on exception instead of 15% at TD)
    —> The STEP has an optional VISA card linked to the LOC (not the investment sub-account of course) instead of a debit card
    —> The STEP allows you to double up payments any time (vs TD where you may only increase payments on an ongoing basis, and only once per year by up to 100%)

    * We’re finding Scotia’s interest rates just as competitive as TD at the moment (e.g. Scotia’s 1-year rate is in the mid 2’s or less, for approved borrowers)

    * The inconsistency among branches is not something we see in the broker channel. When we arrange a Scotia STEP for someone it is always 100% automatically readvanceable. The only exception is if a client is relying on stated income as opposed to proving their income in the traditional manner. The minimum readvance is a straightforward $100.

    In sum, the Scotia STEP is one of the better readvanceables for the Smith Manouevre in our experience. Here is a list with other options so folks can compare: http://www.myvirtualmortgagebroker.com/Smith-Manoeuvre-Mortgages-Smith-Maneuver.html

    With respect to the TD HELOC, our clients have had a much more seamless experience with the National Bank All-in-One, BMO ReadiLine, RBC Homeline, FirstLine Matrix, and Scotia STEP.

    Hope this helps at least somewhat.

    Cheers for now…

  • Ed Rempel April 18, 2010, 2:24 am

    Hi Rob,

    We have found TD to be amazingly competitive much of the time. We were still getting 2.1% for a 1-year on Friday (although it will apparently be up Monday). This is a lot lower than everyone else just during the last 2 weeks. As you mentioned, other banks are like Scotia closer to the mid-2s.

    Scotia allows direct investing now? If they do, then it is a recent change. Or do you just meant they allow transfers to Scotia investing accounts?

    When we talk about direct investing, we mean being able to use a void cheque from the credit line for a direct automatic payment. TD allows this, as do several other banks. Our clients with Scotia have all needed an extra chequing account in order to do the Smith Manoeuvre properly.

    We would have to confirm the direct investing. Have you found you can believe the banks? When we talked to various banks about whether or not we could invest directly from their credit line by using a void cheque, some said yes and some said no. We eventually found from experience with clients that every single bank was wrong about their own product! It did not work with all the bank that said it worked, and it did work for all the banks that said it didn’t. Weird, isn’t it? Have you found that?

    We would actually never recommend the options you mentioned about having a fixed/variable split or multiple mortgage portions in one mortgage. We always have specific recommendations for our clients on what term is the smartest to use at any point in time.

    In addition, having 2 mortgage portions means you lose negotiating power on the due date, so we would always recommend against those options.

    The downside of TD for us is that they charge legal fees and occasionally appraisal fees as well. We have some other providers that absorb all the fees.


  • Robert McLister April 21, 2010, 5:37 am

    Hi Ed,

    We do business with TD as well and they’re a great bank, but their HELOC is much less flexible than Scotia’s (and other lenders) as noted in the previous examples.

    Not to dwell on Scotia, but they do allow real-time transfers from the LOC to a ScotiaMcLeod Direct account. And if you want to use another brokerage you can set up automated monthly transfers from the LOC to a Gain account to a 3rd-party investment account. It’s completely hands-free once you set it up.

    TD’s rates are good but if it’s all about the rate, there are other lenders with better. As of today, Scotia is still in the low to mid 2’s. National Bank is even more competitive on 1-year rates through the broker channel (definitely lower than TD today), and National Bank has the most flexible readvanceable mortgage in the industry.

    By the way, have you been watching 1-year cost of funds lately? http://www.bloomberg.com/apps/quote?ticker=GCAN12M%3AIND
    If this keeps up, 1-years won’t be priced nicely for long.

    Regarding banks, it’s imperative to talk to the right people. At the branch level I go straight to the manager for detailed questions. Lower level bank reps (even mortgage specialists) often don’t have the experience to answer questions about direct investing, auto-debiting the LOC, interest capitalization, etc.

    As for hybrid mortgages (part fixed/part variable), I understand your point, but they are nonetheless very appropriate for certain types of borrowers. Moshe Milevsky, who you quoted in your article today, is a noted proponent of hybrids–despite authoring research supporting the long-term superiority of variable rates.

    Regarding 1-year terms, I know you are a big advocate of them. From a purely mathematical standpoint they often have an edge given the right assumptions. The devil is in the assumptions. (I’ll touch more on this in post that pertains to your 5-year Mortgage Trap story.) Suffice it to say, I would never want to imply 1-year terms are right for all. Blanket statements about suitability make me feel like I’m walking in a minefield, so I try to avoid them.

    Many people simply want long-term payment assurance, no hassle of having to renew each year, no uncertainty about what rate they’ll renew at every 12 months, no risk that this might be one of the 10-23% of times when fixed rates perform better than variable, no renewal fees, etc. We have to respect these viewpoints, despite what we ourselves believe to be the most advantageous term.

    In cases where an individual requests a 5-year term, we’ll often look at their cash flow, risk factors, etc. and demonstrate how a floating/1-year portion diversifies interest rate exposure and reduces potential interest costs and risk. This is where the benefit of a hybrid comes in. A hybrid’s diversification ability generally offsets any lost negotiating power at renewal. That is why hybrids do make sense in specific scenarios.

    Anyways, my fingers are getting a little tired. Cheers for now…


  • Ed Rempel August 4, 2010, 3:46 am

    Hi Rob,

    Have you noticed that rates have declined again? This is probably temporary, but it looks like the fears of large mortgage rate increases were over-done.

    Our experience is that what people want is usually because of lack of knowledge or advice about mortgages. Once people understand the facts about the huge interest savings, that they can still have fixed payments with variable, that avoiding penalties is important, and that effective negotiation requires that your mortgage comes due often and all at once, most will stick with 1-year fixed or variable rates.

    There are a lot of places people can go to get offered “what they want” in a mortgage, but we think it is far more important to give people real advice and education in what is the smartest mortgage for their specific situation.

    I guess my issue is that, in the last 20 years, there has been no time when I would personally have even considered any mortgage other than a variable or 1-year fixed (or shorter) – and definitely never a hybrid. That is why I would find it difficult to tell someone that they should take a 5-year fixed because they are nervous or broke, even though I would avoid them personally. I would rather address the nervousness with education and the broke situation by making sure they have an emergency source of cash.

    Whether we are working with our clients or just referring someone to an SM mortgage, we look at the entire financial situation and how to structure it best – not just the mortgage.

    Our experience is that once people are educated, have their financial situation setup properly, and get some real advice on what is smart for them, almost everyone understands the benefits of variable or 1-year mortgages.


  • Robert McLister August 4, 2010, 6:54 am

    Hi Ed,

    The nature of our work has us monitoring rates by the hour, so we’ve been watching the reversal in yields since April and it’s been extraordinary. Most of the money markets (not just the mortgage market but fixed-income traders with billions of dollars of exposure) were on the wrong side of the trade this spring. The economic environment was just way more ominous than the market could have predicted.

    Of course, hindsight doesn’t pay the bills. It will always be easier to predict today’s weather by looking out the window than by forecasting it three months in advance. Prediction is unfortunately a futile science. Rates are purely random and efficient beyond anything but the very short term.

    In any case, you raise a lot of points and there is 100% agreement about the importance of:

    • Education (hats off to sites like MDJ in this regard)
    • Prudent planning and budgeting
    • The overall long-term value of variable rates and 1-year terms.

    However, a number of issues are not so clear cut.

    Historical variable-rate savings have been established in academic studies, but those studies never included a rate environment like today’s.

    Fixed payment variables are great, but not if: A) the trigger rate kicks in and misinformed consumers are shocked to see their payments rise; or B) rising rates reduces principal repayment and causes amortization extension (i.e. it takes you a few more years to pay off the mortgage).

    Avoiding penalties is key, but not if it means selecting a term with refinance risk or budget risk–and the borrower can’t handle that risk.

    Re-negotiation every year is okay (for some), but not if a 1-year term is unsuitable for your risk profile or the switching costs offset the savings.

    The point is, each borrower’s circumstances are unique. It’s impossible to make the same recommendation to a 95% LTV first-time buyer with a 40% debt ratio and a 75% LTV renewer with a 20% debt ratio.

    You and I happen to prefer variables over fixed rates, but it is commonly known that they are not appropriate for everyone. In fact, if a broker were to put every client in a variable, he/she would likely be in violation of suitability rules and could lose their license.

    This is one example of why hybrids are a tremendous solution. People who would otherwise be compelled into choosing a long-term fixed rate can now diversify their rate risk and benefit from a variable as well. Borrowers can even tailor the rate risk precisely to their exact tolerance (it doesn’t have to be 50% variable. It might only be 25% variable. Moreover, if you keep the hybrid terms the same (e.g. choose a 3-year variable and a 3-year fixed) then you eliminate any chance of getting a poor rate on the short-term component at renewal.

    In sum, as honourable as it is to stick to our convictions, it’s just as important to remain open-minded. A prime example surrounds all the research that’s cited in the mortgage industry. The last 20 years have seen interest rates decline steadily from 14.75% (in the case of prime rate) to 2.25%. That is an astounding 85% drop! By default, any rate study performed during this period has severe selection bias in that it will always favour variable and 1-year rates. To blindly extrapolate historical rate performance into the future (at a time when key lending rates are near their theoretical bottom) is therefore a gamble.

    I’ll close on this note. We’ve had the pleasure of interviewing Dr. Milevsky (author of the industry’s most-cited fixed/variable research) on CanadianMortgageTrends.com. Here are a few of his own remarks that are pertinent for the times:

    • “An environment like we’re seeing today brings into question any type of historical study.”
    • “It’s not about speculating where interest rates are going.” (It can’t be done) “It’s about risk management.”
    • There have been “periods of inversion” where fixed rates were actually lower than variable rates. Dr. Milevsky’s original study found that 10-12% of the time it pays to be in a fixed rate, “and this might be one of them,” he states.

    The moral is: No one knows what tomorrow has in store. As mortgage planners, our primary duty is therefore to protect our clients from the downside while relying on correct probabilities to maximize the upside.

    Take care for now,


  • Ed Rempel August 4, 2010, 1:47 pm

    Hi Rob,

    Thanks for the insightful comments.

    By the way, rising rate environments have favoured variable over fixed much more than falling rate environments.

    You are right that interest rates have fallen 85% in the last 20 years, which is part of why variable rates have cost less. However, if you look at studies of rates from 1950-1975 (like Moshe Milevsky’s) when rates shot up about 2% to about 15%, the variable rate beat the 5-year fixed 100% of the time.

    In rising rate environments, there is generally a bigger difference between the 5-year fixed rates and short term or variable rates.

    We don’t expect large rate increases – just a rise of perhaps 1.5-2% from the bottom over a couple of year back to a more normal interest rate level. But my point is that rising rate environments are even more convincingly in favour of variable rates than falling rate environments.


  • Robert McLister August 5, 2010, 4:37 pm

    Hi Ed,

    That’s an interesting conclusion and there’s lots we can delve into there, but first may I ask:

    * Which rate were you referring to rising from 2% to 15% in 1950-1975?
    * Which particular study have you cited with respect to variable rates beating fixed rates 100% of the time during that time period?


  • Tom March 18, 2011, 9:42 pm


    I am a real estate agent in Ottawa and there is a lot of talk in my office about interest rates this year. I am buying a home and moving in 3 weeks, have to make a mortgage decision soon/

    Here is my situation. Need to get 268k mortgage. Want to do SM

    In december 2010, I got pre-approved for President choice 5 year fixed at 3.52% the rates when up across board.

    Option 1. Go with PC at 3.52% and get Manulife1 in second position at prime+0.50%. Manulife said they will let me to increase the LOC once anually, by the pre-payment please note pre-payment and not premiums.
    The PC has 20% prepayment, anytime, any amount per year. No revolving LOC with PC, only normal loc.

    Option 2: Another Bank offered me prime-0.90% or fixed 5 year for 3.89% prepayment 20% any amount, anytime and I can double up each payment. Get revolving line of credit at prime+0.50%
    Get a mixture of variable and fixed…but who knows by how much the rates will go up from now until 5 years is out……

    Option 3: Another bank offered prime-0.90% and/or fixed 5 for 3.69% but the pre-payment is only 10% and only one lump sum in a year, plus douple up the payment option…
    The diffrence between 3.52% and 3.69% is around $2,000 in extra interest over the 5 year term.

    Option 3: get just the variable for 268k with revolving line of credit

    Option 4: get jusr the fixed at another bank for 268k with revolving line of credit. Painful since I have to swallow extra 2,000 in interest. Difference between 3.52% and 3.69% and between 3.69%
    and 3.89% additional 2500 in interest…..

    Any input appreciated what is the best thing to do?
    Thanks Tom

  • OttawaGuy2 August 30, 2011, 12:22 pm

    I am surprised that there was no comments for the above.
    I am in the same boat now and refinancing my mortgage in October. Any help would be greatly appreciated.

    My Scenario:
    Yearly income: ~90000.00
    Value of my primary residence: ~450000.00
    Current mortgage: 200000.00
    Other Debt: None

    1) Get HELOC for the maximum amount against my residential property. Then use part of this HELOC as 20% down payment to buy a rental property.
    2) Get following rate.
    a) 5 years variable Mortgage: Prime – 0.90
    b) HELOC: at Prime (currently at 3.0%)

    Details of prospect rental property:
    Type: Single family town home.
    Price: ~300000.00
    Down payment: 60000.00
    Mortgage: 240000.00

    I am very interested in “all in one” mortgage product or any other one which may satisfy my goals.

    Any inputs please.

  • FrugalTrader FrugalTrader August 31, 2011, 5:42 am

    @OttawaGuy, you could go the route of traditional mortgage + HELOC which would give you a 160k credit limit. Or you could go readvanceable which is basically the same thing, but allows you to tap into your equity as it’s available. I would pick the one that gives you the best overall rate.

    I’m not a big fan of products like M1 which charge higher rates.

  • OttawaGuy2 August 31, 2011, 10:14 am

    Thanks lot @FT.
    Other questions is regarding HELOC for the future investments:

    1) What is the best way to setup HELOC, if I want to use the remaining and possibly growing HELOC later for other investments such as more real estate or SM?

    2) If I use the HELOC just for investments (no personal use) , do I still need sub-accounts for accounting purpose in case audited by CCRA?

    3) I would appreciate if you can point me to the right bank or right planner who can help me with the setup?

  • Ed Rempel December 7, 2011, 4:56 pm

    Hi Ottawa Guy,

    The key for setting up the HELOC is to be able to track each type of investment separate. You should have one credit line for the SM and a separate one for a rental property. Both should be separate from any non-deductible borrowing.

    The reason for this is that the interest for each type of investment is entered on different lines on the tax return. Also, if you sell some investments or a rental property in the future, you need to be able to track which credit line to pay them against, so you can track the remaining deductibility of each credit line.

    Does that answer your questions?


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