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.

Please Watch your statement closely.

Cheers
Tyler

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.

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

DAvid

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

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.

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?

Thanks

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

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

DAvid

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

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.

Thanks
Tyler

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

I am purchasing a house at 540K. I made down payment of 120K (22%) so i should qualify for HELOC of 420K at 4.75%.

Everymonth, I will make a payment of $732 in principle and $1663 for interest. Then i use this $732 to borrow $732 to invest. The interest on this loan $732 per month is $2.9. Is this $2.9 dollar is the amount I use for my tax deduction?

Thanks
Tyler

Yes, our contact information is there. A good idea for you would be to come to one of our seminars. They are educational seminars about the Smith Manoeuvre and related financial issues – not sales presentations. They include some of my favourite “conventional wisdoms” – things most people believe that are actualy false. Attending the seminar is a good, informal way for us to meet and see whether we will want to work together.

The dates are on our web site, but the next ones are Feb. 26 & 28. You will need to register ahead of time to get in.

Ed

i will follow through and contact you- ed rempel for information/advice. i assume that you are at http://www.edrempel.com?

sincerely
rpost

If you look at cannon_fodder’s spreadsheet, elsewhere on this site, you can see how it works. You end up investing a lesser amount each period, as a greater portion of the investment amount pays the interest on the HELOC. The real growth in the portfolio occurs only once the full conversion occurs, and you have the full valus of your mortgage payment to contribute to your portfolio.

rpost also said: “With house prices increasing, how often should one get their house re appraised to maximize the SM benefits.”

This is a balancing act. It is possible for your home to increase in value at a rate greater than your ability to service a loan at it’s new value. Thus, while you may be able to obtain an increased appraisal value, you might not be able to use that increase.

Smith does not indicate that you should re-appraise; his claim being that you keep your costs within the original mortgage amount. While this may have been to help with the financial comparisons; re-appraising steps you outside the original premise.

DAvid

You do have a lot of questions.

- Before the questions, you mentioned that the net gain is that the investments need to return more than the interest rate on the investment loan. This is not actually true. They need to beat the investment loan over the long term after tax. The investment growth is compounding, which may or may not be true of the interest (depending on how you set up the SM). The loan interest is fully tax-deductible every year, while the growth of the investments is tax-preferred and can be deferred many years into the future with tax-efficient investments. In general, over 10-15 years the investments would need to make about 2/3 of the interest rate on the investment loan to break even.

- From your questions, it does not sound like you have the right products. MCAP does not have a readvanceable mortgage that works with the SM. You also should have, in most cases, an investemnt credit line, instead of an investment loan. A readvanceable mortgage is a mortgage linked with a credit line so that you gain credit available in the credit line with each mortgage payment. It is one product, but the mortgage is a subaccount within the credit line.

- Yes, most readvanceable have variable and fixed rates. If you are trying to pay it down, you should stick with a variable or 1-year mortgage. Variable is particularly adviseable now with rates declining. Prepayment terms are similar to other mortgages, but fully open readvanceable mortgages are also available. If you want advice on what mortgage to get, you can contact us through “Ed’s Mortgage Referral Service” referred to elsewhere on MDJ.

- Readvancing to invest is normally done with each mortgage payment eg bi-weekly. This is easily done with a readvanceable mortgage, but will be very difficult the way you have it with an investment loan.

- You are missing the interest capitalization. You borrow the money from the investment credit line to pay its own interest. Again, this is easily done with a readvanceable mortgage but will be very difficult the way you have it with an investment loan.

Generally, getting your home reappraised so you can invest the difference is best done as often as you can without paying any fees. We have found that every 2nd year we can get a free appraisal, and often every year if there is some other refinancing happening or if your home rises signficantly in value in one year.

You can use a DRIP plan instead of mutual funds if you can get the cash flow to work. You would then probably just buy once every so often, instead of investing bi-weekly as you can with mutual funds. You are restricting your investment choice if you only use DRIPs and they tend to be only very conservative large caps. If you look at MERs, we recommend to look for value for your money, instead of focusing only on cost. We use mutual funds managed by “All-Star Fund Managers” that have long term track records of beating the indexes by wide margins (after the MER) and that we believe will continue to beat the index over time even in very different market conditions.

Ed