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Smith Manoeuvre Mortgage Comparison II – Top Pick!

To continue with part 2 of our discussion about Smith Manoeuvre Mortgages, Melanie McLister, a mortgage broker from Canadian Mortgage Trends,  will now explain the various columns in her comparison table and tell us about her top re-advancable mortgage pick to complement the Smith Manoeuvre! 

Last time around we explained how “readvanceable mortgages” work and how to get them.  This time we’ll review some features to keep in mind if you’re shopping for one.  Our discussion will follow the columns in our Smith Manoeuvre Mortgage Comparison.  We’ll skip the columns we touched on last time. 

Here we go…

Maximum Loan-to-Value 

Most people who implement the Smith Manoeuvre will make at least a 20% down payment.  This way they avoid paying expensive mortgage insurance fees. 

Virtually all lenders offer 80% financing on their readvanceable products.  If you want to put down only 10%, though, there are lenders who will do it–but you’ll pay mucho grande mortgage insurance premiums (plus interest on these premiums if they are rolled into your mortgage). 

Minimum Credit Score

This number is the lowest credit score you can have and still qualify.  

If you don’t know your credit score you can pull it yourself here, or have a mortgage planner do it for free.  Note:  Your credit (Beacon) score is not part of your credit report.  If you get it yourself from Equifax it will cost you $23.95.

Refer to this article to see how you can get a credit report for free from Equifax. 

Maximum Loan Amount 

This is the maximum amount you can borrow for both your home and line of credit (LOC) combined.

Available Mortgage Terms / Interest Type 

The mortgage term you choose affects your interest rate, and the total interest you pay.  Generally, shorter terms carry lower rates—but that’s not always the case.  For example, many lenders currently charge higher rates on their 1-year mortgages than their 5-year mortgages.  That’s due in part to competition and the sheer demand for 5-year products. 

In any case, you should definitely shop around to compare rates and terms, or have a good mortgage planner do it for you at no cost. 

You also have to consider risk versus reward.  Statistically speaking, you’re better off choosing a shorter fixed term, or a variable rate mortgage, versus a longer-term fixed rate.  If history is a guide, it’ll save you thousands over a lifetime.

However, if there is no room for chance, and you absolutely must know the interest and principle you’ll pay each month, then fixed is for you.  Right or wrong, over 70% of Canadians choose fixed-rate mortgages, and the 5-year fixed is by far the most popular. 

Capitalized Interest

A minority of lenders let you capitalize the interest from your line of credit (i.e.  let you pay your line of credit interest from the line of credit itself).  This makes life a LOT easier when implementing the Smith Manoeuvre, so it’s a key point to consider.  Without this feature, you need to manually pay your line of credit interest yourself each month. 

Fees

Fees are everyone’s favorite topic it seems.  Most feel that the evil fee chargers must be defeated!  

In reality, as competition heats up among lenders, fees are coming down.  In most cases (but not all) you’ll at least pay legal fees and/or appraisal costs.  A minority of lenders also charge re-advance or monthly maintenance fees.

LOC Interest compounding 

The line of credit interest compounding period affects the total interest you’ll pay over the life of your credit line.  Let’s use a mortgage example to illustrate.  On a 6.25% 25-year mortgage you’ll pay ~$100 more over 5 years for every $100,000 borrowed if interest is compounded monthly instead of semi-annually.  In other words, semi-annual compounding is the way to go, other things being equal.

Pre-payment Privileges 

If you expect to come into money, make sure your lender allows generous pre-payment privileges (20% minimum per year).  Otherwise you’ll pay interest or penalties for no reason.  Keep in mind, however, that only a minority of Canadians actually pre-pay their mortgage by any significant amount.  Most of my clients have good intentions in the beginning, but end up making only their scheduled payments each month.

Maximum Amortization 

This applies to the “mortgage” portion of your loan (not the line of credit portion).  The longer your amortization, the lower your payments and the more interest you’ll pay.  Keep it at 25 years if you can or you’ll offset much of the Smith Manoeuvre’s benefit.

LOC Call Provisions 

If your lender calls in your line of credit it means they want their money back.  In most cases, this is a trivial point because lenders generally won’t want to break their relationship with you—unless you don’t make your payments.

Automatic LOC Increases 

This is a biggy.  You’ll want to make sure your lender automatically increases the available credit in your LOC as you pay down the principle on your “mortgage” account.  Otherwise you’ll be hassled by calling the lender (or even going into the branch) every month to make the adjustments. 

Note:  This pertains to your line of credit “portion” (or LOC sub-account) and not the total credit you are approved for when you take out the mortgage.  This is often a confusing point to many people.  Your TOTAL authorized credit (your “mortgage” and all lines of credit combined) will never automatically increase. 

Re-application When Increasing LOC

As you pay down your “mortgage” principle, you DON’T want to have to reapply to have your line of credit ceiling raised. 

Re-appraisal to Increase LOC

If you live in an area where home values are increasing rapidly, and you want to borrow more to invest with, look for a lender that will increase your LOC with a simple re-appraisal.  Merix, for example, makes it easy.  They basically just send out an appraiser to your house.  Some lenders, however, consider this a refinance and you’ll need to re-apply and often pay more legal fees. 

Maximum Credit Lines

To implement the Smith Manoeuvre you just need one line of credit.  If you want to have free credit for other things then you’ll need additional lines of credit so your personal interest is not co-mingled with your tax deductible investment interest. 

If you want to spend your credit line on other things, you can choose a lender that offers more than one LOC (or one LOC with multiple sub-accounts).  Alternatively, you can simply apply separately for an additional line of credit from your bank or mortgage planner.

Automatic Investing from LOC 

Very few lenders let you invest directly from your line of credit, but that doesn’t mean you can’t automate the process somewhat.  Most lenders will let you set up automatic debits each month.  That way, your money can easily be transferred from your investment line of credit to your brokerage or 3rd-party investment account.  Alternatively you can give your financial planner post-dated LOC checks with monthly investing instructions.

Portability 

If you need to move, it’s nice to be able to take your Smith Manoeuvre mortgage with you.  Some lenders allow for this. 

In most cases, however, you’ll need to re-apply all over again.  If your financial situation hasn’t deteriorated then your bank or mortgage planner will make this process relatively painless. 

Miscellaneous

This column outlines each lender’s unique features and quirks.  It’s worth a scan. 

That just about covers the comparison table.  The only things we haven’t talked about yet are rates and the best overall Smith Manoeuvre product.

In terms of rates, you’ll find the best deals on products that are not pure lines of credit.  LOCs are typically at or near prime rate, which is 6.25% as we speak.  The products with a traditional “mortgage” component currently offer rates up to ½% lower.  The trade-off is that you can’t freely pay them off any time you want.  For current rates call the lender directly or have a mortgage planner do the legwork for you. 

Now for the grand finale:  Which candidate is the best?  As you might surmise after reviewing all the variables, it’s hard to single out the “best” product, although some are clearly nowhere close to “the best.” 

The most popular product we deal with is FirstLine’s Matrix.  Here’s why: 

  • There are no fees.
  • Your principle is fully and automatically re-advanced after you make your mortgage payments.  There is no need to re-apply.
  • The “mortgage” interest rate is usually the lowest available for this type of product.
  • The LOC interest rate may be below prime in some cases.  This is a benefit unavailable with most other lenders.  (Some restrictions apply)
  • The LOC interest compounds semi-annually instead of monthly.
  • If you want to automatically capitalize the LOC interest and automatically invest from the LOC, you can do so using M-Link (M-Link charges a one-time setup fee and $39.95 monthly fee however.)
  • FirstLine’s pre-payment privileges are the best in the industry.
  • FirstLine is a division of CIBC and very easy to work with.
  • The “mortgage” and LOC portions are together considered one charge term. That means, unlike most lenders, FirstLine's LOC is not reported on your credit bureau. As a result, your credit score is generally unaffected by this debt.

The “best” Smith Manoeuvre mortgage is open for debate. While FirstLine’s Matrix is a solid choice, sometimes a client’s individual circumstances will require a different product.  For example, if you want your “mortgage” component to have a variable rate or a 1-year term, a bank product may be your best bet.  If you work with a mortgage planner, make sure they are willing to recommend a bank-only product if it’s in your best interests. 

As months go by this discussion may well become outdated.  I know of several changes in the pipeline already, as well as lenders who are launching new readvanceable products.  It’s a dynamic industry out there. 

Stay tuned!

About Melanie

Melanie 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 Note

This article is not financial advice and the information is subject to change at any time.  Please consult a qualified financial planner to first make sure the Smith Manoeuvre is right for you.  Then have a good mortgage planner recommend the optimal mortgage for the job.







78 Comments, Comment or Ping

  1. hum… that Matrix seems to be pretty good, I better send this post to my product development team right away ;-)

    I would add a couple of tricks on the sections you mentioned.

    Maximum Loan-to-Value: From my own experience, unless you think you are Warren Buffet’s son, you have no chance to cover for all the fees involve with a 90% LOC­. In addition to that, you will have to put it back to 80% after a certain amount of time. This is definitely a “tricked product” offered by some institution.

    Capitalized Interest: To get around that, simply set up a payment (let’s say monthly) from your checking account. Then, a few days after the payment is made, you simply have to set up an automatic transfer from your LOC to your bank account of the same amount to cancel the previous transaction. Banks would not allow that in general, but the system is not smart enough to understand what you are doing ;-)

    Automatic Investing from LOC: Instead of asking your bank to make a trsf to your investing account. Give a void cheque to your investment company so they can automatically debit your LOC account instead. You will avoid series of post dated cheque.

    Credit Bureau Reporting: If you plan on having a fully used line of credit, you might want to be careful with the institution you choose. Some of them report the LOC to the credit bureau (Like TD and RBC). It will definitely hurt your credit bureau (credit balance to credit available ratio will be too high).

    FT, I think you found the best product, NBC all-in-one is pretty good but still doesn’t offer all that was mentioned in your post. Very good analysis!

  2. 2. Matt Houser

    Why is a re-advancable HELOC required? Is the maneuver not possible with an ordinary HELOC?

    For example, let’s say you have a $100,000 morgtage. Why can’t you get a HELOC for $100,000 and then just take from the HELOC as you pay your mortgage? Why do they have to be linked?

    Thanks,
    …Matt

  3. Matt, you can do the SM from a HELOC (this is the way I do it). However, if you prefer to have your “bad debt” into a regular mortgage, you need a re-advancable mortgage combined with a HELOC.

    The major advantage from this technique is that you can lock your rate for a few years instead of being stuck with a variable rate. You can also benefit from a lower rate for the “bad debt” part with regular mortgage.

  4. Thanks again FT for making this comparison possible.

    Just a quick note. Yesterday we also added Canadian Tire’s new All-in-One mortgage to the comparison table–in case you’re interested in how it stacks up:

    Smith Manoeuvre Mortgage Comparison

    Have a wonderful day,
    Melanie

    P.S. Great tips FB–especially the interest capitalization work-around!

  5. 5. Jordan

    Wouldn’t capitalizing the interest that way risk the deductibility of the LOC? To be safe, shouldn’t you have a separate account for the transfers to and from the LOC?

    Has anyone had any experience with RBCs product? It seems like the best big-bank product from the comparison table, but I might be missing something.

  6. 6. Patrick M.

    BMO’s ReadiLine just got more interesting:

    [...] “Effective until October 31, 2007 customers who take out a five-year term mortgage or renew or refinance an existing mortgage for a five-year term will receive BMO’s Performance Plan with unlimited transactions for free over the term – a savings of more than $800, which in some cases could translate into an extra mortgage payment.” [...]

    “For those not sure whether to go fixed or variable, BMO’s promotion extends to its popular Homeowner ReadiLine product which combines the
    advantages of a traditional fixed-term mortgage with the variable rate benefits of a line of credit, allowing customers to take advantage of the best of both worlds.” [...]

    http://www.newswire.ca/en/releases/archive/September2007/10/c7126.html

  7. Jordan, tax rules state that if you borrow to pay down business/income producing debt, that debt is also tax deductible. So no, capitalizing the interest will not reduce the tax ded of the investment loan.

  8. Hi Jordan, I would defer any official advice on interest capitalization to a qualified financial advisor. Nonetheless, I would agree that it’s best to set up seperate dedicated accounts before making funds transfers. It’s never wise in my view to co-mingle SM funds with other money. Perhaps Ed Rempel or another FP here can comment. Cheers, Melanie

  9. 9. Jordan

    I realize that, but the original comment from The Financial Blogger above said:

    “To get around that, simply set up a payment (let’s say monthly) from your checking account. Then, a few days after the payment is made, you simply have to set up an automatic transfer from your LOC to your bank account of the same amount to cancel the previous transaction.”

    Using your checking account like this seems risky from a taxation point of view. Setting up a 2nd LOC to capitalize the interest is more common in the SM is it not?

  10. P.S. BMO has one of the best big-bank SM products thanks to its pre-payment privaledges. Now with free banking it just got better. In a few years and who know’s what lenders will do to gain market share. But I think it will just keep getting better for Canadian homeowners.

  11. Thanks for the heads up Patrick. When I contacted a BMO rep a couple months ago, they also offered me 5 years free banking (along with free air miles) if I got a 5 yr fixed mortgage with them.

  12. Excellent post

    I just arranged TD HELOC for a new primary residence (got TD to match CIBC’s 2 month prime-1% offer ~$300), but now this gets better as I can go in with BMO or CT’s HELOC products.

    Also, I will need to ask those points (captilize interest, auto re-advance credit, etc..)

    Will update back after tomorrow night’s appointment

    NSB

  13. 13. harvey

    Melanie,I like your comparison and your verdict about Firstline but how can you justify paying 40/monthly via mlink and doing it yourself via BMO orTD.Secondly,Firstline doesn’t offer open mortgage versus BMO offers open term.
    Firstline is only good if you’re going through a broker but to it yourself(layman approach) BMO or TD is a better choice.

  14. Hi Harvey!

    Thanks for the opportunity to clarify. I don’t advocate using M-Link. I just note that it is an option if you want to outsource all of your account maintenance.

    If it were me, I would do everything myself and save the $40 a month. (M-Link also has a one-time set-up charge that makes them even less appealing.)

    As for BMO and TD, I’m not aware of their products being open, unless you’re referring to their lines of credit. If it’s the mortgage portion you’re referring to, I will need to look into it. (Can you clarify?)

    Open mortgages are typically offered at notably higher interest rates. (I’ll try to get their actual rates and post back. If you know them off-hand you might want to post them as well.)

    In such cases, BMO/TD vs. FirstLine may be an apples and oranges comparison. In addition to its other noted benefits, FirstLine’s mortgage and line of credit rates are pretty much the lowest around for this type of product.

    I’ll defer further comparison, however, until I confirm with TD and BMO. Have a great evening!

    Melanie

  15. Hey Mel,

    I think what Harvey might be referring to is BMO’S Open variable mortgage @ prime – 0.85%. Note that this mortgage is only available to clients with better than average credit scores and income.

  16. 16. Harvey

    Yes, BMO has a open variable term and ofcourse the line of credit is always open at most institutions.
    Td does not have an open term in the HELOC product which is a fair comparison to Firstline because of it’s limited pre-payment privileges but BMO is completely open.

  17. Ahhh. OK. Then you’re referring to BMO’s 3-year product right? (They don’t offer a 5-year variable open as far as I know.)

    Their 3-year variable open is priced at prime, currently 6.25%. However, BMO will discount it depending on the client. The prime – 0.85 deal was an old promotion according to BMO but you might still be able to negotiate something similar (not sure).

    You’re right in that lines of credit are open no matter where you go. In almost all cases they’re priced at prime rate. In FirstLine’s case, though, you can often do better than prime–and it compounds semi-annually instead of monthly. Plus you get a fixed rate on the mortgage portion if you absolutely need the security of a fixed.

    In any case, I’ve got a call in to BMO. I’ll post again once I hear back, and also update the comparison if needed. Thanks as always for the feedback and have a good night!

  18. 18. Ed Rempel

    Hi, Melanie,

    How do you find a mortgage planner that will recommend a bank-only product if it’s in your best interests?

    I was with you on most of your mortgage comparison – but not with your top pick. Most of the bank products are easily better.

    The issues with Firstline are:

    1. Fees – you will have to pay legal and appraisal fees – that can usually be avoided with the banks. This can be $500-$1,000.

    2. Can’t invest from credit line – With Firstline, there are more manual transactions, since they don’t allow investing directly from the credit line.

    3. Rates & terms – Firstline does not offer variable or 1-year terms in their Matrix mortgage. Their web site shows only rates over 6%. Studies show variable and 1-year terms virtually always save money over longer terms. Especially now when variable rates are lower than fixed rates and interest rates are about to start declining (next week in the U.S.) and may well drop a lot, why would anyone want to lock in at today’s high rates?

    4. Firstline is the one institution that seems to pay mortgage brokers more for giving a smaller discount to their customers. The broker can make a higher commission or points for a future tight deal if the broker manages to get their customer to sign at a higher rate (or longer term). I don’t know the details of this, but some other mortgage brokers I’ve talked with tell me to be careful with brokers recommending Firstline. Do you know the details of this, Melanie?

    We would like to work with a mortgage broker, but we’ve found that the best SM products are all with the big banks.

    Ed

  19. Hi Ed,

    Hope you are well. Thanks for the opportunity to clarify.

    Finding a suitable mortgage planner is not unlike finding a suitable financial advisor. It’s basically an interview process. If I were researching a mortgage planner, and I wanted unbiased advice, I would ask them directly if they were willing to recommend a non-broker lender if it were in my best interest. We do it quite frequently.

    In response to your questions:

    1. I would disagree. Our clients don’t pay appraisal fees for the Firstline Matrix. As for legal fees, they apply almost everywhere unless on an exception basis. There are very few lenders that also pay your legal fees. When they do, this benefit is usually offset by other limitations of their products. We run all the numbers for our clients, and in the end, they know the bottom line–including legal fees.

    2. There are a variety of ways to invest from a line of credit. It can be fully automated at FirstLine at a cost, but most people can do it very easily by themselves, or have a financial advisor “manually automate” (an oxymoron I know) the process for them each month.

    By the way, in the spirit of knowledge sharing with our audience, which product(s) do you work with that permits investing directly from a LOC?

    3. We have access to rates far below Firstline’s posted rates. Don’t go by their webpage. It’s like going to RBC’s website and looking at their posted rates.

    In general, predicting interest rates is not a game we usually play. However, I will note that there are just as many “experts” predicting higher rates in the next 12 months.

    Moreover, a mortgage planer can often try to sell variable rates till they’re blue in the face. But most people simply don’t like variables—and the numbers reflect that. Many people are willing to pay for security or feel confident that, with rates near historic lows, a fixed is a long-term safe bet.

    By the way, FirstLine presently offers a 2-year as their shortest term. As noted, if a client needed a 1-year or variable we would not put them in the Matrix.

    4. FirstLine is a division of CIBC and one of the strongest and most reputable lenders in Canada. Their products are flexible, their turnaround time is exceptional, and their rates are top notch.

    Several lenders offer incentives, just like investment companies in the financial planning business. FirstLine is not unique in that sense. Regardless, incentives should never affect the judgment of a professional mortgage planner.

    By the way, the points system at FirstLine is actually beneficial to many clients because, with full disclosure, using points lets you customize certain terms of their mortgage—like charging a higher rate and rebating it back as cash so clients can pay closing costs. Also, points are not accrued merely by selling a higher rate. Points are award for a variety of things (talk to a FL rep for details).

    I won’t speak for the industry, but I will speak for myself. We give clients the most competitive rates we can. In fact, in our case clients benefit from “platinum” status at FirstLine, a status that allows for preferential interest rates across all FirstLine products.

    If anything, it’s reasonable to suggest being more careful when dealing directly with a bank. How often do banks try to sell posted rates? That almost never happens when dealing with a professional mortgage planner.

    In the end, the “best” SM product depends on the individual needs of the client. Just like you would never recommend one investment to all your clients, we would not recommend the Matrix in all cases. In some cases, a bank product like BMO’s is better. Nonetheless, FirstLine happens to have the product we feel has the most overall benefit at this time.

    Take care,
    Melanie

  20. 20. Houska

    Further to the discussion on TD/BMO fully open mortgages, Scotiabank gave us a fully open five year variable P-0.75. We are doing a hybrid SM with the true mortgage at five year variable closed P-0.9, a large chunk of invested borrowings (tax deductible interest) at P-0.75 open, and a small HELOC at P which we will periodically manually sweep into the P-0.75. It’s a bit of a hassle, and the P-0.75 product has principal repayments blended into the payments, but at a 40 year amort the cash flow requirement is the same as P interest only, so it works out to an effective post-tax discount of 0.375% over a HELOC at prime. Note the principal repayment and limit increase issues make this more suited to someone with excess cashflow rather than someone who wants to capitalize their investment expenses.

  21. 21. mcf

    Houska,

    How are you “sweeping” the HELOC balance into the mortgage? I’m with Scotiabank as well, and they tell me that there’s no way of increasing the mortgage principal except at renewal time.

  22. Hi Melanie

    I hope this doesn’t turn into a discussion board.
    However I do wonder why there are no CIBC in the comparison table, or is that essentially FirstLine?

  23. NSB, for some reason or another CIBC does not offer a re-advancable product.

  24. FT, You beat me to it. I feel slow against your 3 minute response time. LOL

    I think the closest thing CIBC has is it’s Home Power product at prime rate, currently 6.25%. (Although it is discounted initially for 3 months at P-1.01%).

    Melanie :)

  25. Thanks, FT and Melanie

    Isn’t CIBC HomePower essentially another HELOC, which by definition should be re-advanceable?

    Anyway, FYI, I did talk to TD today in person while signing up my HELOC (correction to the SM table perhaps?)

    1. You can capitalize interest – pay HELOC interest with HELOC by transferring into HELOC first, then withdraw from HELOC after. It’s not recommended though

    2. TD HELOC interest is calculated daily, but compounded semi-annually (I assume this is better for me?)

    3. HELOC credit is auto re-advanced without applying. Still needs application to extend the credit

    4. No setup fee, no appraisal fee (they go by MLS listing if it’s recent enough)

    5. I got free $300 from TD, by telling them about CIBC’s P-1.01% for 1st 3 months. Gonna get another $300 from another HELOC opened at TD

    6. I see on the document that TD seems to be able to do PAD into investment account, as well as PAD into HELOC from my chequing account (for minimum payment of interest only)

    That’s about it, I love TD’s long hours, and kind service, plus I get to see everything on EasyWeb (bank accounts, credit cards, mutual funds, LOC/HELOC) – this is hard to replace by others.

  26. 26. S. Sampson

    NSB,

    I looked into TD as well and wasn’t overly impressed. They also gave me different information than you.

    They quoted almost 6% on the mortgage part and 6.25% on the HELOC. You can definitely do better elsewhere.

    They also said they CANNOT automate interest capitalization because of system restrictions.

    Thirdly, interest on the LOC part is not compounded semi-annually (only the mortgage part is) according to what I was told.

    Lastly, I plan to pay off my mortgage in chunks and have found much better pre-payment options elsewhere.

    Steve

  27. Thanks Steve

    I keep thinking, perhaps we’re talking about different products. Yes, TD HELOC was at prime (6.25%), as with most HELOC (not the fixed portiont or sub-account).

    I did say you have to transfer in the payment, then withdraw from HELOC, for interest capitalization, so yes it’s not automated

    Good point on the interest compounding, I’ll need to clarify that tomorrow when I meet with TD.

    Certainly HELOC is not for everyone, just like SM is not for everywhere, nor Manulife One, nor CT’s One-and-Only.

    We hope to pay off our mortgage in 1~2 years by shifting mortgage around rental properties and very aggressive savings, hence we did not require a traditional mortgage

    I was told, despite me eager to utilize SM, it still is better to pay off your primary residence mortgage (if you have the money), than doing the SM on the mortgage (unless you can guarantee high return on SM investments)

    NSB
    http://www.neverstopbuying.com

  28. 28. Ed Rempel

    Hi NSB,

    Your mortage does not become deductible if you refinance your home mortgage into your rental mortgage. You can only deduct the interest from your original purchase of your rental. If you transfer your home mortgage onto it, it is NOT deductible.

    Interest is deductible based on the reason you borrowed. Any amount you borrowed to buy your home – no matter where you refinance it.

    Thanks for the entertaining comment from your TD contact! It shows that bankers know nothing about the SM. The SM has no effect on your ability to pay down your mortgage. The faster you pay it down, the more you can reborrow with the SM. Your TD contact obviously does not know the difference between ordinary leverage and the SM.

    Ed

  29. 29. Ed Rempel

    Houska,

    Your Scotia mortgage is open – but your term in the STEP program is not. You can change your mortgage, but you cannot move it from Scotia until the end of the term without penalty. “Fully open” does not always mean “open!

    Scotia has good rates, but does not automatically advance, nor can you invest directly from the credit line. I know several cases where a branch manager of Scotia agreed to have his staff manually increase the credit line once each month and manually transfer the available balance in the SM credit line to a chequing account in order to keep the mortgage.

    They would need to do this to do what you can do automatically at several other banks. You may have zero negotiating power at Scotia until your term comes due, but ask your branch manager if they will do the credit line increase and sweeping the account for you. All of this happens automatically at several other banks.

    Ed

  30. 30. Ed Rempel

    Hi Melanie,

    We’ve found that the best SM mortgage depends on the client, but is either BMO, Royal, or TD, and occassionally Manulife One or Merix. In all cases, though, one of these would beat Firstline.

    1. Most of the banks will routinely absorb all legal and appraisal fees if you have the 20% down – if you know how to negotiate with them. None of our clients with 20% down have paid any legal or appraisal or setup fees – or any fees at all. With effective negotiating or the right contacts, all fees can disappear – even legal fees.

    2. Why would you want to pay a fee to “manually automate” (Thanks for that term – I love it!) investing from a credit line when several banks do it for free (eg. BMO, TD)?

    3. We don’t find Firstline competitive at all because of our bias to variable or 1-year rates, which they don’t offer in the Matrix mortgage. You are right about what most people want. Public education on this is essential.

    I’ve done my rant on this a few times, but studies show that taking five 1-year mortgages have saved money over one 5-year mortgage 100% of the time since 1950! Banks and mortgage brokers make much more money on 5-year mortgages and have subtly managed to get people to think wasting money on the “5-year mortgage trap” is somehow safer. How can a 5-year mortgage be safer when there is a 100% chance of wasting money???

    A Manulife study shows that the average Canadian wastes $23,000 in their life because they took 5-year mortgages instead of a variable mortgage (at prime). This means the average Canadian works a full year longer in their life just to make up the money they waste by falling into the “5-year mortgage trap”!

    Especially now, when rates have peaked and are at basically the highest point of the last decade, sticking with variable is highly recommended. In a normal interest rate market (which we have not had for 2 years), variable is lower than short term which is lower than long term rates. Today, we have a flat or inverted yield curve which essentially always results in rates starting to decline.

    You can’t rely on bank or mortgage broker “experts” (since they are always trying to motivate everyone to fall into the “5-year mortgage trap”), but few market or bond experts have been expecting high rates (except for short term moves which is what they usually talk about). The bond market has been anticipating rate declines since early July.

    One of our top fund managers just advised us that they are expecting rates in the US to drop by at least 1.5% by the end of 2008. This would force big drops in Canada as well. It will be interesting to see if we get a drop that sharp.

    I agree with you completely, Melanie, about banks selling posted rates. One of my pet peaves is that they mail out renewals at posted rates, which most people sign.

    By the way, are you connected with M-Link at all, Melanie? They are just a mortgage broker firm. I’m surprised that you mention them. Do you work through them sometimes?

    You do sound like a very nice person, Melanie, and I am impressed that you fully disclose the Firstline point system to your clients. I have never heard the details and would appreciate knowing how their point system works.

    Ed

  31. Hi Ed,

    Fun little dialog. Thanks for the kind words. If you ever have specific questions feel free to give me a buzz any time.

    The primary benefit of the mortgages you mentioned versus FirstLine are their inclusion of 1-year and variable rate mortgage options. (We’re pushing for them in the Matrix as well). Other than that, FirstLine’s multitude of benefits (each explained in my article) outweigh most other factors for our typical client.

    You definitely won’t get an argument from me as to the historic merits of variable rates. We advise clients regularly as to the benefits of variables. We also do stories about the variable vs. fixed debate frequently on Canadian Mortgage Trends.

    Nonetheless, the overwhelming majority of borrowers still choose fixed rates for security, despite this advice. For this reason FirstLine’s Matrix is our most popular Smith Manoeuvre compatible mortgage.

    With due respect, I must oppose the statement that mortgage brokers try to motivate people into fixed rates. Maybe in the past that happened more often but that’s not the norm today. We have very little economic incentive to recommend a fixed or variable rate, other than doing what’s best for the client.

    We should also be clear about the fee issue. For our clients, FirstLine’s Matrix usually has NO fees except legal. In almost all cases I’ve seen, any legal costs are easily offset by the tremendous interest savings afforded by FirstLine’s discounted mortgage and line of credit rates.

    In addition, we do not advise people to pay extra for automating the investing from their LOC. Most people we deal with are well prepared to do it themselves for free. By the way, we have absolutely no affiliation with M-Link.

    Last but not least: rate predictions. We’ve always felt that it’s a dangerous game–kind of like putting grandma’s pension check on black after 5 reds on the roulette wheel.

    Virtually no one can predict rate direction with any long-term accuracy—-not even the highest paid best known economists. The only source we trust in this department is the Bank of Canada, and their current comments clearly note potential inflationary pressures—-which, as you know, can be a negative for rates. But things could change on a dime. That’s the markets for you!

    At any rate, enough work for today. Do enjoy the weekend!

    Melanie :)

  32. 32. Ed Rempel

    Hi Melanie,

    Yes, other than the fact the Firstline does not offer any of the terms or rates we want, they are not too bad!

    Plus there are the legal fees you would have to pay at Firstline, which we’ve been able to avoid with the banks for anyone with 20% down.

    Plus you can’t invest directly from the credit line like you can do with several of the banks. This means there are more manual transactions to do, which is why the entire issue of paying someone else a monthly fee to do the manual transactions even comes up.

    Plus there is the stange issue of the points program that nobody wants to make public. Some mortgage brokers say they advise never to get a mortgage from Firstline without full disclosure of the points program and how it is affecting your mortgage terms and rates.

    These types of incentives have been strictly banned in the financial planning world, but the mortgage broker world is still a Wild West with minimal regulation.

    If you would actually use Firstline, Melanie, in the spirit of knowledge sharing with our audience, would you publish the details of the points program in this blog?

    Ed

  33. 33. Cannon_fodder

    Ed,

    Have you had any experience with National Bank’s version of the SM mortgage product?

  34. Ed,

    Many of these items have been addressed so I’ll refer to my previous posts in lieu of being repetitive.

    As for FirstLine, this debate stems more from an unawareness of their policies—in which case you should to speak to FirstLine directly. Feel free to email me if you’d like a good contact there.

    I’ll defer my response to your characterization of Canada’s mortgage industry to keep this a friendly conversation. :)

    Melanie

  35. 35. Kelly

    Ed, As a fellow financial professional I’m surprised to hear you deride the whole mortgage broker industry the way you do. I suspect provincial regulators and SROs (CIMBL, MBABC, etc) might take issue with some of your comments. I wouldn’t even dream of labeling the financial planning field like you have done with brokers. This is the public record and it’s just a risky move. If you have a bone to pick maybe there is a better forum for it elsewhere. Kelly

  36. For what it’s worth I’ve dealt with mortgage brokers and the banks and I’ll take the mortgage brokers anytime.

    Also regarding FirstLine Matrix – ironically I use this product although I’m not doing the SM.

    I can’t comment on all the features necessary for the SM since I don’t use them, but I can say that Ed is incorrect regarding their rates and basic fees. I got a new mortgage in the spring and at the time 5.19% (for five year fixed) was the best rate I could find anywhere. I talked to two different mortgage brokers, checked INGs posted rate (it was 5.24% at the time) and even gave my own bank (TD) a chance to match or come close (they offered 5.49%). Their shorter term rates were similarily competitive.

    They didn’t do an appraisal – probably because the maximum limit of my LOC is only about 50% of the value of the house instead of 80% so no appraisal fee. I received $500 cashback to pay the legal fees – I believe (but not sure) that this came from FirstLine although it might have been the mortgage broker who paid this. I also had fees of $270 to discharge the HELOC from TD and the mortgage broker paid this.

    So in the end I got a mortgage through a mortgage broker with competitive rates and didn’t pay any fees. I’m not suggesting this is the best product for SM since I don’t know about the other parts necessary but the comments about the banks having better rates and lower fees are incorrect.

    Mike

  37. 37. Ed Rempel

    Hi Kelly,

    You are probably right that I went a bit too far in calling compliance regulation in the mortgage broker world as a “wild west”. My point is that the regulation is significantly less than in the financial planning world.

    For example, I don’t know the details, but it seems that 2 mortgage brokers can get paid different amounts for the same mortgage, depending on their relationship with the company and the amount of discount they give their client. I believe they can also be paid a variety of incentives for a variety of reasons.

    In the financial planning world, everyone gets the same commission for selling the same fund (if it is the same version). If you buy it from a discount broker, they get exactly the same commission as a financial planner. We can’t get extra incentives, since all compensation must be detailed in the prospectus. All compensation of any type must be detailed to the client.

    When I go to a fund company event, I have to pay my own air fare and hotel. We can get marketing cost assistance, but only if preapproved and detailed by actual receipts.

    To be fair, the insurance industry also has less regulation. A few financial advisors have told me they let their mutual fund license lapse and just sell insurance and seg funds because there is less regulation.

    Anyway, I did not mean to deride an entire industry.

    Ed

  38. Hi Cannon fodder:

    The weakness of the National Bank all in one is that all accounts are lines of credit and posted at prime. I am told that this will change in the fall or early next year and you will be able to link a variable mortgage to the all in one. Once, if, that happens it will be a great product. It matches all the other requirements for SM.

    You could check this on your calculator. If you did SM at a 6.25 mortgage would it beat not doing SM on a variable rate mortgage 0.85% less (5.4). Take the difference you save in interest on the variable and use that to do the SM or RM. Which one comes out ahead?

    I would say if you want to be 100% hands off, the National is a good product. The other option with National is to split your mortgage up and put some in variable and use the all in one to support the SM or RM. The only issue is the part that is variable will not readvance so leave enough room in the line of credit to do what you want.

  39. 39. Ed Rempel

    Hi FP,

    My point about getting better rates applies only to SM mortgages. We have clients doing the SM with almost every lender that works for the SM and we’ve found that the best 3 SM mortgages are all not available to mortgage brokers.

    By the way, FP, I see you also fell into the “5-year mortgage trap”. Since 1950, studies show that 100% of the time, getting 5 one-year mortgages would have saved money. So, you can bet that whatever would have to happen for 5-year mortgages to cost more than other options will likely happen.

    Tomorrow, the US will announce their first rate cut. Our clients have been getting mortgages below 5% for 7 of the last 10 years. Could it be that locking in to your rate of 5.19% for 5 long years will not turn out to have been good advice?

    Ed

  40. 40. Ed Rempel

    Hi Cannon,

    We have a client with National Bank All-In-One. It does not readvance until you have $5,000 principal paid down. In other words, it does not readvance.

    The client is doing a fake SM until his mortgage comes due and we can do a real SM.

    It does readvance with 2 credit lines, as Man from Atlantis says, but why would anyone want to pay prime on their main mortgage when you can get prime -.85% from many lenders. There are no advantages over other SM mortgages, so it is simply a waste of .85%.

    They were talking about changing it 2 years ago, but it has not happened yet.

    We do not consider it as an SM mortgage at all.

    Ed

  41. 41. Cannon_fodder

    Man from Atlantis:

    The answer to your question (to SM or not to SM) is – it depends. If you are in a high marginal tax bracket, then the SM is your friend. If you are in a low tax bracket then the advantage is with the lower rate mortgage (assuming you could not have your cake and eat it, too).

    When I put it through the calculator I assumed that in the 5.4% mortgage scenario you would take the difference in mortgage payments and get a loan from day 1 which had interest costs equal to the additional payment. Also, the tax refunds would be applied to the mortgage but not readvanced because otherwise that starts to quack like an SM mortgage.

  42. 42. Will

    Ed, I’ve researched these mortgages a lot. From the quotes I’ve got the banks can’t compete with FirstLine. A one year term or variable is irrelevant. Like most Canadians, I loathe risk and have absolutely no interest in variables regardless of the historical cost differnce. By the way, what makes history so infallible anyways? What if times have changed and history doesn’t hold true for the next 10 or 20 years?

  43. Ed – you did say that FirstLine wasn’t competitive on their rates and fees which in my situation at least wasn’t the case.

    As far as the five year mortgage goes…

    First of all, the number one reason we did a five year mortgage was for budget reasons. Due to various circumstances (which unfortunately were completely within our control), we ended up with a mortgage that was too high and resulted in many sleepless nights. The decision to lock in for five years was made considering that we could barely afford the five year payment at the time and certainly couldn’t afford any kind of increase in interest rates.

    Second – as Will points out in comment #41, the past doesn’t predict the future. Just because one study over a certain time period indicates a preference towards a shorter mortgage term doesn’t mean this will hold true for the future.

    I do believe that over the long term, a shorter term mortgage will do slightly better but making pre-payments will negate a lot of negative or positive effects from the term choice.

    As for your assertions that Since 1950, studies show that 100% of the time, getting 5 one-year mortgages would have saved money. I’m assuming that you are referring to Milevsky’s paper on the subject which can be read at http://www.ifid.ca/pdf_workingpapers/WP2001A.pdf

    Although he concludes that in general the average consumer would be better off by choosing shorter terms for their mortgage, he never says it pays off 100% of the time.

    If you know of other similar studies then please let me know since I like to read this kind of stuff.

    Mike

  44. 44. Ed Rempel

    Hi Man from Atlantis,

    Why would you compare doing the SM at 6.25% vs. not doing it at 5.4%? That is the unfortunate comparison you are left with if you go with the National Bank All-In-One.

    But doing the SM at 5.4% with another bank obviously beats both of those options.

    Ed

  45. 45. Ed Rempel

    Hi Will & FP,

    You don’t think a streak of 58-0 is significant?Just because 5 one-year mortgages have beaten 1 five-year 58 consecutive years, you think all that is different this time?

    Moshe Milevsky’s study is excellent and compares variable rates (at prime) with 5-year mortgages. It shows that variable rates have beaten 5-year mortgages 93% of the time.

    I have a study from a mortgage broker that compares 1-year rates with a 5-year rates. It shows the 1-year beat the 5-year 100% of the time since 1950.

    I was shocked to find this, since I bought my first house in 1980 and took a 5-year mortgage at 13.5%. The rates shot up to 22.75% and then just returned to 13.5% by 1985 when the mortgage came due.

    I thought I had been extremely lucky. However, the study from the mortgage broker showed that the 1-year mortgages were lower than 13.5% 3 of the 5 years in that term. This means that even when mortgage rates shot up from 13% to 23%, 1-year mortagages still beat 5-year mortgages!

    We have been recommending that our clients take only 1-year or variable mortgages since the early 1990′s. Since then, we have been between 3-4% twice, between 4-5% five times, this year is one of only 3 times we’ve been over 5%.

    We have been generally in declining interest rates since 1982. Demographics actually point to this trend to lower rates should generally continue for another decade or 2. I can explain this, if you like.

    If you always assume rates will go down, you would have been right almost all of the last 25 years.

    We have been in a very strange, flat interest environment for the last couple of years. In a normal market, 5-year mortgages are about 2.5% higher than 1-year or variable mortgages. This extra 2.5% is what we consider an extremely expensive insurance policy to protect against the very unlikely event of a massive rate increase.

    Flat interest rate environments like today have almost always led to interest rates dropping. This is why 1-year mortgages have also always beat 5-year mortgages in the past when rates were flat.

    We’ve been on a bit of a crudade about this for the last decade, since we feel that both banks and mortgage brokers have subtly been brain-washing Canadians to fall into the “5-year Mortgage Trap”. We feel there needs to be a voice on the other side. Plus we need to advise our clients on whatever we think will be best for them.

    Ed

  46. Ed – I haven’t seen that study so I can’t comment on it.

    My point is not that the past won’t repeat itself but that it’s just not 100% guaranteed as you seem to believe.

    Mike

  47. 47. Kelly

    Ed, I think you’re hanging with the wrong crowd. No brokers I know push 5-year mortgages on anyone. Like many have said, it’s the clients themselves that come to planners demanding 5-year products. You’re obviously free to continue your “crusade” but you might want to reconsider dragging the whole broker industry throught the mud in the process. It’s getting both old and transparent.

  48. 48. Ed Rempel

    Hi Kelly & FP,

    My issue is that I run into people every day that are stuck in 5-year fixed mortgages. You area right in that we do see a lot more variable than we used to, but we run into several each week where their 5-year mortgage becomes an issue restricting them from moving ahead financially.

    We look at their entire debt situation and often try to refinance more effectively at lower rates, but they have fewer options because of the 5-year mortgage.

    Then we look at their long term goals such as retirement and the SM means they can retire when they want and with the lifestyle they want with hardly any effect on their existing lifestyle, while saving through RRSPs only will mean they need to invest quite a lot from their lifestyle.

    But again, they will have to pay a penalty to get out of their 5-year, non-SM mortgage. We have a complicated spreadsheet to figure out whether it is really worth it to pay the penalty now and start the SM, or wait until their mortgage is due. There are a lot of variables in figuring this out. There are some other options most of the time, but again they are restricted by being stuck with their 5-year mortgage.

    For those where moving to a larger home is one of their goals, it is surprising how often their mortgage term is longer than they plan to stay in the house.

    We have no trouble explaining to people why variable or 1-year mortgages will save them money. Almost 100% of our clients have been using variable or 1-year mortgages since the mid 1990′s.

    Why do so many people fall into the “5-year mortgage trap”?

    I think it comes down to nobody gave them advice.

    Some of this is that both brokers and banks tend to make more with a 5-year mortgage – fixed or variable. And there is more ability to look good by discounting a fixed rate than a variable rate.

    When I ask people why they went with a 5-year, they often say they were just given options, but no advice. Many were told they might save money with variable, but that fixed was “safer” – then asked which they prefer. Some said the broker or banker seemed to somehow be subtly hinting that they should go long. Most said they did not get any advice (just options) and some said the advice was to go with 5-year fixed either because rates were rising or because it is “safer”.

    There is such a massive need out there for people to get real advice.

    To be fair, we don’t find much difference between those that got their mortgage from a broker or a bank. In fact, 5-year fixed are probably more common with bank customers.

    Why don’t many brokers and bankers give advice? Is it because:
    - They don’t know that variable and 1-year have saved money almost 100% of the time?
    - They don’t want to give advice to avoid liability or being blamed for being wrong?
    - Bias to higher compensation for longer terms?
    - Bias to being able to offer bigger discounts with fixed rates?
    - They want to sell a mortgage from an institution that does not offer variable or 1-year rates?
    - They think that giving advice will make it sound like they are pushing for a sale?
    - They are trained to just offer options and not give advice?

    I’m not sure why. But I’d like to know.

    Our little crusade is our way of trying to educate and trying to give people the best advice.

    Ed

  49. Ed,

    If you go 1 yr fixed, does that mean that you would have to get “pre-approved” every year for a new mortgage to lock in rates? Wouldn’t this affect credit scores?

  50. 50. Ed Rempel

    Hi FT,

    No, there is normally no credit check done a renewal, unless you are refinancing.

    You can get a few credit inquiries a year without affecting your credit rating. We are asking our mortgage contacts for details on how many inquiries are needed before it becomes an issue and I’ll let you know.

    Ed

  51. This is certainly interesting debate between the mortgage brokers :)

    I just want to get my new primary residence, pay off my HELOC as fast as possible, and then maybe do SM.

    To clarify, TD didn’t give me any advice about SM as I didn’t ask, and wasn’t interested at this moment either.
    I only said that I’d pay down rather than SM is because I’ll have cash to pay off 50% of my HELOC in a month, drastically reducing my “bad debt”. Actually, I’m quite confused about SM now that I’d rather not think about it (-_-”)

    My brother is an accountant, so I hope he knows what he’s talking about

  52. 52. Ed Rempel

    Hi NSB,

    Debate between mortgage brokers??? Have I left that impression?

    We are not mortgage brokers. We are financial planners. We don’t sell mortgages – we are the ones in the trenches that have to figure out exactly how to implement the SM for each client.

    We just refer clients to wherever they can get the best mortgage for their situation. There are 7 SM readvanceable mortgages and we have contacts at all 7. Mortgage brokers only have access to 3 of the 7.

    Your brother is an accountant that knows about the SM?

    Ed

  53. It’s important to be careful when generalizing. The best professional mortgage planners work along side financial planners “in the trenches” to help people create the optimal SM strategy. FP’s usually don’t have all the necessary insight into mortgages, and mortgage planners shouldn’t pretend to be qualified in investment advice. I’m not sure who Ed is referring to, but good mortgage planners refer clients to ALL lenders with readvanceable mortgages, not just 3. That’s been noted a few times already but it’s important to reiterate.
    Have a great evening,
    Melanie :)

  54. Here’s an update as promised on BMO’s Readiline. I got a call today and they are, in fact, still offering P – .85 on a 3-year open variable, which can be used as the “mortgage” portion of their Readiline product. Feel free to email me if anyone needs more info. Variable rates have been rising lately (Scotia just bumped theirs today) so it’s tough to say how long this rate will last. Have a great weekend! Melanie

  55. 55. Ed Rempel

    Hi Melanie,

    Really? Scotia no longer offers prime -.85%? We just heard the same thing about National Bank now only offering prime -.5%.

    Apparently, some of the banks have lost some money on the ABCP liquidity issue that has arisen in Canada. It is the “made in Canada” version of the sub-prime mortgage issue in the US.

    We had thought the liquidity issue would just pass, so we are surprised to see 2 banks change their mortgage rates.

    Have you heard any more details, Melanie?

    Ed

  56. Yes, unfortunately, Scotia cut the discount on some of their variable rates, including the STEP, to Prime – .50% on Friday. We may soon see more lenders doing the same–many already have.

    You’re right in that tight liquidity is the culprit. Variable mortgage rates are based on the interplay between 30-day bankers’ acceptance (BA) rates and prime rate. Lately BA yields have jumped significantly as you can see here:

    06/20/2007 4.36 %
    07/04/2007 4.51 %
    07/18/2007 4.55 %
    08/01/2007 4.56 %
    08/15/2007 4.87 %
    08/29/2007 4.89 %
    09/12/2007 5.01 %

    Source: http://www.bankofcanada.ca/en/rates/interest-look.html

    That means lenders have been making less on the spread between their cost of funds (BA rates) and the variable interest rates they charge. As a result, many have raised their variable rates (cutting their discount from prime rate) in order to maintain profitability.

    At last week’s Alternative Lending Conference in Toronto, the speakers (all top lender exec’s) forecast 6-12 months before Canada’s money market would loosen up. Lately we’ve seen positive developments in the BA market, however. BA spreads have risen 20 bps in the last 10 days—which puts less pressure on variable rates. In any case, we’re watching with bated breath!

    – Melanie

  57. Just a quick follow-up to the above. BMO has raised their variable rate (cut their discount) from P-.85 to P-.50 on the 3-year variable mentioned above. ING will likely cut their discount this week as well. That leaves a just handful of lenders with big discounts to prime.

    - Melanie

  58. 58. Ed Rempel

    Hi Melanie,

    I think that what is really happening is that the banks know rates are probably starting to decline. Therefore, they will want variable rates to be higher than fixed, in order to tempt people into taking the fixed rates.

    Until recently, it looked like rates were staying flat or possibly rising, so the banks were content to have variable rates lower than fixed rates. But now that it really looks like rates are about to start declining and have already started falling in the US, variable rates now need to be moved higher than fixed.

    We will stick with variable rates, especially now.

    Ed

  59. Hi Ed,

    The catalysts for fixed and variable rate moves have been somewhat different lately. Fixed rates have been declining because their cost-of-funds is based on bond yields, which have been sinking.

    Variable rates, however, are geared to bankers’ acceptance rates, which have been rising. That’s caused the Prime-BA spread to fall from its long-term average of ~160 basis points to ~120 basis points. This has been a direct 40 bps hit to banks’ profit margins in many cases. Recovering that profit is the prmary reason lenders have jacked up variable rates lately.

    Here’s a Fixed/Variable story we wrote with more info, in case it helps.

    Have a great night,
    Melanie

  60. 61. layman

    Now its November, where are the best “fully open” rates now, I need flexibility due to sabatical in the new year and potential sale of home but have to renew next month my banks offering 6.75 I heard I can get 5.75 at scotia but they want legal fees to do the switch somebody said if theres more than 20% those fees should be absorbed…I know Canadian Tire is higher but theres no fees if I sell in 6 months whats the best deal. I may use the LOC portion to start my own business which probably qualifies for the SM right.

  61. 62. Ed Rempel

    Hi, Layman,

    Yes, investing in your business would qualify for the SM, assuming it is a real business. You are taking a sabbatical when you have a business?

    We do offer a free mortgage referral service that can sort this out for you, if you like. See the article on SM mortgages at http://www.milliondollarjourney.com/ed-rempels-picks-for-the-best-smith-manoeuvre-mortgage-ii.htm .

    Ed

  62. 63. layman

    Taking a sabbatical and contemplating a new business…I’ve read the MDJ articles, reviewed the comparison sheet. Note: redfrog compounds daily not yearly and there are legal fees not just appraisal fees…CT covers both if you use their lawyers.

    My current considerations mostly for flexibility are:

    1. Scotia 5.75 on mtg prime for LOC (+fees)
    2. CT fully prime (no fees, but daily)
    3. redfrog same as CT but fees

    The one thing I’m unclear on is the capitilization of interest, ie. where will it be easiest from a payment point of view if I have no income for 6 months

  63. 67. MD

    Is now a good time to refinance to make a new purchase?

    Bank: BMO
    Condition: 5 year fixed (@4.35)
    Mortgage Term Balance: 15 months
    Ref Mortgage rate: getting a blended mortgage from the bank at a higher rate than current fixed ( 4.48)

    How to get max benefit from this approach? Or can you suggest an alternative?

  64. 68. Harvey

    Hello MD,
    Are you interested to do SM at the same time when you purchase or you just want to change homes.
    Is your mortgage a Readiline product or not?
    Harvey

  65. 69. MD

    Harvey:
    I plan on purchasing a second home with the refinance from my current home. I have a fixed 5 year term with BMO. I am breaking the term to refinance in order to purchase another property. The bank is offering a blending mortgage at no penalty.

    What is the benefit of taking the blending mortgage offered by the bank at a higher rate than my current fixed rate.
    Is a variable rate a better option at the moment?
    I don’t understand the question ” is the mortgage a Readline product?
    What is the advantage of using the SM?

  66. 70. Harvey

    MD,
    How much is your mortgage amount currently and what is your remaining amortization?
    How much is the penalty that the bank quoted you?
    Readiline is a product that BMO has which comprises of a mortgage and a line of credit all in one product.
    It is ideal to do Smith Manoeuvre(SM).

    I don’t think blending is a great option in today’s market,if you give me the above numbers i can do a quick calculation for you.
    Harvey

  67. 71. MD

    How much is your mortgage amount currently and what is your remaining amortization? 25 years

    How much is the penalty that the bank quoted you? None

    Readiline is a product that BMO has which comprises of a mortgage and a line of credit all in one product. no line of credit

    As of today: 260, 0000 + @ 25 years amortization

    fixed 4.35 fixed 5 years ( 15 months left)

    - balance 15 months on current 4.35 fixed@260,000 plus is the balance

  68. 72. Ed Rempel

    Hi MD,

    I just noticed your post. It probaby is worth your while to break your mortgage now.

    You said there is no penalty, but if you have a 5-year fixed mortgage, there will be a penalty. It is possible that the penalty is significantly more than just the normal 3-months’ interest.

    Blending is generally never a good idea. It is normally a blend of your current rate and todays “posted” rate. However, nobody should take the “posted” rates, since you can almost always get significant discounts from the posted rate.

    I would suggest to call you bank and ask them for the amount of the penalty if you move your mortgage now. We are recommending 1-year fixed mortgages today and are getting 2.4%. This is 1.95% lower than your current rate, so your savings would be 1.95% * $260,000 *15 months /12 = $6,300. If the penalty is less than that, than it is probably worth breaking it and refinancing now.

    Ed

  69. 73. Wil

    Some really good stuff here, thanks. Anyone feeling perky and needing a challenge?

    We have an RRSP mortgage (i.e. lent the money to ourselves) with about $100,000 outstanding. We also have what seems to be a HELOC with TD where we have the RRSP holding our mortgage. We could borrow the full amount of the mortgage and pay it off entirely. But then we would have interest payments leaving our economic unit – i.e. to TD.

    We figured out – ourselves – that interest to ourselves on the RRSP mortgage was double-taxed – firstly when earned, secondly upon withdrawal from the RRSP. Obviously, then, we want to minimize the interest we are paying on the mortgage.

    Somewhere there is an optimum strategy for how much to borrow from the LOC and how fast to pay off the RRSP mortgage. I’d settle for a reasonable calculation.

    Also,

    1) Any way to make the SM work on an RRSP mortgage?

    2) Has anybody found or put together a spreadsheet for SM calculations?

    Thanks and regards.

    Wil

  70. 74. cannon_fodder

    Wil

    I don’t know about an RRSP mortgage and was always warned off that structure.

    But, you will find a free “traditional” SM spreadsheet at this site. The link is embedded in one of the main SM threads.

  71. 75. Ed Rempel

    Hi Wil,

    Here’s a great idea with only pluses. Get rid of the RRSP mortgage and buy real investments. Then get a new mortgage at a low rate and do the Smith Manoeuvre.

    With an RRSP mortgage, you have to choose between the most expensive mortgage in Canada or the worst RRSP in Canada – or some compromise. Normally, you can borrow at a low rate (We are getting 1.99% today on a 1-year mortgage.) and invest at a high rate (stocks average 10-12%/year long term).

    That gives you a profit spread, depending on how you do it, of 4-10%/yea. With an RRSP mortgage, you lose that entire spread, plus big fees, because whatever rate you choose is both your RRSP return and your mortgage rate.

    Let’s take an example. Normally the plan is to choose the highest reasonable interest rate, in order to put more into your RRSP. Let’s say you take 5% today. That is both a horrible mortgage rate and a horrible RRSP return!

    The RRSP mortgage gives you an illusion that you are paying yourself – but it is just an illusion. If you don’t pay, your RRSP must foreclose on you and sell off your home, just like the bank would.

    Really, there is no difference between you having an RRSP mortgage where you choose 3% and having a 3% GIC in your RRSP plus a 3% mortgage from the bank – other than big fees.

    Once you get rid of the RRSP mortgage, you can invest your RRSP properly, then get a mortgage at a great low rate and do the Smith Manoeuvre – 3 huge pluses.

    If you want to model the SM, use Cannon Fodder’s spreadsheet.

    Ed

  72. 76. BCGameDeveloper

    I’m looking at setting up a HELOC. What currently is a reasonable rate for the LOC portion of one of these mortgages?

  73. @BCGameDeveloper – I believe a good HELOC rate these days is P + 0.50%. Most are offering P+1%.

  74. 78. BCGameDeveloper

    National Bank (my current mortgage holder) is offering P+0.75. I’ll shop around to see what other banks might offer.

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