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…
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.
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 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.
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.
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.
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.
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.
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.
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.