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

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.

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

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

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

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

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?

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?

[...] Favorite Readvancable Mortgage (Melanie Mclister) [...]

[...] week—in part 2 of this article–we’ll discuss various features specific to readvanceable mortgages.  By the end of [...]

[...] MDJ, you would have seen quite a few postings about The Smith Manoeuvre, tax implications, recommended readvancable mortgages and investment strategies.  This article however will go over what I think are the best [...]

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

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

[...] Smith Manoeuvre Mortgage Comparison II – Top Pick (56 [...]

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

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

- Melanie

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