David is right. However, I was confused by you saying prime was 6%. It is only 2.25%.

I saw your post on a different site talking about the RRSP mortgage strategy where you quote 6% interest. If you take today’s rate for a secured credit line of prime +.5%, or 2.75%, and then add some to allow for rate to rise to a more normal level, then you should be able to invest nearly double the $67,200 and sill have all your interest payments covered.

Ed

You are correct. If you can find someone to loan you 36 million at 0.01% interest (a very unlikely event) you could pay the monthly interest that accrues with the $336 you have reduced your principal. Since you are unlikely to get such a wonderful interest rate, the $336 will service only $67,200 or thereabouts at 6%.

The Rempel Maximum simply takes the income available from the reduction in principal on your home, and uses that amount to service ONLY the interest on an investment loan.

The math is simple — the understanding is more difficult!

DAvid

I clearly understand SM.
But Rempel Max formula is confusing to me.
“They have a home worth $400,000 and a mortgage of $200,000 at 5% and are paying $1,169/month (25-year amortization). They can reborrow at prime of 6%, the investments average 10% long term and they are in a 40% tax bracket. Each mortgage payment pays down $336 of principal x 12 months / 6% = $67,200″

Why do you do “$336 of principal x 12 months / 6% = $67,200″
Per year payment of principal $336 x 12.
Why divide by 6% ? What is the reason ?
Who gives $67,200 ?

Let’s say I give interest of 0.01 %
Then the number becomes 336 x12 / (0.01 % 100)
= 336 x 12 x 100 x 100
= 3600 x 100 x 100
= 36,000,000

36 million.

Is is some scheme ??
I encourage you to explain.

No, I’m just passionate about what I believe. I think we mostly agree. I would not buy an average mutual fund, just like I would not buy an index fund.

The index is essentially an average. Most mutual funds are average and usually underperform. Some are below average, but some are above average. Just like any other field involving humans, there are some fund managers that are all-stars.

However, you are right that finding them is not necessarily that easy. To tell the difference between talent and skill, you actually need to find out exactly how they work and what is unique about them, so you can try to understand if his outperformance is likely to continue over time.

For those unwilling to do the research or get the advice, an index fund is better than most other choices.

While it is true that all-star fund managers are more likely to be value style fund managers, it is not true that most value style fund managers are all-stars.Every style has superior and inferior fund managers, but in addition to that, some investments styles are generally more effective than others.

I agree, Buffett’s fee schedule really talks the talks. I’d love to find a younger version of him now with that kind of skill and fee schdule.

Ed

I must sound so harsh. You clearly have a strong understanding of finance and are very knowledgable. I guess at this point we are going to have to disagree on the subject of fund MERs.

No one is saying that an index fund is the best investment out there. However, it is a good low-cost investment in a variety of companies that make up part of the market. It won’t do the best but it won’t do the worst. This makes it an ideal investment to include in your long term planning for retirement. Once that base is there, there is no reason you can’t use some of your money to chase higher returns in actively managed funds or even individual stocks.

Every fund company has one or more “value” funds. It is a fairly popular investment approach that many managers attempt. I’m sure I could find several such funds that have underperformed their associated index.

“He did charged a fee of 25% of the return over 6% with his Buffett Partnership.”

This is what I call walking the talk. He only gets paid if he actually makes you a profit. There is a big difference between this and charging people 2% rain or shine. If you truely can offer up superior advice and returns, then certainly you should only get paid if you do so. As it is now, MERs are only a “pay me and we’ll see how I do” fee.

Aolis

All I can tell you is that there are fund managers that we believe are “All-star fund managers” that have beaten the markets by wide margins over long periods of time.

We believe in this. Everyone on our team has 100% of our investments in exactly the same funds that we recommend to our clients. I have never – and expect never will – own an index investment.

A mere MER of 2-3% would not have dropped any of Warren Buffett’s “Superinvestors” below the index. He did charged a fee of 25% of the return over 6% with his Buffett Partnership.

To see how well Buffett did, he ran his partnership for 13 years and beat the DOW all 13. His return was 29.5%/year less his MER of 5.8%, so his investors made 23.8%/year. The DOW in the same period made only 7.4% (including dividends).

The other’s also beat the indexes by wide margins. Here is the article if you want to read it. It’s a classic: http://www.edrempel.com/pdfs/superinvestors.pdf .

Ed

The reality is that you get paid by selling actively managed mutual funds. It is in your interest to try and get me to chase higher returns by telling me about “super-investors” so that you can sell me a fund that charges a two percent annual fee of which you get a good portion. Three out of four canadians that follow that route will loose their bet.

None of the results in your article took into account an annual MER. I suspect that some of the top investors would fall off the list at 3%.

If I don’t have time to research companies, what makes you think I have the time to research fund managers or even financial planners that recommend fund managers?

You can’t hold up Buffet as a shining example of a “super-investor” and tell me to ignore his advice. Even he doesn’t charge an annual fee to his investors like you are suggesting that I should pay.

Aolis

Okay, I’ll take Crosby, Malkin, Thornton, Lidstrom, Pronger & Luongo, and you can take an index of the average of all hockey players. How much would you like to bet?

How many levels of successful choices did that take?

Oh, I love a good debate about the efficiency of the market, Aolis.

Most people have no trouble believing they can recognize superior talent in sports players and that these superior sports players will likely continue to be superior. Why is it hard to assume the same thing with super-investors?

Buffett’s answer to you was specifically assuming you would not have time to invest and following your question ending with requests about which “specific sectors and percentages.” Could he have just been saying that you should buy a broad-based investment and “get back to work”?

If Buffett actually thought that, then why does he not buy index funds? He really believes in the “Super-investors of Graham-and-Doddsville”. As he said in his debate at Columbia: “I think that you will find that a disproportionate number of successful coin-flippers in the investment world came from a very small village that could be called Graham-and-Doddsville.”

You are right that one outlier does not prove anything, but it is faulty logic to assume that just because luck could explain someone’s success, it proves that all are luck.

What about all the other investors in Buffett’s classic article that all massacred the index over long periods of time? Note that the ones that are still active continued to massacre the market since the article was published. What would possibly make you think they would suddenly lose it?

Tell me, would you really prefer an index fund to having Warren Buffett himself manage your money?

Ed

I just noticed your post. You need 20% down to be able to get any of the readvanceable mortgages. So, FT is right that I would suggest to try to pay your mortgage down that far.

You may be able to finance this in a different way, such as with an unsecured credit line or some creative strategy to get a much larger tax refund to pay down your mortgage (such as a larger RRSP loan). If you have no other debt and 2 good jobs, you should qualify for a good sized unsecured credit line.

I would recommend to stick with a 1-year mortgage – whether or not you can get 20% down by January. We call 5-year mortgages the “5-year fixed mortgage trap”. Rates are almost always much higher. Based on a study, taking five 1-year mortgages instead of one 5-year mortgage would have saved you money 100% of the time since 1950. This has held true whether rates are rising or falling.

We are getting 2.05% on a 1-year fixed now. If you take a 5-year fixed at 3.75%, then you would be paying more unless 1-year rates average 4.3% or more for years 2-5, which is quite unlikely.

Staying short has added advantages, especially for people doing the SM, since it allows you to restructure your mortgage every year if anything changes in your life. This also allows you to negotiate extra goodies every year – free appraisal, unsecured credit line, etc.

Since you are both teachers, the SM may be particularly well suited, because you get hardly any RRSP room. The SM gives you an alternative way of getting tax deductions and investing.

Ed

I just noticed your post. Yes, it is the tax refund from the investment loan that reduces your mortgage amortization.

Your mortgage may be gone in 5.25 years, but you have a NON-deductible investment loan at B2B at a higher rate than your mortgage. What do you plan to do with that?

I would suggest that whatever your strategy, if you reinvest the distributions instead of paying them out, then your expected benefit is higher – and you can avoid all the “4 Meaningless Transactions”.

Ed

It is interesting that you mention hockey players. We have a pool at my work where we put togther our ideal team of NHL players and the team with the best stats wins the pool. No one pretends that it is anything other than gambling.

You have three levels of betting going on. The actual company managers have to make the right business choices. The fund managers have to pick the right companies. And then the advisor has to pick the right fund managers. Index funds cut out the latter two levels and then invest in many companies to average out the first one.

Warren Buffet also benefits from the “survivorship” bias. Finding one outlier “superinvestor” (or three) does not show anything. There is no way for you to demonstrate that he will do well in the future or that you can pick others like him. The worst part is that you will still charge me two to three percent each year just for trying.

I’m not aiming to get the best returns possible compared to average returns. I’m want to avoid getting the worst returns. The one thing that I have the most control over is my investment costs so I’m going to focus on getting those as low as possible.

Also, I asked Warren Buffett for advice and he told me to invest in low-cost index funds. If he is indeed a “Superinvestor”, then shouldn’t we follow his advice?

http://www.fourhourworkweek.com/blog/2008/06/11/061108-picking-warren-buffetts-brain-notes-from-a-novice/

Also, some banks will allow you to move to a re-advancable product with minimum charge if you maintain your current mortgage within the new product. We only had to pay the Notary fees to register the HELOC against the house.

DAvid

Unfortuately my term is coming due in January and I really want to lock into a five year fixed term for 3.75 – 4.00 %. Is it possible to make a deal with a bank to start a readvanceable mortgage a couple of years into my term?

Adam

My wife and myself are both teachers and we’re at the top of our pay scale… we have no debt except for the mortgage and we have no major expenses in the next five years… everything major has been done to our house in the last two years… ie. bathrooms, roof, boiler, decks… I would love to start the Smith Manoeuvre but we don’t have 20% payed off of our mortgage… is there anyway to get a readvanceable mortgage or will we just have to wait for a couple more years and pay down the mortgage and have the value of the house increase???

Thanks for your help!

Adam

Thanks for your response. You’re right, to say my mortgage will be paid off is misleading, the mortgage will be converted to an investment loan of the same amount in that time period. We’re using some new numbers now to consolidate some debt and do some house renos. We’re looking at a new mortgage of 187,00, converted in 5.25 years and a projected 15 year benefit of 725,458. It’s my understanding that the interest on the loan with B2B is tax deductible but only on the ACB. And as the ACB goes down over time and the interest deductibility is reduced, the balance on the LOC converted debt from the mortgage goes up and therefore so does the interest deductibility on it. Or am I not understanding something properly here? For the Rempel Maximum, I’m unclear how the 60,000 investment loan gets used to reduce the amortization on the mortgage. How does that all work?

It is not really correct to say your mortgage is paid off with the Smith/Snyder, because it is replaced by a NON-deductible investment loan of the same amount – at a higher rate.

I put your figures into our calculator. First, your mortgage has 18.4 years left, but you can refinance it now at 2.4%. That will reduce your amortization to 14.25 years.

Then you can invest your available equity and do the SM. That would reduce your amortization to 12.3 years. More importantly, the projected net benefit of this strategy over 15 years is $568,000 (assuming 10% return and interest rates 1% higher than today).

If you do the Rempel Maximum, your existing mortgage payment would cover the cost of an additional investment loan of $60,000. Investing that would reduce your amortization to 11.8 years and increase the projected net benefit to $681,000 after 15 years.

At that point, all your debt would be tax deductible and you will not have touched your investments – just left them to compound.

There is probably a better strategy by combining your entire financial picture, such as combining other debt, possibly redirecting RRSP contributions, etc.

You should also project whether this strategy, plus what you are doing already, will be enough to give you the retirement that you want.

Ed

I have recently met with Rob Smith as well and have been run through the same scenario as Dunk. It all seemed fairly logical to me as well but now that I have read your explanation of the other side of that strategy I have begun to question its effectiveness also. I must admit I have read your Rempel Maximum a few times trying to wrap my head around it (as I have with so many components of the SM) and am still trying to grasp the concept. If I understand correctly, rather than go through the extra steps that Rob has suggested, it would be easier to just use a readvanceable LOC, maximizing my available equity initially rather than grow it gradually as my regular mortgage decreases. This way I get full advantage of the investment loan tax breaks immediately, and the benefits of compounding interest on the investment sooner. Correct? The one think I’m not sure of is with the Smith/Snyder method my mortgage will be paid off in 4 years, what would it take with the Rempel Maximum? House 420,000, mortgage $150,000 at $1040 month 4.99% with 15 years left on amort. Thoughts, recommendations? I’ve got around 20 years until I want to retire.

Thanks,

JJ