“Ed’s Mortgage Referral Service” is still available and is a free service. We have contacts with all the mortgages that work well for the Smith Manoeuvre, know the pros and cons of each and always know what the best deal is. We also have good advice on what term to take.

If you send us the answers to the 10 questions, we’ll contact you to refer you to our contact for the best Smith Manoeuvre mortgage. The 10 questions are in an MDJ article at:

http://www.milliondollarjourney.com/ed-rempels-picks-for-the-best-smith-manoeuvre-mortgage-ii.htm

Ed

Do your homework and talk to as many ‘informed’ people as you can to get the most accurate correct information….go to the source!

Each plan works some what differently and all have plus’s and minus’s. I’m pleased with TDMP in the ease of set up and the follow up by the staff. Tax time is upon us and TDMP offers a full service tax package as I sure others do.

At the end of the day….it’s all about how well you sleep at night with the decissions you’ve made.

I’d use a check list:

If I lost my job…how fast could I get a new job at same pay etc.
If I got disabled…Coverage? How much? How long most company plans only last two years, and do not factor bonuses.
Life insurance…need more if doing this.

Risk how did I handle the melt down of 2008? If it happened again and took more time to recover, am I ok with it.

Fees are important, how much advice am getting? If tax help and risk management is not included (which does not come from the mortgage broker) then do it yourself.

I have to make a mortgage decision right away in the next couple days and am feeling I don’t have proper time left to research more on the subject so it looks like I will likely have to allow my current mortgage to rollover for a year open/convertible.

I guess short-term while I do more research the M1 would be a better option? (it being what-seems-to-be one big open account, especially if it varies with prime)

Thanks for your input.

We have found that the best way to save money on your mortgage is to avoid the “5-year fixed mortgage trap”. Banks and mortgage brokers make more money on long terms, so they often try to subtly persuade you to take longer term fixed rates.

Studies consistently show that long term fixed mortgages nearly always cost more money. One study I saw from a mortgage broker showed that, since 1950, five 1-year mortgages would have saved you money compared to one 5-year mortgage 100% of the time.

You save money by always going either short term or variable.

With this process, we have been getting rates for our clients between 4-5% almost all of the last 15 years, so today’s 5-year rates are hardly even low by historical standards.

In today’s market, we think 1-year terms are best. We are getting 2.05% for 1 year now (with possible legal and appraisal fees) or 2.5% with zero fees of any kind.

There is a lot of good info on the MDJ site about the Smith Manoeuvre. FT has done a good job of putting together what is probably the best source of info on the Smith Manoeuvre.

Read a bunch of the articles and comments, and then if you have any questions, you can post them.

Ed

The time on this blog is definitely not my local time.

We were never reps for TDMP. We have always used our own strategies. They were one of our mortgage providers for 2 months, but we went back to working with the banks were we have been getting better service and products.

We looked at TDMP’s strategy. It is called the “Smith’Snyder” and was developed by an advisor in PEI named Lloyd Snyder.

We analyzed it in depth and could not find any advantages at all compared to the Smith Manoeuvre. It looks like you are paying off your mortgage quickly, which is a great selling feature and it might persuade people to leverage more highly than it would otherwise.

However, when you analyze it in depth, you see that having the investments pay out distributions reduces the returns of the strategy. For example, if you take $1,000 distribution out of the investment, this is not profit but an arbitrary amount of your own principal that you are getting back.This is why your investment loan becomes non-deductible with every distribution you receive.

When you receive $1,000 distribution, then $1,000 of your investment loan is no longer deductible. You can then pay that $1,000 down on your mortgage. So, your mortgage is $1,000 less, but $1,000 of your investment loan is NON-deductible.

The end result is that exactly the same amount of debt is deductible, the same amount of debt is non-deductible. The only difference is that the non-deductible investment loan is at a higher rate than your mortgage.

After about 12 years of transactions (5.5 in your case), your mortgage is paid off but replaced by a NON-deductible investment loan for the same amount (less the payments your were making anyway).

You can create that entire effect in one day. The process in the Smith/Snyder, when you analyze it completely, only manages to convert your mortgage into a NON-deductible investment loan or credit line over 12 years. If you call your bank today. you can tell them that you want your mortgage to be a credit line, with the same balance owing. Then you will have created the same effect as the Smith/Snyder, but you will have done it in just one day.

We only do tax returns for clients, but you will need to make the “Snyder Tax Calculation” on your tax return every year. Since you have received some ROC distributions, not all the interest you paid on your investment loan is tax deductible. It is up to you to calculate the correct amount.

Your 2 options down the road both have tax disadvantages. After about 12 years, the book value of your investment will be down to zero, because you will have received 100% of the principal back on your investment with the ROC distributions over the years.

At that point, let’s look at your 2 options:

1. If you sell to pay off your NON-deductible investment loan, 100% of the what you sell is taxable to you as a capital gain. This would be true even if the investment has not gone up. So you would need to sell $200,000 of investments to pay off $150,000 loan, for example. Since your investments is paying out a distribution every month, you should not expect the investment to have gone up much at all.
2. If you keep receiving payments, 100% of those payments are taxable to you as a capital gain from then on.

We consider the process to have “4 Meaningless Transactions”:
1. You receive the ROC distribution.
2. You pay it down on your mortgage.
3. You reborrow to invest the same amount (in addition to the principal that you would normally invest with the Smith Manouevre).
4. You do the “Snyder Tax Calculation” to calculate the declining amount of your original investment loan that is still tax deductible.

After the 4 transaction, essentially nothing is any different.

If you doubt me, do a projection of the entire process you are doing, and then compare it to what happens if you reinvest all the distributions. You will find that you will be slightly ahead.

At each year, you will have the same amount of tax deductible debt, the same amount of NON-deductible debt, the same amount of investments, etc.

All that work for nothing!

What you lose, though, is 4 things:

1. You probably lose investment returns because you looked for investments that pay a ROC distribution, instead of find the best investments.
2. You refinanced your mortgage into a NON-deductible debt at a higher interest rate.
3. As Brian mentioned, lots of fees that do not apply with the Smith Manoeuvre.
4. Tax risk, because it is up to you to do all those tax calculations every year. CRA has started to focus on leveraged strategies like this where the investment principal is paid out each month.

Ed

I am not a mortgage broker but do know some very good ones depending on your location. I’m in Ottawa.

I believe that morgage rates are as low as 2.25% for variable and somewhere around 4.1% for 5 year fixed…you should do some looking around though.

Your first step should be to go to TDMP.com and complete the on line test to see if the TDMP process will work for your particular set of circumstances.

A TDMP rep will contact you by e-mail which will include a wealth flow chart based on the numbers you provided them on that test and set up an appointment to contact you by phone. This is a very informative conversation.

The next step is the TDMP rep will set up an introduction between yourself, a qualified mortgage broker and an investment broker…. This is an even more informative conversation.
I am personally with CIBC Firstline who TDMP work with as they have the ‘Re-advancable’ mortgage you will require to utilize the TDMP process.

There are other providers of similar services to TDMP and you should ensure you do due diligence prior to selecting any of them. Ed Remple, who contributes to this blog is one of the people who offer a differing approach to the method.

Some are more user ‘involved’ than others but TDMP is more suited to those, like myself, that are not market savy but are willing to learn as they go. This service has a small monthly fee and a set up fee, both of which are fully tax deductible and the set up fee is built into your new mortgage when you re-finance.

The others seemed to me to be more for those that have some investment knowledge.

I’m pleased with the service I have received for the less than $40 per month fee which is also built into the monthly process so your not paying any more than you already are for you monthly mortgage payment.

Let me know if you want more info…. Glad to pass on anything that will help others make an informed
Decision.

Dan

I am 26 and i bought a house 3 years ago (JAN 2007). I didn’t get well informed and i got a mortgage with nbc 5 year term closed with the interest rate of 5.45% . Now i want to change, i would like to refinance, and this time, i want to get well informed before proceeding with refinance. first i was going to apply for manulifeone, but i read bad reviews and talked with a broker who told me not to go with them, and that same broker told me that nbc as a good product all in one which is good but not for everybody. i would like to know what are the best products right now, and i would like to know more about this TDMP and the smith manouvre.

As for the NON-deductable investment loan…As you know from your time working as TDMP rep., it MAY only become non-deducatable once the mortgage is paid off (some 14 yrs from now ).

At that point, I have 2 options…

Pay off the investment LOC attached to the morgage by cashing in the investment portfolio that has been generated over that 14 yrs from taking the equity out monthy and investing it … this option leaves me with no mortgage, no outstanding LOC and little to no wealth portfolio but the mortgage is payed off 16 yrs early leaving me with what was the full mortgage payment amount monthly for investing…I win

OR

Continue the process of funneling the full amount that WAS the mortgage payment through the account thus keeping it as a deductable investment loan and increase my wealth portfolio until it is well in excess of the amount I owe on the LOC.
At this point, I sell off a portion of the wealth portfolio, pay off the LOC and am left with no mortgage, no LOC and a significant amount left in the wealth portfolio…I win again

As for who is doing my tax return…are you offering??….I’m open to your involvement and input.

Dan

What are you going to do with the NON-deductible investment loan that results from taking the payments out of the leveraged investments?

Once your mortgage is paid off, are you planning to start paying that off? Or will you convert that into a new mortgage and start converting that amount?

Who is going to do your tax return?

Ed

My concern is fees ($40 per month) and the mutual fund ROC (the fund that is distributing the money).

A number of funds had to cut the distribution beacuse of poor market returns in 2008 leaving anybody doing what you are doing short money every month. If we have a correction (after the market hit the lows in march) which I think is overdue then expect new cuts to start to happen sometime in 2010.

The other problem I see is taxes on the ROC fund you may be using. I hope this works out for you but unless fees are covered for you and you get lucky with the funds I see this as a sad story…money wise.

Since my last posting here back in August, I have pulled the trigger and started the TDMP process, converted my mortgage, pulled the equity out of my house and invested it for growth. I am not suggesting that you get rid of your mortgage….quit the opposite.

If I were 28 again (18 years ago ) and had this as an option, I would not have hesitated. It is not that I am only paying off my mortgage much faster with the additional $800 per month principal only payments that are now being made on top of my regualr mortgage payment as a result of my investments, I am freeing up that $800 equity PLUS the principal portion amount of my regular mortgage payments every month (an additional approx. $400) for continued investment. As the principal continues to get hammered down monthly, that $400 grows because the interest amount on the mortgage payment is calculated on the outstanding principal balance, thus increasing the available equity amount for investing every month.

At the end of the process, I can keep my existing mortgage open and continue to funnel all of the money (regular monthly mortgage payments that I no longer need to make ) through it and build wealth at an accelorated rate with the continued tax deductions annually or, cash out some of the investment equal to the outstanding balance of the Line of Credit and pay it off. I am then mortgage free years early, the LOC is payed off and closed and I have the ‘growth’ portion of the investments for my retirement and I can continue to invest my freed up cash flow (without the tax deductable advantages….not the way I’m planning to go!).

The bottom line is, if I started this 18 years ago, I would be at the end stage of having the house payed off, funnelling the full mortgage payment amount through the system and have many more years to build the wealth at the accelorated rate. Of course, this process was not available 18 years ago so you have a significant advantage.

Really something to think about if you have some equity just sitting in the walls of the house not doing anything.

Let me know if you have any questions and good luck!

Dan

Just so you are clear, the ROC distributions do NOT pay off your non-deductible debt any quicker. When you take the ROC distribution and pay it down on your mortgage, the amount of your investment loan that remains deductible is reduced dollar for dollar for the extra amount you pay on your mortgage.

If you receive a $1 distribution and make an extra $1 mortgage payment, then your mortgage is $1 less but $1 of your investment loan is no longer deductible. So, your total non-deductible debt is still exactly the same.

This is why we call this process the “4 Meaningless Transactions”.

You receive the ROC distribution, pay it onto your mortgage, reborrow the same amount to invest and then do the Snyder tax calculation to see how much of your investment loan is still deductble.

At the end of that, nothing at all has changed. You have the same amount of deductible debt, the same amount of non-deductible debt, the same amount invested – the only difference is that you did a bunch of work.

If the projections you are seeing show your total non-deductible debt being paid down more quickly then if you reinvested all distributions, then you should question the assumptions.

For example, the distribution is not related to the return of the fund – it is only getting some of your own money back.If the fund is a pension style, which means a balanced fund, then you can probably only expect long term returns of 6-7%, so if it is paying out 8%, the projection should show the “income” fund declining every year.

This is especiallly true now when interest rates are so low and expected to rise, so the bond portion of your balanced fund will likely make hardly anything. Bonds decline when rates rise.

You asked why the mortgage brokers and banks are recommending this. They all just do the mortgage. A ploy that that appears to pay off your mortgage more quickly is a good selling feature that helps sell mortgages.

You can find details of our service on our web site or by calling or emailing us. This is not an appropriate forum for talking about our sevice, but since your asked, in short, we are a comprehensive planning firm that focus on helping our clients figure out and achieve what they really want in life. We believe that the planning is what most people need most – not investment A vs. investment B. This includes advice in all financial areas, doing tax returns, etc., all of which is done for no fee. However, we are selective and only work with clients that are serious about their goals and work 100% with us.

With the Smith Manoeuvre, we do a few things differently all to get the best and cheapest mortgage, most effective investments and maximize tax savings. Our clients don’t normally pay any fees related to the mortgage or SM, since we are the advisor setting it up, not the mortgage broker. (TDMP needs to charge fees becauses they are a mortgage broker firm that is administering the SM.)

We are not restricted to only the 3 SM mortgages available to mortgage brokers. We have access to all SM mortgages, especially the ones with a few banks that tend to have the best products and rates. We also save money for our clients by sticking with 1-year terms (the best now) or variable (the best in normal environemnts) that are proven to save money.

The real key to the SM is the investments, so we focus on finding the best investments based on quality of fund manager and risk/return, instead of looking for funds that pay high distributions.

Ed

Yes, the dividends do not include any ROC returns. It is pure dividend income which, you may well know, is the preferred type of income from a tax point of view except at the highest of marginal tax rates (capital gains income wins out at the highest levels). For example, in Ontario you can make around $35k in just dividend income without paying tax – in BC it is more than $60k!!!

I would not support the TDMP process because of its high expenses. I’d always council people to don’t bother getting into something this sophisticated until they understand to a good degree leveraged investing and all of the risks/rewards. Of course, once you do, then it should be relatively straightforward to do everything yourself.

Even if you took out an SM friendly mortgage and then just borrowed once per year to invest, how much more difficult is that than coming up with those lump sum RRSP contributions? I have only once worked with a financial advisor that I knew had my best interests at heart. He ended up quitting the industry because of the conflict of interest he would have to live with every day.

My plan as of today is to put my faith in my investment planner and follow his instructions/directions. As I had indicated previously, he has advised that my portfolio will mirror the big pension funds ( Ont. Teachers, RCMP….). He has advised that the exposure will be diverse in risk elements however, nothing at the high end of the scale.

I will check into the investment clubs in the Ottawa area, if nothing else, I can learn the language to better understand.

Just to be clear, you do not support the TDMP process based on the fees what exactly? but do support the SM process as it can be self administered with a litle help setting it up?

For whatever it is worth, both FT and I decided (independently) to construct an SM portfolio heavily laden with blue chip dividend paying companies. My reason was that I could create a portfolio that, with my high marginal tax rate, would deliver a dividend stream that would more than cover the interest payments. Now, 1 of my 12 stocks has suspended its dividends and another has cut it in half. Yet, I’m still in good shape and my SM portfolio is positive in spite of being invested in September of last year.

If you are not able to ‘jump start’ your SM portfolio (e.g. possible if you have a lot of untapped equity in your home that can be released through the HELOC) then perhaps you should look at a couch potato portfolio (there are articles here about that) and find some TD eseries mutual funds that come close to it.

Why take that approach? Because if you have periodic small investments to make, you don’t want the commissions of buying stocks directly to constantly depress your returns. Mutual funds like the TD eSeries are low MER funds with no cost to purchase. You may decide, perhaps when they achieve a certain size, to sell them and then buy couch potato ETFs for an even lower way to participate in our stock markets.

Look for an investment club (or clubs) in your city. You may find that really helpful to be amongst a group of people with various opinions but no conflict of interest. Hopefully you can find one that welcomes the inexperienced to gently guide them through the field of investing.

I will have to check into the ROC situation and have forwarded a request for info from Ed so I can do a 1 to 1 evaluation of his solution vs TDMP’s.

It seems you may have found the solution in going with a financial advisor that was at the TDMP seminar. The one I have met operates out of TO but is up in Ottawa enough to hold my hand through the process until I become comfortable.

I would also like to hear from others on both side of the coin.

I am currently at the mortgage application stage of the TDMP process to convert my standard mortgage to a reinvestable mortgage with the LOC component. What I have read has made me second guess my next steps.

Ed, what is it that you offer through your services that differs from TDMP other than the rates. I am not well informed in the investment world and during my initial meeting with the investment side of the house, I felt very re-assured that the funds would be invested in a pension fund type portfolio. The investor showed me various printouts of what I could expect to see based on a 5 – 8% market return.

I do not want to simply pay off the mortgage and be left with an equal outstanding debt. My understanding is that the LOC is payed out from the investment portfolio after the mortgage is done….or you can continue the process to continue to build wealth.

Why is this being sold by the local Mortgage Brokers and Banks if it has so many pitt falls?

Pete, you seem to be pleased with the process thus far. I would be very interested in picking your brain as I not been able to speak with anyone directly who has “pulled the trigger” on this yet.