Anyhow, with interest rates so low, I’m wondering what my options are, if I wanted to get a better rate, being in a closed mortgage. Is paying the penalty worth it?

I’m really confused, yet really happy to see how people are paying off their mortgage so much faster, and end up with a non-RRSP portfolio in the end.

Just wondering if I can apply it, and use it in my particular case. First house bought exactly 1 year ago, mortgage amount at $304K, on 5-year closed @ 5.2%. Balance right now should be at around $297K.

From what I understand, I have little equity. How can I eventually hope to perform a SM?

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The type of loan (HELOC) does not affect whether or not it is tax deductible. Tax deductibility is based on what you used the money for. If you borrow against your condo (rental) to make a down payment for your home, it is not tax deductible because the purpose of borrowing is to buy your home.

If you do that, you can do the SM on this HELOC, on your home, and on your rental condo. That way, you can convert this HELOC to tax deductible over time.

Have you worked out the cash flow on renting your condo? We have seen a lot of peope with rental condos in Toronto over the last few years and nearly all are paying $400-500/month out of their pocket. The rent is quite a bit less than the mortgage payment, property taxes, condo fees, insurance, repairs, and other costs.

Therefore, condos in Toronto are not really a good choice for a rental property. If you want to have a rental property, consider an older, multiple-unit building.

Your other option is to sell the condo when you buy your home so that you can do a larger SM. If you leverage a similar amount into the stock market or mutual funds to what you had planned to leverage by keeping the rental, you can make a far higher profit over time, as long as you invest effectively and for the long term.

Ed

A couple of things you need to know. First, CIBC is the only bank with no SM mortgage at all. You will have to use a “fake SM” strategy of some sort if your mortgage is with CIBC.

Most bank employees don’t seem to get much of a benefit in mortgage rates, so you may well be better off with a real SM mortgage at another bank. We are recommending 1-year mortgages today and are getting 2.4%. Is your rate better than that?

Also, the SM can easily be moved to your next home, as long as you will have at least 20% down.

We would not recommend the SM as a short term strategy of 3-4 years, but as long as you will have the 20% down, even though you are readvancing the mortgage, then you can easily move the SM credit line to your new home then and continue the SM.

Where the market fluctuation of only 3-4 years may hurt you is in the price of the condo. We usually recommend staying at least 5 years in any home. Otherwise it is usually not worth buying.

When you include all the costs, such as real estate commissions on selling, legal fees twice, land transfer tax twice, GST, etc., it is unlikely you will get your money back after only 3-4 years.

You may want to consider renting. The condo market is strange in Toronto now, with rents not keeping up with rising prices over the last few years. Therefore, you can probably rent the same condo you want to buy for $300-500/month less than owning.

Ed

Just to add to FT’s comments, the other advantage of the SM over ordinary leverage is that the SM does not require any of your cash flow. If you have other good uses for your cash flow, then the SM is usually better than ordinary leverage.

We would not suggest your try the SM if you are planning to try it for only 1-2 years. It is borrowing to invest, which is a risky strategy. The risk declines very significanlty with time. To be effective, you need to be the kind of person that will stick with the strategy when the market goes through significant declines.

If you are planning to just “try it”, it is unlikely to work for you. The first time the market declines, you may sell and abandon the SM, and if you sell at a low, you will probably lose money.

If you are concerned about having credit lines reduce your credit score, most SM-type mortgages will show up on your Credit Bureau, but not all. The best ones are mainly with the banks, and those will all show.

What you can do to maintain your credit score is to not max out the credit line portion. Leave 10-20% of the credit limit available. Your credit score may be reduced if you have a few credit lines and all are maxed. So leave some credit available in some, if you can.

Ed

I just heard about the SM and was wondering if I could still apply it to my case.

I own a condo in Toronto that’s almost paid off, planning to get a bigger house in the suburbs, however, money that will be used for the downpayment is tied up in the condo. I’m planning on renting out the condo as an investment property instead of selling it to get the cash. If getting a HELOC to make the downpayment would turn it into a personal loan (not tax deductible), what are my other options on how to structure this? Thanks.

I am looking to purchase my first home (a condo in downtown Toronto), and have already been approved for a mortgage with CIBC. As I work for CIBC, I have received a relatively low interest rate. The closing date on my condo is November 1st, and I just recently heard about the SM. I’m trying to do as much research as possible before jumping into this and have a few questions for you; first off, I am only planning on living in the condo for about 3 or 4 years, then buying a larger home in the suburbs. So I’m wondering if my ’short term’ ownership plan makes me an un-ideal candidate for the SM. I realize this will likely subject me to fluctuations in the marketplace (given the investments) moreso than someone with a longer time horizon. Also, my initial plan was to pay down my mortgage as soon as possible – I would likely be able to pay it down within 4 years.

Any advice for someone in my situation?

Thanks!

I am definitely going to consider it. I guess there is little harm in trying for 1-2 years; a short-term. I just need a decent rate, and also, a readvanceable that doesn’t report everything to the credit bureau every time you use the HELOC…

Cheers!

1. Remember, with a readvancable mortgage, if you invest with the HELOC, you are basically investing the equity of the property. So basically, you can make 80% of your rental property value tax deductible instead of whatever is left on the installment portion of the mortgage.

2. That’s the scenario that I’m in. We’re on our way to paying off our mortgage in about 3-4 years, but we still do the SM.

3. A HELOC will give you a preferred rate over a traditional LOC. So in terms of investing with borrowed money, it makes sense to reduce your overhead.

1) you get a readvanceable mortgage for your rental property; but you can already deduct many / most of your operating expenses, including mortgage interest for tax purposes?

and/or

2) you are already making mortgage pre-payments, to pay down your mortgage

and/or

3) you can simply “borrow to invest” without the SM; and deduct the interest paid to borrow the money for tax purposes?

Thanks in advance for your input!

What makes the SM so attractive, besides its advantages, is its eminent rationality.
So, I would suggest that the repayment of the HELOC should also be guided by the same sober rationality and not by “feelings.”
I always explain to my clients that keeping the SM in place as long as possible is in their best interest. Mainly because their port folio would probably earn more yearly than their retirement income would be otherwise.
However, the repayment of the HELOC could be justified by two reasons.
First is if the payment of the interest is so burdensome that they can no longer afford it. This is unlikely to happen if the investments are performing well.
The other reason would be if they could not take advantage of the tax write offs. This is also quite unlikely to happen after they accumulated a large port folio, because its income would certainly entail tax obligations that would be at least partially offset by the tax refunds.
So, unless one of these two conditions are met, the HELOC should not be paid back.