Prime -1%? That interest rate is not available now. Do you mean prime +1%?

I would recommend to avoid variable rates for now. We believe that mortgages with big discounts from prime will be available again in a year or 2, so stay short. You will probably regret locking in to a mortgage for 5 years that does not have a big discount from prime when those become available again.

I would suggest to stick with 1-year fixed for now and enjoy the amazingly low 1.99% rates available now.

Ed

You’re right on the first part. I called Firstline today and we’re going to be renewing at a much lower rate. We were initially locked in at 5.79 when we activated the matrix part of the mortgage, but they’ve changed the product now so we’ll be a Prime-1. As for the second part, it is risky, but I’m comfortable with the investment, and the manager so I’m willing to accept it for now.

2 questions:

Mortgage at 5.79%??? That is ridiculously high. Most likely, you will benefit by paying the penalty and getting a new mortgage. We are getting between 1.99% to 2.3% for 1-year fixed today.

What kind of investment bond are you referring to that pays 15%? That must be a high risk investment and is likely unsuitable for the Smith Manoeuvre. It is a leverage strategy, which already magnifies your gains and your losses. Using it to invest in high risk investments is extremely risky.

Ed

Using our example, we have a 120k HELOC setup at 2.5%/a. Mortgage is locked at 5.79%.
We’ve pulled 100k of that into investment bonds returning 15%/a, paying out quarterly. Our first quarter payment came in and it was only 2 months worth, so we held that in the tracking account to pay the HELOC interest costs. I’m debating whether or not I should “capitalize” that interest by pulling that money back out of the HELOC, and getting back up to the original $2500, or just leave it at the eroded amount.

Now, our second interest payment has arrived, and I’m ready to get this into full swing and make a mortgage payment. So, assuming I capitalize that interest, I’ll have $6250 in the tracking account. So, I’m thinking I withold the 40% for tax, make a mortgage payement of $3750, pull 10k out of the heloc and reinvest it, and go on my merry way till next quarter. Rinse, repeat.

All the while, we’re still making our accelerated payments of $700 into the mortgage.

So, am I on track or have I botched this?

Is it true? if so, i have to xfer money from my HELOC account to my saving account very month so Etrade can withdraw it? I am so confused

Thanks for any helps

[...] Hopefully by this point, we would have employment lined up, but if not, we would need to dip into our portfolios or line of credit.  If rates were to remain low like today (2.25%), it would be a toss up on whether to use the line of credit or liquidate our portfolio.  The largest downside of the line of credit is that it would create an additional monthly expense, unless we were to capitalize the interest. [...]

How do you keep track of how much the interest payment will be for the current month. It will always increase, and I can see myself making errors on the amount if I calculate it myself.

Do the LOC’s have automatic interest payments where the bank will automatically pull the funds out of an account?

Based on the SM Money flow diagram shown here, if I make a capital gain in my discount brokerage account, but do not withdraw that gain and simply re-invest it, then will I still be able to claim all of the interest paid on the originally borrowed money?

Thanks,
Universal.Trader

I read that quote from Fraser and have not talked with him since then. I’m not sure exactly what he means, but he was advocating mutual funds with ROC distributions. I took his quote about Cash Dam as referring to this, since I believe he had been using Cash Dam as an explanation for the ROC process.

Anyway, it works perfectly for rental properties and nonincorporated businesses. It is purely a tax strategy – not an investment strategy. Your mechanics sound exactly right, Alan.

Ed

Thanks for the quick reply. I read one article in specific where Smith said he wasn’t going to be recommending it after the Lipson decision….and then all the naysayers started blogging! At any rate, I read IT-533 and, trying not to be daft here, but the mechanics for me would be – pay eligible expenses from HELOC, draw on property revenue for lump sum on personal mortgage portion of HELOC…right?

Thanks again.

What are you reading? The Cash Dam is specifically mentioned and allowed by CRA in IT-533.

I have seen quite a few advisors use the Cash Dam as somehow an explanation that allows an investment loan to stay deductible if you take ROC distributions out of a fund. That doesn’t fly, but that isn’t Cash Dam.

Using Cash Dam with rental properties works well to make your home mortgage deductible.

Ed