The Smith Manoeuvre

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Contents

Opinions

  • FirstLine Matrix mortgage is the best choice for my situation.

Ed Rempel's Picks

Good:

  • BMO Readiline or HOLC - From BMO only.
  • Merix HELOC - From mortgage brokers.
  • Royal Homeline - From Royal only.
  • TD HELOC - From TD only.

Bad:

  • Firstline Matrix - From mortgage brokers.
  • Manulife One - From financial advisors or Manulife.
  • Scotia STEP - From Scotiabank or mortgage brokers.

FrugralTrader

Good:

  • BMO Readiline
  • Firstline Matrix Mortgage
  • Royal Homeline - From Royal only.

Stuff to Look For

  1. Readvances automatically (not manually).
  2. Variable rate at prime -.5% to -.6% or better (at today's rates - recently reduced).
  3. Fully open. (Flexibility can be extremely useful in future years.)
  4. Allows investing directly from the credit line.
  5. No fees at all - no legal, appraisal, broker, or administration fee.
  6. Allows multiple credit lines (add one for emergencies or for the Cash Dam).
  7. Allows electronic transfers

Links

Accounts

Mortgages

Rates

Flow Chart

Image:Smflow.png

  1. Income from paycheques et al.
  2. Bi-weekly mortgage payments (this may need to be routed through the 'BMO Chequing' account)
  3. Mortgage payments are instantly transferred to the HELOC (principal only)
  4. Available HELOC funds are transferred to discount brokerage account for investing (not 100%, need to leave some behind for HELOC interest)
  5. Monthly, transfer HELOC interest payments to chequing account (so there is a paper trail of investment interest payments, in case of tax audit)
  6. Capitalize interest by transferring the money back to the HELOC
    1. Some debate on whether or not interest payments are deposited to HELOC or paid for from the chequing account
  7. Dividend strong portfolio pays monthly/quarterly dividends, transfer to chequing account
  8. Remaining income (after RRSP contributions and living expenses) is transferred to chequing account
  9. Monthly/Quarterly lump sum payments (not to exceed %20 of mortgage per year) payed to the mortgage account
  10. *** lump sum payments transferred to HELOC account
  11. *** lump sum payments (minus interest capital) transferred to discount brokerage.

Questions for FrugalTrader

  • Can you post a series of events that outlines the following:
    • setting up the SM (as well as with the RM twist)
    • the various transactions of a biweekly or monthly payment (SM and RM)
    • the various transactions at a yearly pre-payment (SM and RM)
  • What is your current investment portfolio distribution looking like?
  • What are your thoughts on GE and Encana for the SM?
  • What happens if you rent out your home? The portion of the house that is rented out (percentage), can be claimed as a tax deduction on the mortgage interest. i.e. renting 50% of the home results in 50% of the mortgage interest being tax deductible. Definitely an additional benefit on top of a SM.

Questions for Financial Advisor

Questions for Accountant

More Important

  • What can you tell me about the Smith Manoeuvre (SM)?
  • What are the dangers (i.e. what is the worst case scenario)? pretty much the same as without the SM, going bankrupt and forced to sell house and cover LOC while house price and market is down. Must repay LOC (whatever isn't covered by market liquidation) at high interest rate
  • Can you liquidate your leveraged investments at any time and invest in a rental property? Yes, but you will have to deal with capital gains/capital losses
    • What happens if there are capital gains issues? you have to pay them, as you normally would
  • What happens once the mortgage is retired and what is the next step? Slowly start repaying the LOC, make sure not to trigger too many capital gains each year. Also possible to keep the LOC and retain the tax benefits of the loan interest.
  • How do taxes compare with CA dividends (non registered account) vs US dividends (RSP account)? US Withholding Tax - to be researched later
  • Should I liquidate my non-reg investments to generate initial capital? YES, if possible
    • What if selling realizes capital gains? You have to pay them, it sucks, but usually worth it in the end for the principal payment
    • Are the laws on how long i must wait before i can re-invest in the same investments (after purchasing the real estate and starting the SM)? If sold at a capital loss, must wait 30 days, if sold at a capital gain, you can repurchase immediately. Capital gains are actually good for SM, because you essentially just reset your ACB and trigger CG taxation.
  • Should I use the HBP (RRSP withdrawal) to generate initial capital? YES, any extra down payment capital is always good and HBP is interest free, the best kind of loan.
    • If RRSP funds are withdrawn (HBP) at a capital loss, do i claim capital loss on tax return? RSP accounts cannot claim capital losses on anything (just as capital gains are not taxed)
      • Can I repurchase right away, or do i have to wait 30 days? I think so, i don't see why not since there is no CG/CL involved

Less Important

  • Differences when starting the SM in hot market vs cold market? Ideally you want to start in a cold market, so you buy at a lower price, then when re-appraising in a hot market, your equity will go up and you can borrow against a higher equity value, thus giving you more money to invest.
  • How well would $250,000 mortgage with a $50,000 down payment work with the SM (roughly)? FINE, actually the larger the LOC the better (more leveraging). remember though, 20% of that DP cannot be borrowed against, only the equity beyond 20% can be borrowed against (see mortgage LOC portion terms for more details)
  • What happens if you plan on selling your current real estate midway through the SM? FLM has portability which allows the LOC to be secured against the new real estate, hopefully with added equity!

Questions for Broker

  • Am I able to get a readvanceable mortgage? YES, fairly easy
    • What are the conditions, requirements? Just need 20% down

Links

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