Smith Manoeuvre Mortgages

Million Dollar Journey was kind enough to host our story about Smith Manoeuvre mortgages ("Smith Maneuver mortgages" for the spelling challenged) today.  You can read it here.

If you're looking for this type of product, you'll also find MyVirtualMortgageBroker.com's comparison of Smith Manoeuvre mortgages of interest.

Comments

[MillionDollarJourney.com]

Thanks for the mention Melanie! Great article btw.

FT

[Henry Jameson]

Outstanding work Melanie! This list will be an excellent resource for SM users. I have yet to find anything else like it on the net.

Henry

[Brian Poncelet,CFP]

Good work Melanie!

I have one question, which banks will allow the HELOC to capitlize the interest in order to make the Smith Manoeuver work with less hassle? I know Manulife One can do it but, this product is not for everyone. For your do it your selfers (DIYS) this would be very interesting...I think almost no one capitilizes interest rates.

Regards,

Brian

[Online Mortgage Broker]

Hi Brian,

This is a great point. I will add a column to the Smith Manoeuvre mortgage comparison to note which products allow for capitalization of interest. As you point out, there aren't many!

Just give me until next week and I'll try to get the info direct from all the lenders. Things change all the time so I want an update straight from the horses mouth.

Best,
Melanie

[Brian Poncelet,CFP]

Hi Melanie,

Thanks for your help! There is many mortgage brokers who claim to do the Smith Manouever but never talk about interest capitalization... see pages 72-74 of Frasers Smith's book. Because of this, very few do the SM or charge a monthly fee to administer this!

I have called some brokers who claim to do the SM, but they will admit later they have not read the book!

Try it yourself! Almost no one does it! ( mortgage brokers) The banks are even worse! No one can give their clients as a case study on how to do the SM, if it so popular then this should be no problem!

Regards,

Brian

[Online Mortgage Broker]

Hi Brian,

There’s a lot of truth in that. The Smith Manoeuvre may be theoretically simple (once you grasp its basics) but, in practice, it has some important non-intuitive technicalities. Interest capitalization is a case in point.

There’s also a lot of client specific considerations. For these reasons, we don't give investment/tax advice on it. We refer such questions to a handful of highly trained financial advisors we work with. That lets us stick to our core competency: selecting the best Smith Manoeuvre mortgage for the client.

While I won’t speak for all mortgage brokers, I will say this. Some mortgage agents try to do it all. I think that shortchanges the client sometimes. Only qualified financial advisors are truly equipped to handle the Smith Manoeuvre’s tax/investment aspects—especially with the more advanced variations of the SM.

And yes, there are a lot of posers out there! We try not to be one of them. :)

Have a wonderful evening,
Melanie

[Brian Poncelet]

Hi Melanie,

How is that interest capitlaization column coming? I believe this is the most important feature to the SM!

regards,

Brian Poncelet,CFP

[Online Mortgage Broker]

It's almost done! I posted the info for 10 of 12 lenders. Just waiting for Vancity and RBC's responses.

Here's the updated page:

Smith Manoeuvre Mortgage Comparison

Have a good weekend.

Melanie

[Brian Poncelet]

Hi Melanie,

Thank you for your work but think the interest capitalation is wrong for a few banks. I talked to a director of business development and an underwriter, both told me that Merix CAN NOT CAPITALIZE INTEREST!

The director of business development (ontario) told me they do not have the technolgy to pay the interest from the reserve HELOC. I believe there may more banks that also can not capitalize
interest that you have listed. I will try to dig deeper for you and get the facts, it's a lot of work!

Regards,

Brian Poncelet,CFP

[Canadian Mortgage]

Hi Brian, We got that info from our BDM at Merix. I'll call you to find out who you spoke with. All our Merix info was reviewed by them twice but that doesn't necessarily mean anything. I will double-check and report back shortly. Thanks for the note. Melanie

P.S. If you need our contacts at each lender let me know and I will provide you their numbers.

[Canadian Mortgage]

Brian, We're having certain lenders recheck the information they provided us. Your assistance has been valuable and greatly appreciated!

CMT

[Sandor]

Hello!

A pleasant surprise to find this site.
I am an advisor doing the SM with some regularity, so the comments were interesting to read.
If you permit, I would like to add my view related to capitalizing the interest.
Capitalizing may appear as necessary, in fact essential, when the LOC is added to the mortgage, thus increasing the monthly payments to an unsustainable level. In this case the client has scarcely any other escape but to capitalize. This however, will increase the over all debt.
I don't think I would recommend this to anyone.
Instead, replacing the mortgage completely with an LOC would, in most cases, lower the monthly payments and liberate further funds for investing, while the level of indebtedness wouldn't increase.

Sandor

[Brian Poncelet, CFP]

Hi Sandor,

I am confused with your statements.
A line of credit is 6.25%. A varibale mortgage is prime -.5% ...
5.75%. A five year fixed is say 5.8%. You want some to replace that with a higher interest rate and invest that extra money where?

regards,

Brian

[Marc S.]

I have just stumbled upon this site in my research into the Smith Manoeuvre. The capitalization of interest is what I find difficult to understand - or at least the discussion of lenders not allowing recapitalization. Some of the lenders state that the LOC funds are mine to do with whatever I want - buy a car, take a vacation. So why can't I simply withdraw the necessary funds and then turn around and deposit the necessary amount to cover the interest? How can the lender know where the funds for the payment are really coming from?

[Canadian Mortgage]

Hi Marc,

Some lenders don't want to make it too easy for you not to pay your LOC interest from your own funds. :)

Just as often, the reason given by lenders regarding their inability to charge your LOC for the interest due is technical. Their back-end systems are simply not set up to permit charging the LOC itself for the interest each month.

However, I've never heard of anyone having trouble with withdrawing from the LOC to a chequing account, and then using those funds to pay the LOC interest.

Rob, Co-Ed. CMT

[Alex]

I was wondering if it would make sense for me to perform the smith manoveure if I have exactly 80% remaining on my current mortgage from a house that has a value of $420 000?

[Canadian Mortgage]

Hi Alex,
80% loan-to-value is generally a fine starting point for the Smith Manoeuvre. It depends on your whole financial picture though. It's always best to chat with a qualified financial advisor to determine suitability. If you need a referral for someone who offers free consultations just shoot us an email.
Cheers,
Melanie

[Tim]

Is Investors Group the only Mortgage broker that works with the Smith Manoeuvre that allows 100% repayment at any time with no penalties?

[Brian Poncelet, CFP]

Hi Tim,

Short answer is no. Having worked at Investors Group the plan is to sell you IG funds or third party funds with higher fees.

regards,

Brian

[Mortgage Broker]

Hi Tim,

Check out National Bank, Manulife, and BMO. If you need any help feel free to shoot us (or me) an email.

Cheers,
-Melanie

[Life insurance in Canada]

I have heard about Smith Manoeuvre and I think this is a good way for you to turn the debts into annual tax refunds and build a larger retirement portfolio at the same time.

I read the question from Canadian mortgage: "Is Investors Group the only Mortgage broker that works with the Smith Manoeuvre that allows 100% repayment at any time with no penalties?", but I cannot find any answer. Could someone help me with this?

[Online Mortgage Broker]

Hi LIC,
Melanie answered the question above I think. National Bank, Manulife, Envision, and BMO are some of the other options.
Cheers,
Rob

[Sandor]

I am sorrym but I don't monitor this blog regularly, (although I know I should) and so, Brian's reply wasw missed:

This is what he writes:

"Hi Sandor,

I am confused with your statements.
A line of credit is 6.25%. A varibale mortgage is prime -.5% ...
5.75%. A five year fixed is say 5.8%. You want some to replace that with a higher interest rate and invest that extra money where?

regards,

Brian

Posted by: Brian Poncelet, CFP | October 20, 2007 at 05:46 PM"

So, hi Brian!

Indeed I am advocating the replacement of the mortgage with the LOC. As you point out in your example, the interest rate on the LOC is higher. BUt the mortgage rate, albeit lower, is compounded twice yearly, while the LOC interest is not at all, since it is always paid up to date. This results in more, or less in the same monthly payments. (My observation is that if the amount of the surplus LOC is chosen carefully, then the saving can be 2-3 hundred dollars a month.) But the more interesting result is the fact that on the LOC there is no need to pay principal payments, those can go strait into the investments. The combination of this two "collateral" consequences give an advantage to the LOC.