HawthorneVillager.com

Well went to a seminar down in Oakville last night about the Smith Manoeuvre and how to make your existing bad debt non-deductible mortgage into a good debt deductible interest mortgage.

Was a 45 minutes seminar. There were two speakers one from each side of the equation a mortgage specialist and a financial advisor. Both are required to execute. They are there to sell THEIR products.

The seminar was very informative, answered a lot of questions and covered several scenarios. There were also 2 people there who are currently using it.

It was interesting to know that two of Canada's biggest schedule A banks are behind this CIBC via Firstline Mortgages and RBC through Matrix Mortgages (or a name similar).

What is very important here is the flow of money - where it comes from and where it goes. You also have to invest in their blue chip mutual funds that range in return - of course the higher the return the greater the volatility but also the higher the MER. The MER's range from just over 1% to 3% (so we were told yet to be confirmed). Returns after MER charge have been ranging from 8-12% (so we were told yet to be confirmed). To complete the transaction it takes the better part of 3-4 months as they need the timing and movement of the cash to be absolutely perfect.

Here's a detailed example -

Appraised value of Home $400K
Existing Mortgage balance $200K

Essentially you have $100k equity you can use/take out without incurring CMHC fees. It's sitting there doing nothing when it could be working for you. I'll touch on this later when I touch on the Accelerator.

From what I understood;

You have your regular chequing account, we'll call it #1, that your pay cheques get deposited to and your mortgage payments (whatever frequency) get withdrawn from. You make a payment on your mortgage and a small amount is applied towards the principal. That small amount that is applied to the principal is then available and taken out of a set-up ILOC (Investment Line Of Credit) and moved into a different chequing, let's call it #2. The money is then withdrawn from #2 to purchase these Mutual Funds while at the same time a small amount is being clipped off to service the interest on the ILOC and that interest generates a tax deduction at the end of each year - and each year it will be bigger and bigger. Now this is what I can't remember - if the income/earnings/distributions from the funds re-invested in a DRIP (Dividend Re-Investment Plan) for the compounding effect or paid back into #1 to be applied as a principal only payment on the mortgage to free up more funds on the ILOC ultimately to be purchase more mutual fund units.

As you can already see you'll be taking advantage of dollar cost averaging by buying units on a regular basis at different points in the market.

At the end of each year you're going to claim the ILOC interest. With the monnies you get back from the govt your going to apply this again to your mortgage as a principal only payment which in-turn becomes available on the ILOC to be moved into #2 to have some clipped off to service the interest then buy more units.

Now this whole process can be accelerated, this is where the equity in your home comes into play.
You take some of the equity in your home and open another seperate investment account which is invested in the same the type of Mutual Funds but the income/earnings/distributions are paid back into #1 to be applied against the mortgage principal which in-turn again frees up more money on the ILOC to be moved into #2, some clipped off to service interest on the ILOC then invested.

Your mortgage will be paid off faster and the ILOC interest will keep increasing generating a larger deduction each year as it was used for non-registered investments.

I am doing some further research and might even request to have the Financial Advisor come to show me some figures with their Smith Manoeuvre calculator using my numbers. Also have a few other people looking into for me.

Cheers,
Gman

Here's a bunch of questions I have come up with and emailing to the advisor -

The presentations were both very well done and before I had the time to consider the various aspects, the seminar was
over. Since then, I have been thinking about the process and now, I have several questions.
Before I proceed with any further discussions, I would appreciate further clarification of the questions that have come
to mind since the seminar. Other than the fund companies listed below, please provide a list of the other fund
companies that are available to me?
„« Clarington Funds Inc.
„« Stone & Co. Ltd.
These companies offer a variety of investment options which raise the next question:
„« are there any restrictions that limit my selection of the funds offered by each of the companies?
„« you mentioned that the distributions from the investment options are monthly. Do I have the choice of selecting
funds that provide other than monthly distribution of dividends?
„« are the MERs stated on each companies sites the same as what I would receive as your client or would you as a
bulk buyer, be passing on a reduced MER to me? If yes, what would the new MERs be?
„« as the historical annual returns reported by each of the mutual fund companies includes the reinvestment of
dividends, I would appreciate if you would provide the returns of the funds available to me based on the distribution of
income being used to subsidize the monthly payments. The annual returns I would appreciate would be the customary 30
day, 3 month, 6 month, 1 year, 3 year and from inception of the funds.
„« are there any up front, monthly, trailing or other fees associated with any of the funds? If so, please provide
details.
You mentioned there may be two options available to me, which I believe were:
„« funds could be held by the fund company ¡§In Trust¡¨ where tax is deferred until such time as the
investment is closed and;
„« funds could be held by the fund company in my name where dividend income would be subject to tax during the year
earned
Is my understanding of the above correct and do I have a choice?
As nothing in life is free, I must assume that other administrative costs exist relative to the process and may be
collected from the distribution of income. As such, I would appreciate if you would provide specific details with
regard to any fees collected up front, or deducted at any time during the operation of the program or at the point of
termination. Additionally, who provides the account set up to receive and process the monthly distribution of income?
What fees are associated with that account?
What is the reporting frequency?
Assuming the new lender offers both fixed and variable rate mortgages with different interest rates based on term and
type of mortgage selected, do I have a choice of terms and amortization of the new mortgage? If yes, what are the
current rates offered by each of them?
Am I correct to assume that any excess of the monthly payments is applied to the mortgage until such time as the
mortgage has been fully converted to an investment line of credit? Then, is it correct that my monthly payments will
stop when the revenue from the investments exceeds the monthly expenses? Also, is the mortgage discharged and the
investments held used as security for the investment line?
I didn¡¦t understand the details of the ¡§accelerator method¡¨ mentioned and would appreciate clarification.
You also mentioned that the only ¡§out of pocket expenses¡¨ are those required for the appraisal fee? As I have
an existing mortgage that will be subject to a form of penalty for early payment, is that expense paid by the new
mortgage provider or would it be added to the new mortgage itself? Who picks up the other costs associated with the
discharge process of the exiting mortgage? And who is responsible for the legal and other fees required for the
preparation and registration of the mortgage and distribution of funds? For example, the approximate market value of
the house is $___,___ , and the present mortgage balance is $____,___ and assuming I want my P & I payments to be the
same amount $___.__ , I will require a mortgage in the amount of $___,___. If I apply for a mortgage in that exact
amount, is that amount subject to any increase for the collection of any other costs?
When I purchased the home, I also purchased Title Insurance. Does that policy continue if the mortgage is paid and if
not, will Title Insurance be provided by and at the cost of the new lender?

Cheers,
Gman

Yeah but past returns provides no indication of future performance. Over the long term that MER's going to eat up your possible returns.

Do you really have to "invest" in their funds? Can you get help to do this "smith maneouvre" if you wanted to just put it in a straight index fund? Something like the TD TSX index eFund which has like a 0.31% MER. I'd be interested in learning more about this, but wouldn't want to be forced/restricted on what investment it could go into. Sounds like at that seminar they'd steer your money into only their mutual funds?

OK.....

I can answer some of these.

You can do a Smith Manoever with ANY bank...provided you are working with someone who knows what they are doing, and as this is a VERY in-depth, specialized program, there aren't many people who are extremely knowledgable in explaining OR executing this strategy.

Our bank, Scotia is one of the most "friendly" banks for this, as one of ou products, the "STEP" is a very accomodating feature of our mortgages, that enables the Smith to be executed over and over without re-applying for the mortgage, with a variety of benefits.

From the investment perspective, you do NOT have to invest in specific assets....

HOWEVER.....

you DO need to as GMan stated, to have a mortgage specialist, and a financial planner to execute this....

The financial planner you use may have restrictions as to what assets they are able to sell/work with....for instance, an Edward Jones rep may only be able to sell certain assets, whereas, an Investor's Group agent may only be able to sell other assets and funds. Each financial planner is unique as to their product range.

If you have any questions feel free to let me know, as this is a maneuver that I am quite familiar with, and I am still in the midst of organizing a seminar on this as well, for HV'ers......in the very near future.

Jessica

Rick, we both hit reply at the same time!

Just posting so you can see my response and all my questions just above your reply.

Cheers,
Gman

Why do you need a financial planner for this? I can pretty much understand why I'd need a bank/mortgage specialist. But what's the financial planner doing? What's the requirement that someone use one?

Couldn't this be simplified if one had current investments that could cover their current mortgage?

i.e. hypothetical example
(1) Current Mortgage is $100,000
(2) Current investments (outside of RRSP) is say $100,000

When mortgage comes up for renewal, could you simply sell $100,000 of your current investments to pay off the mortgage totally. Thus you have no mortgage anymore for a couple days

... Then take out a new investment loan/mortgage against the house for $100,000 for investment purposes..Wouldn't that make the new debt "good" ? i.e. the interest on that would be tax deductable?

Is the financial planner just required if you're doing the monthly step part? Where every month you have part of your principal payment moving/flowing into your investment? If you didn't do it on a monthly basis, and instead did it only as a one-time-thing only, do you still need a financial planner?

you can, Rick, it's not a legal requirement or anything. However, it's definately strongly recommended to have a professional on your side as there are so many finite little things to remember in order to not create problems for the tax savings. So many little rules.....

I am comfortable in doing all of this, as a mortgage specialist, but to be able to expertly carry this off, to the fullest of your capacity, and to create the best scenario possible with all benefits, I would suggest having some kind of professional on your side to ensure you are reaping the rewards, whether it be your FP, or an accountant, or whatnot.

The worst thing in the world would be for you to think that you have this going for you, and then being audited, and finding...uh-oh....I missed that little loophole!!

It really depends on your personal situation, financially, tax-wise, etc. etc. on how to make that decision.

Jessica

oh Ok yes that makes sense. I'd need expert assistance in regards to mortgage and tax/accounting help to make it proper so CRA doesn't say I did it wrong. But in my personal situation I wouldn't want a financial planner who tried to restrict investment options or steer us towards only the ones they carry.

Guess I would need more of both a mortgage specialist and a tax accountant who had experience in home mortgages for investment purposes.

From what I can see thus far it's loaded with fees!

Cheers,
Gman

I have been doing a lot of reading in reagard to this for the past little while also. While the concept is interesting, there are a few points that you have to be aware of otherwise you can really screw things up.

This biggest problem i see with the SM is that you are pretty much limited to buying mutual funds for investment. The reson is that you a buying units over a period of time, ie. after every mortgage payment. Only with MF can you do this without getting dinged with huge commission fees.

A lot of people WANT to buy ETF's instead, but remember you need a self directed trading account to buy ETF's and you pay comission each time you buy new units - which will lead to huge commission fees. Unless you have a trading account with extremely low comissin fees, it is really not feasible.

Another thing that came to mind was using seg. funds for the SM. With seg funds you can guarantee up to 100% of your initial investment is returned - thus at least you can never lose what you put in.

The SM its definitely interesting. And the discussion is helpful in throwing ideas around.

cheers.

the monthly PAP, which I believe you are referring to, is what they refer to as a level 3 or 4 "Manoever". It is more complex. There are a few other ones, that I promote over that particular one, which have great results without that administration, and they work on an annual, semimonthly or quarterly schedule.

Come on our to my seminar, I think that my approach to this might be a little towards what you are looking for for your personal approach.

Remember, as with my premise with ALL my clients, whether it be a financial planning client or a first time homebuyer, there are so many options out there you can pick and choose what works best to your specific situation, and that is where you benefit with working with me! (!) cheeky, eh? haha But seriously, anyone with some knowledge in the mortgage industry can do your financing, you should be looking for someone who goes the extra mile to provide advice and knowledge, with expertise along the way, similar to how you would choose for instance your financial planner and r/e agent.

I do welcome you to come out.

The seminar tonight, btw was postponed due to the weather, we are rescheduling in the next 2 weeks....so if anyone would like to attend, please contact me, it would be great to put some faces to some on here!

Jessica