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Comparison Of Popular Readvanceable Mortgage Products In Canada
- Thread starter MooseHead
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QUOTE (MooseHead @ Sep 19 2010, 10:16 AM) Also, has anyone had any personal experience with any of these mortgages? If so, how did/do you find them from an investors point of view?
Cheers,
MH
They work very well in my opinion. We have numerous STEP mortgages and a couple at Firstline (Matrix) and we use the LOC portion as our Reserve Fund. So all excess cashflow goes to prinicipal paydown, which increases the amount of available LOC every month. I find this much easier than managing another bank account to hold reserve funds and is a "forced" savings program. Also, if/when we build up enough equity in the properties, a portion of the available LOC could be used as seed capital for the next investment, thus making the interest paid on the LOC tax deductible.
The only downfall with the Scotia STEP is that you have to make a request every time that you want to access or "up" the LOC portion, but other than that, it is very slick.
Regards,
Cheers,
MH
They work very well in my opinion. We have numerous STEP mortgages and a couple at Firstline (Matrix) and we use the LOC portion as our Reserve Fund. So all excess cashflow goes to prinicipal paydown, which increases the amount of available LOC every month. I find this much easier than managing another bank account to hold reserve funds and is a "forced" savings program. Also, if/when we build up enough equity in the properties, a portion of the available LOC could be used as seed capital for the next investment, thus making the interest paid on the LOC tax deductible.
The only downfall with the Scotia STEP is that you have to make a request every time that you want to access or "up" the LOC portion, but other than that, it is very slick.
Regards,
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We have a couple of the CIBC Matrix mortgages and several Scotia Step mortgages. Much prefer the Step as they offer more options, and generally Scotia has been more investor friendly over the last 3+ years.
Note that Scotia will also register the Step Mortgage at the full appraised value of the property rather than at the loan amount, no good if you plan to take out a 2nd mortgage on the property, but very good if you might want to re-leverage the property during the term of the mortgage - which assumes the likelyhood of significantly higher value during the mortgage term. The benefit here is no need for a new mortgage or legal or registration costs, just a mortgage amending agreement (and of course Scotia being a willing lender).
Note that Scotia will also register the Step Mortgage at the full appraised value of the property rather than at the loan amount, no good if you plan to take out a 2nd mortgage on the property, but very good if you might want to re-leverage the property during the term of the mortgage - which assumes the likelyhood of significantly higher value during the mortgage term. The benefit here is no need for a new mortgage or legal or registration costs, just a mortgage amending agreement (and of course Scotia being a willing lender).
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We have a Scotia STEP on one property and in addition to the full-value mortgage registration Garth mentions, we experienced the following: 1) The mortgage contract explicitly forbids registration of any other loans on the property, which put the kibosh on a VTB loan we`d arranged. 2) Accessing the LOC required a complete new application and qualification by Scotia. So basically, we had the worst of both worlds - couldn`t put on secondary financing and couldn`t access the LOC.
Unfortunately, our broker did not inform us of either of those conditions and we didn`t learn about them until it was too late.
We also have several RBC Homeline mortgages and they were set up from the start with active LOCs. The contract permits additional secondary loans, with notice to RBC.
I`ll also second the technique Monte mentions. We`ve used the LOC balances as a substitute for cash-balance reserves, to fund value-improving renos and have drawn on them to purchase new properties - a very easy way to access additional capital.
Unfortunately, our broker did not inform us of either of those conditions and we didn`t learn about them until it was too late.
We also have several RBC Homeline mortgages and they were set up from the start with active LOCs. The contract permits additional secondary loans, with notice to RBC.
I`ll also second the technique Monte mentions. We`ve used the LOC balances as a substitute for cash-balance reserves, to fund value-improving renos and have drawn on them to purchase new properties - a very easy way to access additional capital.
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QUOTE (JimWhitelaw @ Sep 19 2010, 11:36 AM) 2) Accessing the LOC required a complete new application and qualification by Scotia. So basically, we had the worst of both worlds - couldn`t put on secondary financing and couldn`t access the LOC.
Hi Jim,
When we went to access the LOC at Scotia for the first time, we did have to sign some papers, but I don`t believe there was any qualification as this amount was already registered on title and approved as the "Global Borrowing Limit".
So you are saying that Scotia declined the request to even access the LOC, even though it shows on every statement and online banking how much LOC that you can have access to??
Hi Jim,
When we went to access the LOC at Scotia for the first time, we did have to sign some papers, but I don`t believe there was any qualification as this amount was already registered on title and approved as the "Global Borrowing Limit".
So you are saying that Scotia declined the request to even access the LOC, even though it shows on every statement and online banking how much LOC that you can have access to??
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QUOTE (MonteDobson @ Sep 19 2010, 11:52 AM) So you are saying that Scotia declined the request to even access the LOC, even though it shows on every statement and online banking how much LOC that you can have access to??
Yes. We were told by a Sr. banker at the branch that in order to access the LOC, we`d have to submit a complete new application. Part of the reason given was because the mortgage was arranged by a broker and not handled by the branch directly so they didn`t have all the required information. (??)
Also, I found another comparison of re-advanceable mortgages available in Canada. It is far more comprehensive than the 3-product comparison in the OP. No doubt the the 3 products compared in the referenced article are the ones that the author is licensed to sell. This comparison covers a dozen different products:
http://www.myvirtualmortgagebroker.com/Smi...h-Maneuver.html
Yes. We were told by a Sr. banker at the branch that in order to access the LOC, we`d have to submit a complete new application. Part of the reason given was because the mortgage was arranged by a broker and not handled by the branch directly so they didn`t have all the required information. (??)
Also, I found another comparison of re-advanceable mortgages available in Canada. It is far more comprehensive than the 3-product comparison in the OP. No doubt the the 3 products compared in the referenced article are the ones that the author is licensed to sell. This comparison covers a dozen different products:
http://www.myvirtualmortgagebroker.com/Smi...h-Maneuver.html
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The one thing I`m not grasping from this (and I`m sure it isn`t complicated) is how does a re-advanceable mortgage turn your personal residence mortgage from a non-deductible debt to a deductible debt? I understand that interest paid on a mortgage or heloc for an investment property is tax deductible, but how does this apply?
I have no brain power left in me for the day, please help!
Cheers,
Chris
I have no brain power left in me for the day, please help!
Cheers,
Chris
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QUOTE (MooseHead @ Sep 19 2010, 08:06 PM) The one thing I`m not grasping from this (and I`m sure it isn`t complicated) is how does a re-advanceable mortgage turn your personal residence mortgage from a non-deductible debt to a deductible debt? I understand that interest paid on a mortgage or heloc for an investment property is tax deductible, but how does this apply?
I have no brain power left in me for the day, please help!
Cheers,
Chris
By itself it doesn`t. It`s all about what you do with the money you borrow from the LOC. If used in the pursuit of profits then generally the interest cost is deductable.
I have no brain power left in me for the day, please help!
Cheers,
Chris
By itself it doesn`t. It`s all about what you do with the money you borrow from the LOC. If used in the pursuit of profits then generally the interest cost is deductable.
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QUOTE (JimWhitelaw @ Sep 19 2010, 04:57 PM) Yes. We were told by a Sr. banker at the branch that in order to access the LOC, we`d have to submit a complete new application. Part of the reason given was because the mortgage was arranged by a broker and not handled by the branch directly so they didn`t have all the required information. (??)
Also, I found another comparison of re-advanceable mortgages available in Canada. It is far more comprehensive than the 3-product comparison in the OP. No doubt the the 3 products compared in the referenced article are the ones that the author is licensed to sell. This comparison covers a dozen different products:
http://www.myvirtualmortgagebroker.com/Smi...h-Maneuver.html
Hi Jim,
I hate to say it, but I think you really got some bad direction with your Scotia Experience. I`m guessing that you were dealing with a branch that didn`t have a great relationship with the broker channel. Fact is, what they sell through the broker is the exact same product the branch has. If you were qualified for a certain STEP limit on day 1, then later on down the road, you should always be able to borrow back to that limit without hassle.
Scotia will require a new Personal Credit Agreement and may require a title search but that`s it. It is one of the best products in the industry.
Also, I found another comparison of re-advanceable mortgages available in Canada. It is far more comprehensive than the 3-product comparison in the OP. No doubt the the 3 products compared in the referenced article are the ones that the author is licensed to sell. This comparison covers a dozen different products:
http://www.myvirtualmortgagebroker.com/Smi...h-Maneuver.html
Hi Jim,
I hate to say it, but I think you really got some bad direction with your Scotia Experience. I`m guessing that you were dealing with a branch that didn`t have a great relationship with the broker channel. Fact is, what they sell through the broker is the exact same product the branch has. If you were qualified for a certain STEP limit on day 1, then later on down the road, you should always be able to borrow back to that limit without hassle.
Scotia will require a new Personal Credit Agreement and may require a title search but that`s it. It is one of the best products in the industry.
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QUOTE (MooseHead @ Sep 19 2010, 08:06 PM) The one thing I`m not grasping from this (and I`m sure it isn`t complicated) is how does a re-advanceable mortgage turn your personal residence mortgage from a non-deductible debt to a deductible debt? I understand that interest paid on a mortgage or heloc for an investment property is tax deductible, but how does this apply?
I have no brain power left in me for the day, please help!
Cheers,
Chris
You should read a book called the Smith Manoeuvre to get the whole picture. Author is Fraser Smith.
In a nutshell, you use all your after tax cash and savings to pay down your non-tax deductible debt. As you pay down this debt, your equity is re-advancable. When you advance the loc, for a qualified investment, you are turning non tax deductible debt into tax deductible debt.
That`s just a bit of what the book goes into.
I have no brain power left in me for the day, please help!
Cheers,
Chris
You should read a book called the Smith Manoeuvre to get the whole picture. Author is Fraser Smith.
In a nutshell, you use all your after tax cash and savings to pay down your non-tax deductible debt. As you pay down this debt, your equity is re-advancable. When you advance the loc, for a qualified investment, you are turning non tax deductible debt into tax deductible debt.
That`s just a bit of what the book goes into.
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QUOTE (RobMacdonald @ Sep 20 2010, 01:04 AM) You should read a book called the Smith Manoeuvre to get the whole picture. Author is Fraser Smith.
In a nutshell, you use all your after tax cash and savings to pay down your non-tax deductible debt. As you pay down this debt, your equity is re-advancable. When you advance the loc, for a qualified investment, you are turning non tax deductible debt into tax deductible debt.
That`s just a bit of what the book goes into.
Thanks Rob and everyone for the replies. Rob, have you read the book and if so, how did you find it? I checked it out on amazon.ca and it has mixed reviews. Also, there is a Smith Manoeuvre Calculator CD as well, have you ever tried it?
I`ve read quite a bit that 20% is the minimum down payment most banks will accept for a Readvanceable mortgage. Are there exceptions to this? Is 20% still required for a personal residence?
Cheers,
MH
In a nutshell, you use all your after tax cash and savings to pay down your non-tax deductible debt. As you pay down this debt, your equity is re-advancable. When you advance the loc, for a qualified investment, you are turning non tax deductible debt into tax deductible debt.
That`s just a bit of what the book goes into.
Thanks Rob and everyone for the replies. Rob, have you read the book and if so, how did you find it? I checked it out on amazon.ca and it has mixed reviews. Also, there is a Smith Manoeuvre Calculator CD as well, have you ever tried it?
I`ve read quite a bit that 20% is the minimum down payment most banks will accept for a Readvanceable mortgage. Are there exceptions to this? Is 20% still required for a personal residence?
Cheers,
MH
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QUOTE (RobMacdonald @ Sep 20 2010, 01:00 AM) I hate to say it, but I think you really got some bad direction with your Scotia Experience. I`m guessing that you were dealing with a branch that didn`t have a great relationship with the broker channel. Fact is, what they sell through the broker is the exact same product the branch has. If you were qualified for a certain STEP limit on day 1, then later on down the road, you should always be able to borrow back to that limit without hassle.
Thanks for the info, Rob. I will follow up with Scotia direct and bypass the branch I dealt with earlier. It seemed really odd what I was being told there; I`m glad to hear it`s not the norm.
Thanks for the info, Rob. I will follow up with Scotia direct and bypass the branch I dealt with earlier. It seemed really odd what I was being told there; I`m glad to hear it`s not the norm.
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QUOTE (JimWhitelaw @ Sep 19 2010, 05:57 PM) Yes. We were told by a Sr. banker at the branch that in order to access the LOC, we`d have to submit a complete new application. Part of the reason given was because the mortgage was arranged by a broker and not handled by the branch directly so they didn`t have all the required information. (??)
Also, I found another comparison of re-advanceable mortgages available in Canada. It is far more comprehensive than the 3-product comparison in the OP. No doubt the the 3 products compared in the referenced article are the ones that the author is licensed to sell. This comparison covers a dozen different products:
http://www.myvirtualmortgagebroker.com/Smi...h-Maneuver.html
Thanks for the link Jim, I found it very informative. Although they are all advertised as readvanceable mortgages, they have many distinct (and important) differences such as: LOC being callable anytime vs. only upon default, pre-payment privileges, auto LOC increase after principal payments, automatic investing from LOC, etc. All of these options make a huge difference it seems. Obviously having the LOC automatically increase as principle on mortgage is paid as well as being able to invest automatically with the LOC are extremely important from an investors point of view. Certainly much more convenient.
Also, I found another comparison of re-advanceable mortgages available in Canada. It is far more comprehensive than the 3-product comparison in the OP. No doubt the the 3 products compared in the referenced article are the ones that the author is licensed to sell. This comparison covers a dozen different products:
http://www.myvirtualmortgagebroker.com/Smi...h-Maneuver.html
Thanks for the link Jim, I found it very informative. Although they are all advertised as readvanceable mortgages, they have many distinct (and important) differences such as: LOC being callable anytime vs. only upon default, pre-payment privileges, auto LOC increase after principal payments, automatic investing from LOC, etc. All of these options make a huge difference it seems. Obviously having the LOC automatically increase as principle on mortgage is paid as well as being able to invest automatically with the LOC are extremely important from an investors point of view. Certainly much more convenient.
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QUOTE (MooseHead @ Sep 20 2010, 03:55 PM) Thanks Rob and everyone for the replies. Rob, have you read the book and if so, how did you find it?
I took this out of my local library today, and am about half way through. It seems like a pretty good introduction to the general concept of the Smith Manoeuvre, but its focused more towards making stock/bond/mutual fund investments with the money rather than real estate investments. The principle (principal conversion
) is the same in any case.
I would be interested in hearing any "boots-on-the-ground" experiences from doing the Smith Maneouvre with real estate. What re-advancable products did people use? Any issues getting the interest capitalized directly on the LOC portion? And of course the big one is any anecdotes from those who have had their returns examined by the CRA, what they thought of the whole process.
Best regards,
Michael
I took this out of my local library today, and am about half way through. It seems like a pretty good introduction to the general concept of the Smith Manoeuvre, but its focused more towards making stock/bond/mutual fund investments with the money rather than real estate investments. The principle (principal conversion
I would be interested in hearing any "boots-on-the-ground" experiences from doing the Smith Maneouvre with real estate. What re-advancable products did people use? Any issues getting the interest capitalized directly on the LOC portion? And of course the big one is any anecdotes from those who have had their returns examined by the CRA, what they thought of the whole process.
Best regards,
Michael
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QUOTE (bizaro86 @ Sep 20 2010, 04:12 PM) the CRA, what they thought of the whole process.
The quick answer from the CRA is that "we don`t care what you do with your rental income." They do, however, care that you carefully track your borrowing and that you can trace back all interest expenses claimed on your tax return to an investment-related outflow.
If you mix your accounts and use one LOC for both personal and business expenses, then you will have a difficult time explaining how your personal borrowings get paid off and your business borrowings are still on the books. I would only use a product that has more than one LOC, then you have one for yourself and one or more for your business.
Also, remember that there many things are open to interpretation by whatever auditor you happen to get. Be sure that if you are ever reviewed, you have a tax team to handle the auditor.
Sherilynn
The quick answer from the CRA is that "we don`t care what you do with your rental income." They do, however, care that you carefully track your borrowing and that you can trace back all interest expenses claimed on your tax return to an investment-related outflow.
If you mix your accounts and use one LOC for both personal and business expenses, then you will have a difficult time explaining how your personal borrowings get paid off and your business borrowings are still on the books. I would only use a product that has more than one LOC, then you have one for yourself and one or more for your business.
Also, remember that there many things are open to interpretation by whatever auditor you happen to get. Be sure that if you are ever reviewed, you have a tax team to handle the auditor.
Sherilynn
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QUOTE (bizaro86 @ Sep 20 2010, 05:12 PM) I took this out of my local library today, and am about half way through. It seems like a pretty good introduction to the general concept of the Smith Manoeuvre, but its focused more towards making stock/bond/mutual fund investments with the money rather than real estate investments. The principle (principal conversion
) is the same in any case.
I would be interested in hearing any "boots-on-the-ground" experiences from doing the Smith Maneouvre with real estate. What re-advancable products did people use? Any issues getting the interest capitalized directly on the LOC portion? And of course the big one is any anecdotes from those who have had their returns examined by the CRA, what they thought of the whole process.
Best regards,
Michael
Hi Michael, I decided to go ahead and order it from amazon so I`ll let you know what I think once I get a chance to read it. How did you find the rest of the book?
I would be interested in hearing any "boots-on-the-ground" experiences from doing the Smith Maneouvre with real estate. What re-advancable products did people use? Any issues getting the interest capitalized directly on the LOC portion? And of course the big one is any anecdotes from those who have had their returns examined by the CRA, what they thought of the whole process.
Best regards,
Michael
Hi Michael, I decided to go ahead and order it from amazon so I`ll let you know what I think once I get a chance to read it. How did you find the rest of the book?
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QUOTE (MooseHead @ Sep 22 2010, 12:09 PM) Hi Michael, I decided to go ahead and order it from amazon so I`ll let you know what I think once I get a chance to read it. How did you find the rest of the book?
I think you`ll like it, as it explains the process quite simply, which is helpful. There is a bit at the end about cashflow damming, which is the part that relates to using it for real estate investment, although as I mentioned the idea is the same.
Michael
I think you`ll like it, as it explains the process quite simply, which is helpful. There is a bit at the end about cashflow damming, which is the part that relates to using it for real estate investment, although as I mentioned the idea is the same.
Michael