Best Smith Manoeuvre Mortgages
The first step to implement the Smith Manoeuvre is to get a readvanceable mortgage.
What is the best one?
We have unique personal knowledge of the quirks of each of the Smith Manoeuvre mortgages from working with hundreds of clients to implement and manage the Smith Manoeuvre.
We are not the mortgage person that gets you a mortgage.
We are the financial planners that figure out the best structure and then help you implement & manage the Smith Manoeuvre.
We are also the tax experts that know how to make sure you get the maximum tax refunds.
In this post, you will learn:
- What is the Smith Manoeuvre? Why consider it?
- What is a readvanceable mortgage?
- What mortgage features are important?
- How do readvanceable mortgages differ between banks?
- Which are the best Smith Manoeuvre mortgages?
- How do you setup your mortgage for the Smith Manoeuvre?
- How can you keep your credit line tax deductible?
What is the Smith Manoeuvre? Why consider it?
A quick refresher. The Smith Manoeuvre is a strategy to invest for your retirement without using your cash flow by borrowing against your home equity over time. As your mortgage declines, you gain equity which you borrow back to invest. This converts your mortgage into a tax-deductible credit line over time.
We have helped over 1,000 families plan for the specific retirement they want. It can be challenging to save as much as you need for the retirement that you want. There is often a tradeoff between how comfortably you live now and how comfortable or early your retirement will be. An “Interactive Financial Plan” helps you figure out exactly what is best for your life.
Most people want to retire with a lifestyle similar to what they are used to, with hopefully no mortgage and some extra money for travel & entertainment, or whatever they enjoy doing.
We found from experience that adding the Smith Manoeuvre into a Financial Plan was often the difference allowing people to live similar to their current lifestyle now, and still be able to maintain it after they retire.
The Smith Manoeuvre allows you to invest for your retirement without using your cash flow, because you borrow to invest to pay the interest on it. That means your lifestyle is not affected. This is in addition to all the saving you do now to your RRSPs & TFSAs.
Instead of living well now and then retiring with little money, or sacrificing your lifestyle now, the Smith Manoeuvre often makes your retirement plan work.
At minimum, it can get you much closer to the life you want.
The best article on the internet with all the details about the Smith Manoeuvre is on my blog here: https://edrempel.com/smith-manoeuvre/ .
What is a readvanceable mortgage?
For the Smith Manoeuvre, you need a readvanceable mortgage. This is a mortgage linked to a credit line, so that you gain credit in your credit line with each mortgage payment.
For example, you buy a $1 million home and get a readvanceable mortgage with a limit of 80% of the value, or $800,000. To start, you have a mortgage of $800,000 and a credit line with a limit of $0. Then you make your first mortgage payment, which brings your mortgage down to $799,000. That gives you $1,000 available credit in the credit line immediately that you can invest.
The next month, your mortgage payment reduces your mortgage by say $1,005. You use $5 to pay the interest on the $1,000 you borrowed last month, which is called “capitalizing the interest”. You can invest the rest, which is another $1,000.
Banks also have conventional mortgages and can add a credit line, but that is not the same. They are not linked. The critical factor is that you must gain credit available with each mortgage payment.
What mortgage features are important?
There are many relevant features. Some are very important, some are annoyances only, and some are important depending on what you want to do.
The important features are:
- Total credit limit: Most banks will lend you up to 80% of the appraised value of your home, assuming you qualify. A lower limit is a major factor, since it can mean you have quite a bit less to invest. The exceptions to 80% are Manulife One that will only let you readvance up to 65% and Meridian Credit Union with a maximum of 70%.
- Revolving limit: Every bank limits the credit line to 65% of appraised value. Note that the “total credit limit” is the total of the mortgage plus credit line, while the “revolving limit” is the limit on just the credit line. All banks are the same here.
- This lower 65% revolving limit is only an issue when your mortgage is close to being paid off. When you start the Smith Manoeuvre, you probably have a large mortgage and small credit line. However, when your mortgage is paid down to 15% of your home value, say $150,000 on a $1 million home, then your credit line is up to 65%, or $650,000. That is the maximum, so you cannot access any more credit.
- We have methods to be able to continue the Smith Manoeuvre. They require that a portion of your credit line must be turned into a mortgage. This works if your readvanceable mortgage allows multiple mortgages.
- Invest directly: It is very convenient to be able to give your investment firm a void cheque from your credit line and invest the $1,000/month automatically every month. This does not work at most banks, but does with the BMO Readiline, TD Flexline and National Bank All-in-One.
- Interestingly, when we started working with different banks 15 years ago, we asked them all whether you could invest directly from the credit line. All 5 major banks gave us the wrong answer! BMO & TD said it would not work, but we tried it and it worked. The other banks all said it would work, but when we tried it, it bounced. 😊
- Monthly fee: Manulife One and National Bank All-in-One have a monthly fee. They intend the credit line to be your main chequing, but that doesn’t work with the Smith Manoeuvre. The other banks all have no fee for a readvanceable mortgage.
- Automatic readvance: Gaining credit automatically in your credit line with each mortgage payment is the key feature of a readvanceable mortgage. This works same day at most banks. The exception is that it only works at Scotiabank if the mortgage person has selected that option, plus you get the credit the following month. Meridian Credit Union Flex Line works, but you get the credit the following month.
- Manulife One does not work at all if you use the chequing part of it as a chequing account. You have to call your mortgage person every few months and sign forms to increase the credit line limit. It does work if you use the Manulife One only has a mortgage & credit line, but then you are paying the chequing account monthly fee for nothing.
- Automatic capitalize: Capitalizing the interest is usually the one manual transaction you need to do every month. The interest from the credit line is charged to your chequing account, but you can transfer from your credit line to your chequing to cover this, so it does not affect your cash flow. If it is your main chequing account, then you need to transfer the exact amount – to the penny – to have a clean audit trail for CRA. If you use a separate chequing account just for Smith Manoeuvre, then it doesn’t need to be exact, just enough so the payment does not bounce.
- The only bank that does this automatically is the Desjardins Versatile Line of Credit. That’s convenient, but doing the one manual transaction each month is only a minor annoyance. Once you do it once, you can see it’s an online transaction that only takes a couple minutes.
- Minimum to readvance: All banks allow you to access the extra credit in the credit line as soon as it is available. The one exception is Scotia STEP, which does not allow you to use the credit line until there is $10,000 available. This is somewhat of a problem if you have only 20% down on your home, but not an issue with a larger down payment. Once you pass the $10,000 credit available, you can access every dollar.
- Multiple credit lines: Some banks allow you to have many credit lines within your readvanceable mortgage, and some allow only one credit line. For the simple “Plain Jane” Smith Manoeuvre, one credit line is okay. However, it’s important if you want to use some of the credit for any other purpose, such as separating a split credit line to use as an emergency fund or for another strategy like the Cash Dam (a tax strategy for self-employed people or for rental properties). You can get multiple credit lines with the BMO Readiline, RBC Homeline, Scotia STEP, National Bank All-in-One and Manulife One.
- Readvance to one credit line: If you have more than one mortgage and more than one credit line within your readvanceable mortgage, most banks give you all the extra credit from paying down all your mortgages in one credit line.
- BMO Readiline is the one exception. They have mortgages & credit lines in pairs. If you have 2 mortgages within your Readiline, then you have 2 credit lines. Each mortgage payment gives you credit in the paired credit line.
- This feature may or may not be an issue. If you are only doing the Smith Manoeuvre, but have 2 mortgages, it’s convenient to get all the credit in one credit line, which you use for capitalizing & investing. However, if you are doing more than one strategy and have 2 mortgages and 2 credit lines for different purposes, it can be a tax issue to have your credit become available all in one credit line.
- Having credit become available in 2 credits if you prefer only one is a minor annoyance that just requires one extra monthly online transaction. Having it become available all in one credit line when you want it in 2 can be a tax issue. This is only an issue if you want to use the 2nd credit line for a purpose other than the Smith Manoeuvre.
- Multiple mortgages: Most banks allow you to have more than one mortgage within your readvanceable mortgage. This is a very important feature. Once your mortgage is paid down to 15% of the value of your home, say $150,000 on a $1 million home, your credit line is at the revolving limit and you cannot readvance any more. This means you cannot capitalize the interest or invest from your credit line, so you would have to use your cash flow.
- The solution is to convert part or all of your tax-deductible credit line back into a mortgage. This only works if your bank allows more than one mortgage.
- For example, at that point you will have your main non-deductible mortgage at $150,000 and your Smith Manoeuvre tax deductible mortgage at $650,000. Then you will have one or 2 credit lines with limits of $0. The total is still within your total limit of $800,000.
- Having only one mortgage is a big problem when your mortgage is almost paid off. We generally move clients to a bank that allows multiple mortgages when their mortgage starts to get small.
- All the major banks allow more than one credit line except CIBC Home Power, Desjardins Versatile Line of Credit, MCAP Fusion and Meridian Credit Union Flex Line.
- CIBC Home Power is new and has only been available a few years. 15 years ago, we did many large seminars about the Smith Manoeuvre. At that time, CIBC was the only one of the big 5 banks without a readvanceable mortgage. I made a joke about it at every seminar. 😊 Finally, just a few years, ago, they have one, but it’s more basic than the other banks.
- Competitive interest rates: The Smith Manoeuvre is very effective at building wealth, but you still should get a good interest rate on your mortgage. Generally, mortgage rates in a readvanceable mortgage are exactly the same as a conventional mortgage. This is a subjective opinion based on my experience, but MCAP Fusion and Manulife One often have noticeably higher rates than the other banks.
- Credit line interest rates are the same at all banks at prime +.5%, however, TD bank sometimes offers a lower rate. TD is also the only one that will negotiate the credit line rate. All banks will negotiate the mortgage rate, but not the credit line rate.
- Available from mortgage broker: You would think that mortgage brokers would be a good source for a readvanceable mortgage, since they are independent and not limited to just one bank. However, only 4 of the 10 readvanceable mortgages are available from a mortgage broker – TD Flexline, Scotia STEP, MCAP Fusion and Manulife One.
- Readvanceable mortgages need to be setup with the right structure. Mortgage brokers often cannot fully set them up and require a bank person to finish the setup. Bank mortgage people can deal with all features, so it is generally best to go directly to the bank for your Smith Manoeuvre mortgage.
- Available for rental properties: Most banks allow their readvanceable mortgage on most properties, including your home, rental properties, and most cottages. Desjardins Versatile Line of Credit and Meridian Credit Unin Flex Line are the exception and are only offered on your home.
- Allowing readvanceable mortgages on other real estate means you could do the Smith Manoeuvre on many properties at the same time. Our record is 7 Smith Manoeuvres for one couple at the same time – their home, cottage, and 5 rental properties. That can be a large monthly investment for your retirement!
- In general, it’s best to pay rental property mortgages as slowly as possible, since they are tax-deductible. My rule of thumb is that when a rental property mortgage is down to half the value of the property, it’s usually best to sell it and invest in the stock market, which gives you a higher return, tax refunds and no work. However, if you do the Smith Manoeuvre on the rental, then it stays fully leveraged and is usually work keeping. Since you pay the mortgage down very slowly on a rental, it is usually a small Smith Manoeuvre.
Which are the best Smith Manoeuvre mortgages?
I rate each bank’s readvanceable mortgage based on all the above features and how important each feature is.
The top mark goes to BMO Readiline with a 10. Everything works perfectly, with only minor annoyances. We also have an excellent BMO mortgage contact to get it setup right every time. BMO’s mortgage contacts can also do mortgage renewals, not just new mortgages, which is important since the Smith Manoeuvre is a long-term strategy.
TD Flexline gets a 9. Everything works, but it allows only one credit line.
RBC Home line gets a 9. Everything works, but you can’t invest directly from the credit line.
Scotia STEP gets an 8. You need a knowledgeable Scotia bank person to set it up to readvance right away. It seems to us that every client gets a somewhat different STEP mortgage, which is annoying. Some don’t readvance at all unless setup correctly, and some readvance the following month not right away. The $10,000 minimum is a significant issue for people that just have 20% down payment. We have a knowledgeable Scotia bank contact, so we can get it setup correctly.
CIBC Home Power, Desjardins Versatile Line of Credit and MCAP Fusion get a 7. Allowing only one credit line and only one mortgage is a big problem if you want to use part of your credit for anything other than the Smith Manoeuvre, and it a huge problem when your mortgage gets small.
National Bank All-in-One gets a 7. It actually works quite well, but the monthly fee adds up. You can avoid the fee by going to almost any other bank.
Manulife One is a special case and only gets a 2. It is by far the worst choice. First, you can only readvance 65% of your home value, not 80% like all the other banks. It is designed to be your main chequing account, since the credit line is a fully functional chequing account. Combining your chequing account and your mortgage in one can allow disciplined people to pay down their mortgage more quickly. However, if you use the credit line as a chequing account, then you have to split off a fixed limit Smith Manoeuvre credit line that does not automatically increase. You have to call the bank or go there once or twice per year & sign forms to increase your credit limit. In practice, this means you have less to invest, because you have to leave a buffer.
The ratings and all the features are on the table below:
How do you setup your mortgage for the Smith Manoeuvre and keep the credit line tax deductible?
Initially, you should have a total limit of 80% of your home value. Your normal non-deductible mortgage is what you owe from buying your home. Then you have the Smith Manoeuvre credit line for the rest of your limit. It is usually most effective to invest the full amount and then keep investing monthly to keep your total amount borrowed close to your total limit.
The more you invest, the better it should be for your retirement!
To avoid having any problems with CRA, make sure every mortgage and every credit line within your readvanceable mortgage has only one purpose. Each is either non-deductible for your home purchase or emergency fund, or it is tax-deductible for the Smith Manoeuvre. When your main mortgage is small, you will probably also have a tax-deductible Smith Manoeuvre mortgage plus one or 2 Smith Manoeuvre credit lines.
If you are doing the Smith Manoeuvre on a rental property or are doing the Cash Dam as well as the Smith Manoeuvre, you must keep the rental & Cash Dam mortgage or credit line separate from the Smith Manoeuvre. While they should all be tax deductible, they are deductible on different lines on your tax return. You need to be able to support them separately if CRA asks.
Keeping a clean tracking of everything that is tax deductible is critical. If CRA asks, you need to be able to show that the “current use” of all the money in the tax deductible portions was used to invest or to pay the tax-deductible interest (capitalize). If you cannot show it, CRA does not correct your figures. They just disallow the entire deduction.
We have many clients doing the Smith Manoeuvre and e-file the tax returns for most of them every year. We choose the option to have CRA contact us, not you for any questions. We usually have 2 or 3 clients every year that CRA requests support for their Smith Manoeuvre interest deduction. It’s a big job and usually a 60-page document to support it, but we have done it many times and know how to do it. Our clients don’t have to worry about the CRA, as long as they follow our instructions.
The Smith Manoeuvre is an excellent wealth-building strategy that can make the difference for you to retire with the life you want with a minimal effect on your lifestyle today. Getting the best readvanceable mortgage makes it much easier for you.
You may prefer to get a readvanceable mortgage from your main bank or a bank where you have a good mortgage contact. With the details in this post, you can see specifically the difference between that readvanceable mortgage and the best one so you can make the best choice.
Planning With Ed
Ed Rempel has helped thousands of Canadians become financially secure. He is a fee-for-service financial planner, tax accountant, expert in many tax & investment strategies, and a popular and passionate blogger.
Ed has a unique understanding of how to be successful financially based on extensive real-life experience, having written nearly 1,000 comprehensive personal financial plans.
The “Planning with Ed” experience is about your life, not just money. Your Financial Plan is the GPS for your life.
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Other than convenience, what is the advantage of investing directly from the credit line? I use RBC, and move money from HELOC, to chequing acct, to RBC DI brokerage account.
Thanks for the great summary of all the banks’ mortgage features. For the Cash Dam strategy, which line should I report the interest expense? Is it line 22100 interest expense?