|I received this email from Crystal, a loyal reader of The Financial Blogger : Hey FB!I have been reading your articles for awhile now trying to piece everything together on the Smith Manoeuver – I also read the book a few months ago. I noticed that all of the contacts disappeared from the Smith Manoeuver website – but have been corresponding with a mortgage specialist affiliated with them – I was hoping to get your opinion if you have time!||
-I purchased a pre-construction condo in Edmonton last year, only paying 5%
until the condo is completed.
-The amount owing is $155,000.
-I have a 5 year fixed mortgage secured at 5.4% with TD.
-I will be putting 20% down when I finally get to activate the mortgage –
which is looking to be in 6 weeks or so. I will be pulling $15,000 from my
RRSP to use as down payment for First Time Home Buyer.
-The value of the property has increased to $280,000 since I bought it.
-I don’t have a financial advisor. 🙁 I am hoping to retire in 30 years!!
Here is my answer :
– You should definitely get a financial advisor that is comfortable with the SM. He will be able to find the best product on the market to operate the SM according to your needs. However, since you don’t have one at the moment, here are my personal advices :
– It seems that you have a pretty good equity in your condo (Edmonton’s market is just incredible!). Therefore, you are allowed to get up to 80% of you property value. Counting that you will end-up with a 155K mortgage for five years (I would be expensive to transfer it to a more SM friendly product), you will have 69K left for a line of credit (280K * 80% – 155K). Technically, you are better of getting the HELOC with TD as they already have your first rank. Finding another institution that will accept to be 2nd might be expensive in term of interest rate. I would say that you can start you SM with a 2nd rank HELOC at TD. When you are signing your documents, make sure
they register the full amount of the property (280K) so you don’t have to pay for lawyer fees in the future.
– Another trick would be to ask them to finance a smaller part as a mortgage and increase your line of credit. For example, you might have a 112K fixed mortgage at 5,4% and a 112K HELOC at P+0 with a owing balance of 43K. This 43K could be slowly transfer into tax deductible debt through the SM.
– Make sure that TD offer multiple sub-accounts with their HELOC. If not, you need to find another institution that would go 2nd rank (and DO NOT register the full amount of your property value with TD in this case as you will be left with no room for a 2nd rank). I know that IG is offering a HELOC 2nd rank behind the registered amount with another institution. If you can find an IG consultant that is familiar with the SM, you will kill two birds with one stone 🙂
– If you can pull out the full 20K in RRSP under the HBP, I would do it. You can simply apply the extra 5K (considering that you planned on putting 15K from your RRSP as cashdown) in the SM and start with this amount invested on the very first day.
– The key point is to look at your budget and assess how much you have available for the SM. Do not use the maximum amount possible, we always run into unexpected situations where we need money. Use your extra cash flow to pay down your HELOC or make extra payment on your mortgage. You can always use the room available from your HELOC as an emergency fund (you will find a post about this topic on my blog).
I hope that those advices help her out with her great project of implementing a Smith Manoeuvre. Any other ideas?
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