An interesting coincidence brought me to write this post about a company called TDMP. About 2 weeks ago, I received two emails from two different readers asking my opinion on the Tax Deductible Mortgage Plan. Since I never heard of this company before (they do not seem to be active in my province), I was really curious about their plan. This is basically a firm offering to setup The Smith Manoeuvre for your financial pleasure.
I am not going to do a review of their service (since I didn’t get paid for it 😉 ) but I will use the example of Chris, one of the two readers, to illustrate which kind of question you should ask a financial advisor when they approach you with such leverage strategy.
What is the strategy?
Chris and his partner make 150K and have a free mortgage property worth 400K. They have been approached by TDMP in order to leverage over their property. This sounds a lot like a Smith Manoeuvre strategy but it is called that tax deductible mortgage plan. The projection was based on a “income fund” providing 8% return per year. So if you have bad debts (i.e. non tax deductible debt); you pay them with your investment returns and you re-borrow the money to invest again. Therefore, you are switching bad debts into good debts.
Hum… let’s say you pay 4.75% (prime rate) on a loan where the interest are tax deductible (therefore a net charge of 3%) and you make 8% per year with your portfolio. This sound very interesting isn’t? Well I don’t think that things can be that easy!
What are the fees and why should I pay them?
According to both readers, TDMP charges $39 a month for the administration fee of the whole setup. While this sounds to me like another hidden / other fee that company charges to improve their profit margin, they may do extra stuff for their client too. Even thought $40 a month seems a lot (since you are still paying interest on the loan and MER’s for your investment), I told Chris to ask them what were they doing for so much a month. An added value would be to keep track of the client’s investment record and interests charged along the year in order to facilitate the completion of their tax report.
In which kind of investment portfolio the leveraged money will go into?
I think this part is a big must as it will determine if you will end-up as the king of the leveraging or another poor victim from “evil” advisor bringing their clients blindly into the abyss of madness.
In Chris’ case, the broker didn’t give much information the first time besides the fact that it will (will? Never use this word as a financial advisor) give a 8% return according to past performance. I must admit that this is kind of odd. The first thing would be to determine the client’s investment profile instead of offering a one fits all fund. Anyway, there is no such thing… regardless the past performance of the fund. Based on that premise, we should all sell Sprott Canadian Equity Fund that has an astonishing record. However, the fund also went down badly a few times since its inception as well!
I guess the main point I am trying to make with this post is do not sign leverage proposal on the first meeting and come back with a lot of questions for the second meeting. My conversation with Chris was obviously lengthier but in the end, it will lead to a second or maybe a third meeting where fundamental questions must be answered. Good luck to you my friend!
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