As I’ve been looking into using the Smith Manoeuvre strategy, I’ve come across a few mortgage solutions that will fit nicely. Among them include the RBC Homeline mortgage, the First Line Matrix mortgage, and the Manulife ONE (M1) mortgage. The first two mortgages are similar where they have a traditional mortgage portion with a home equity line of credit (HELOC) portion attached to it which increases the credit limit as the mortgage gets paid down. The M1 mortgage, on the other hand, works a bit differently.

How does the M1 mortgage work?

  • The M1 mortgage operates like a giant secured line of credit and checking account combined into one. Within the M1 mortgage holds ALL of your debts, including your mortgage, car loans etc. The twist that M1 offers is that you deposit ALL of your INCOME into the M1 account so that any savings at the end of the month works against the DEBT instead of just sitting in your stagnant checking account.

Try the Online Calculator:

  • With the extra money left over every month working against the debt, the theory is that your debt will get paid off faster. The M1 website has a calculator that predicts how many years you can shave off your mortgage by using their product.
  • I tried the scenario with a $200k home and a $150k mortgage due to be paid off in 21 years. If I were to switch to M1 and apply my $25k in savings against the debt, I could have the mortgage paid off in approximately 9 years. Not bad hey? I’ll bet this could be accelerated even more if you applied the Smith Manoeuvre principles (pay down mortgage with tax deductions).

Advantages:

  • Depending on your situation, the mortgage and other debt will inevitably be paid off faster if you can use every extra dollar towards your mortgage.

Drawbacks:

  • Rates are fixed at prime with no discount. You can find a variable mortgage that is more competitive at prime – 0.85 (recent mortgage rates). On top of that, since M1 is a giant line of credit, interest is compounded MONTHLY, and not semi annually like conventional mortgages. This makes the gap even bigger between M1 rates and conventional rates.
  • Every day spending is withdrawn from a non tax deductible line of credit.
  • $14 monthly fee. (really don’t like this)
  • Lack of M1 bank machines/tellers.

Who should use this?

  • People who have money left over at the end of the month after all bills are paid. You’re debt will most likely be paid down faster than a conventional mortgage.
  • People looking for a viable mortgage solution to use with the Smith Manoeuvre.

How would you use this with the Smith Manoeuvre?

  • You can create multiple accounts under the M1 plan. If you wanted to start investing using the Smith Manoeuvre with the borrowed money in M1, you can set up a separate account for this to help keep track of the paper trail.
  • I’m not sure if this is possible, but ideally, as you pay down the non-deductible mortgage, you would want your “separate” SM account to grow automatically.

Conclusions

  • With the rates being higher than conventional mortgages along with the $14 monthly fee (I’m frugal), I don’t think that this product is right for me.
  • I think that with discipline, you could pay down a lower rate conventional mortgage quicker than M1 and with no fee.
  • This mortgage ends up reducing the pay back period because it applies all of your savings against the mortgage. This will work with ANY mortgage (if you have the discipline). Why not get the RBC Homeline mortgage with lower rates and apply all your savings against that non-deductible mortgage. You’ll get the increased credit limit automatically on the HELOC side. This would act just like the M1 mortgage BUT with lower overall fees and interest.

Need more info?

I have written another article regarding the Manulife ONE mortgage which includes an analysis of the overall cost in the long term. Check out our Manulife ONE calculations, it’s a real eye opener.

The Manulife One website is also full of info, you can check it out here.

Anyone with M1 right now? Care to comment?

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I’m an M1 customer and feel the need to point something out, which may or may not be true with RBC’s Homeline mortgage but is based on my experience with a traditional RBC mortgage. With my old, traditional RBC mortgage, when I wanted to make extra mortgage payments on a monthly basis, the maximum extra payment I was allowed to make couldn’t exceed my regular payment. In other words, if my regular payment was $1700, my extra payment in a given month could not exceed $1700. With M1, I can deposit any amount that I want into the account to reduce the balance, which is ideal because in a typical month my excess cash is well over what a traditional mortgage payment would be.

With respect to your issue with M1 having few bank machines, the way I get around that is to have a zero-fee bank account elsewhere and use those machines when I need cash. Otherwise I pay with Interac.

As for the $14 monthly fee…..yeah, definitely not ideal. But I feel that the benefits of the account and the flexibility it provides you with definitely outweigh the $14 charge.

Hi!
Nice summary – I wish this was around before I read (twice!) the entire thread on Mork’s board… :-)

I looked at M1 and came to the same conclusions as you. I am using Scotia’s Total Equity Plan to implement the SM. The limit on the HELOC does not increase automatically but it appears that it is an easy process that one can start online…

Cheers,
Fernando

It ain’t for everyone, but if you are the type of person who has taken the time to crunch some numbers on M! versus alternatives, then you are already ahead of the curve.

One of the disadvantages you listed is confusing. What sort of line-of-credit exists where every day spending can be tax deductible?

With M1 (or any LOC or loan) you can go ahead and deduct the interest associated with investments (M1 offers “sub accounts” to help track this seperatley, but it isn’t neccesary, you can track it yourself). Likewise spending on expenses for your investments can be deducted – it doesn’t matter where the money comes from – an M1 account, a chequing account, a loan, etc.

Back to topic.. I’m still with M1 myself – the coming months will determine if we stay with M1 or not.

FT: “I tried the scenario with a $200k home and a $150k mortgage due to be paid off in 21 years. If I were to switch to M1 and apply my $25k in savings against the debt, I could have the mortgage paid off in approximately 9 years. Not bad hey?”

I believe that if you look closely at the numbers in the calculator, you will find that you must leave an additional $300 per month in the M1 account to achieve this 9 year amortization. The calculator will NOT allow you to enter numbers equal to your current mortgage, without indicating no benefit. Since you are paying more, of course your mortgage balance will drop. If you play around with the calculator, you can actually have it show numbers where it indicated that your total principal & interest with M1 is higher than the “Old Way” yet it indicates a savings in the bold print!

Try it and see! Just pad your expenses to absorb all your net income except your current mortgage payment.

IF your only debt is a mortgage, and you have a regular income, there are more efficient ways to pay your mortgage than through M1.

David

You use one of the other banks readvancable mortgages with a fixed rate portion at whatever the current 5yr rate is. Set up the amortization period so that your mortgage payment would be equal to half your salary for the same time period. Have your mortgage payment double to equal your salary. Then use the variable portion of the HELOC to pay your day to day expenses. This will allow you to work exactly like the M1 account except with a lower rate on the “mortgage” portion of your HELOC. You would pay off you mortgage faster than using M1 since it is a lower rate and you would still have all the benefits.

FT: I agree. I wouldn’t recommend using borrowed money for day to day expenses. I would actually prefer that any borrowed money be tax deductible.

I was just putting out another option for people considering using M1. What I did instead was use the M1 calculator to see how long it would take to repay my mortgage using M1. Then I calculated the extra amount that I would need to add to my mortgage payment to pay off my mortgage in the same time frame as the M1. It still left me with money from my paycheck after my mortgage payment (due to the difference in rate and compounding).

Another option is if you are using the SM and the income from your investments are enough to cover your day to day expenses, you can modify your stratergy and use that income to cover your expenses.

The point is that there are other alternatives to the M1 account that will yield the same results.

Has Mork.ca disappeared?
Mork’s blog has received no real updates since the summer, and the activity on the Manulife discussion was being updated at irregular intervals. It has been unavailable since Friday, and I wonder if Mark has decided to step out of the blog world into other activities? The disappearance of the blog’s information is unfortunate, as it was one of few open discussions on the topic.

David

If you have a regular mortgage and have any liquid cash outside of that. That’s the banks money – you owe them that. It’s exactly the same as ‘using borrowed money for day to day expenses.’

In fact it’s worse. As an M1 client I always give every cent I have to the bank and only take back what I need to live. Whereas you’re paying them as little as you can and ‘pretending’ like the rest of the money is yours. It’s not.

On top of this – if you have a regular mortgage and have any money invested outside your RRSP that is the banks money too. Even if you aren’t doing the Smith Maneuver exactly if you have any money invested outside your RRSP, you’re paying more than you should because you’re sitting at exactly the same spot if you owe 150k and have 5k invested. Or you owe 150k put your 5k towards that and then reborrow it to invest it. Except in scenario 2 you can now write-off or ‘expense’ the interest. Why don’t you want to make an extra 3% (or whatever) just from being able to write it off?

Sorry – but I have this argument too often with people who try and justify NOT getting M1. It just doesn’t make sense not to.

Although – I must say if you aren’t really really really good with your money. I warn you about having huge amounts of credit. I am really good with my money. But it’s hard not to think “I already owe 150k… what’s another 2k…? It won’t cut a year off my mortgage! It’s peanuts in comparison!”… watch out for that mentality. It can become a real problem and is echoed by others I know with HELOC’s.

I have the RBC VIP package: handful of checking and savings accounts plus a couple of credit cards. I also have a RBC mortgage (in yr #3 of 5 with 4.59% rate), and a nonsecured line of credit at roughly 8%.

I’m now in the process of setting up a Homeline, figuring I would dump the balance of the credit cards and line of credit into the Homeline, and then automatically transfer my salary deposits so that they achieve a M-One like plan as was described.

1 point and 2 questions:

– RBC is asking me for $750 in notary fees to set up the Homeline – depending on duration, that may add up to more than $14/month of M-One.

Q1- The way M-One and Homeline calculate interest, if I leave salary and savings in there for 1-2 weeks at a time as permitted, it seems as though M-One puts that money to work for me better, whereas with Homeline I would have to manually apply it to my mortgage, otherwise it is just paying back the credit line. If I know I need the money for an upcoming bill, I would be inclcing not to lock it into the mortage though. Am I missing somehting? Should I automatically apply my monthly payment’s worth of cash to the mortgage knowing I can alwasy pull it from the line of credit if needed?

Q2- Lastly, does anyone know if Homeline can act as a checking account – namely have car lease payments etc automatically draw money form it vs drawing form my checking account? That would allow me to not always be on the trigger moving money back and forth.

Thanks for the great reading…

On the Notary Fees: This is often a simple flow-through of costs. Offer the Banker that you will find a less expensive Notary. All they do is witness signatures and notarize the fact. The Notary will have to attend a location where you & the banker are. IF you can find a mortgage specialist that will come to your home, have the meeting at the notary’s office!

The application of your salary to your debt only affects your last dollar. As long as you are holding debt in your LOC, there is no sense in paying more against your mortgage. The real savings with your plan come from the 1.4% reduction of your mortgage interest rate, and the 2% by having a SECURED LOC. As long as you are paying these as rapidly as possible, you will maximize your savings. For instance, on a 20 year, $150,000 mortgage, you will save about $120 in interest costs each month simply by retaining your current interst rate. If you add that $120 to your payments, you will see a rapid reduction in your debt.

Have a look at: for a further discussion of this issue.

You can make all the electronic transfers you wish (i.e. bill payments, etc) from the Homeline. I am uncertain how outside automatic debits would work. However I have two comments on the issue: for regular structured payments like a car loan, just set up a recurring automatic transfer of the appropriate amount for your car payment from your LOC to your chequing account. Then it’s there waiting for the automatic debit.
OR, don’t worry about putting every last dollar in your LOC. IF you have a $1500 paycheque every two weeks, and you spend it to $0 in that time, your interest savings in the LOC for the two weeks are $1.73. Have a Timmy’s coffee instead of Starbucks once a week, and you’ve recovered the costs of managing your account in the fashion you describe. Rather than worrying about the pennies you would save by running every dollar through your LOC, focus on the savings your interest rate has provided.

Finally, in addition to FT’s last paragraph, once the HELOC reaches $0, apply the income you had been using to reduce that account to your mortgage, as a double-up payment.

David

Thanks for the answers and suggestions, especially the Horton’s one – is their decaf any cheaper than regular? :-)

With regards to Frugal’s comments in 14, even with the Homeline I keep my original 4.59% mortgage. M-One gives you one interest rate on the whole sum (right?) but Homeline let’s you keep your original mortagge intact, as well as the option of splitting it into two mortgages (one variable, one fixed perhaps) that both sit “alongside” your prime HELOC, each at their own rate.

So to your commetn of why not just take a regular HELOC and avoid the $750 fee and still maintain the lower mortgage interest rate – I *am* still keeping that lower rate, and I guess the “Homeline” spin gives me a couple of perks such as multiple mortgages and a dynamic line of credit that rises to the value of the home as they are paid off (versus a fixed line of credit).

I’m a bit of a newbie, so I may be missing somehting here. Thanks for the great assistance.

M1 also gives you the option of locking in a max of 75% at a lower fixed rate – currently 5.25% for a five year term.

http://www.manulife.ca/canada/mBank.nsf/Public/todays_rates

Joe,
You are right in your comments in 17, however, you might be better able to negotiate a lowering of the $750 fee at renewal if RBC wants to keep your business. You may also find that the options to apply split mortgages, etc will only be offered upon the expiry of your current mortgage term. If the Fee is not a worry, make the switch when you are ready.

Chris,
While Manulife gives you the opportunity you describe, I am uncertain if the combined accounts behave as the M1 does. I believe that lower rates are offered only with a traditional type of amortized principal & interest payment. I understand that the ‘interest only’ option of the M1 is not available, nor the ability to pay down any amount your wish. Thus taking the fixed interest route changes M1 into something akin to the offerings of the other banks.
That being the case, there is little impetus to switch!

David

Talked to a CFP about this today. I have a Homeline with RBC and he brought up Manulife One as a great alternative. What he said was the interest on the Manulife One is calculated “daily” which is it’s big advantage, so short term things like full paycheques and the like get factored in immediately.

I don’t know what Homeline does, trying to ask my bank.

Oops, meant to add. Who cares about 14% and a higher rate if it shows that the amount you carry will allow you to pay of in 50% of the time. You are obviously saving tens if not hundreds of thousands by shortening your amortization that much. So does the Manulife One @ 6% really matter then? Does X year @ $14/month really matter? $164/year for 8-9 years is still FAR less than tens of thousands of dollars.

The biggest weakness with M1 is the rate. I went from Manulife One and 6% to an open BMO mortgage at prime – .85%, which is saving me over $2K in interest per year.

The only difference is that rather than having my paycheque deposited in my Manulife One account and being applied to my mortgage immediately, I have to call BMO and have them transfer the money to my open mortgage.

The interest isn’t compounded daily, the daily amount in the LOC is USED in the eventual calculation…it’s not compounded daily, just calculated daily. BIG difference.

The interest isn’t compounded daily, the daily amount in the LOC is USED in the eventual calculation…it’s not compounded daily, just calculated daily. BIG difference.

It makes sense that it’s that way as any other way wouldn’t make any sense for the product.

Gah not sure why that posted twice. What I meant to add was for my situation running the numbers with a CFP shows M1 as a SIGNIFICANT savings even after the slightly higher rate and $162/year fee. Along the lines of mortgage going from 20 years to 9.7 and a total savings of about $130k in interest.

The benefit I “possibly” see (im not sold on this btw) is the ability for transient $ to apply temporarily (paycheques etc). That’s not necessarily $ I want or can sink into the mortgage, but it’s temporary presence in that account to lower the interest for those few days (particularly with two decent incomes) has some possible attractiveness to it.

I’m unsure if that is true with my HELOC.

Investigating :)

Max,
The only way you will reduce your mortgage amortization from 20 years to 9.7 and save $130,000, is by leaving a considerable amount of cash in the account on a monthly basis. While putting your paycheque into the M1 account will save you a few dollars in interest, it will not save you the amount your advisor indicates. Have a look at my previous messages, and follow up on them. If you run the Manulife calculator, and pad your expenses to match your current situation, where you spend all but your mortgage payment, you will see the actual advantage. You can then increase your ‘savings’ in small increments and see how the application of those amounts affect your mortgage.

Also remember, if you have short term debts, the Calculator will add their value to you loan in perpetuity. For example, if you factor your $500 per month car loan into the calculator, but only have 4 months left to pay on that loan, the $500 is added to your M1 paydown for the rest of it’s life.

By adding these $hundreds to your monthly mortgage, it has the appearance of painlessly paying the mortgage faster, when in fact, the car loan you figured to have paid off in 4 months is applied to your mortgage for 9 more years. If you have the ability to make that commitment in the M1 case, you should similarly do so with a lower cost product.

Have a close look at the product before you jump in, and also ask your advisor how much Manulife pays him for the referral!

Have a look at the RedFlagDeals.com site for more information as well.

Just ran some #s myself and it’s VERY sensitive to the amount you spend monthly. You are right, it’s basically dependant upon you managing to sock away X thousand dollars a month that sits in the mortgage. It’s basically an open mortgage that requires the same discipline as doubling up on a closed would.

If I’m going to do that, then I’ll just double up the payments instead and if i DO ever need that double up $ it’s available on the HELOC.

Cheers

Chris said: “I went from Manulife One and 6% to an open BMO mortgage at prime – .85%, which is saving me over $2K in interest per year.”

Is this the same Chris who authored messages 1 & 18? If so, were you able to take advantage of Manulife’s ‘money back guarantee’ upon moving to the BMO product? Your experiences would be of interest.

Yes – same Chris. I was with M1 for over a year, so I didn’t qualify for the money back guarantee.

Truth be told, I still think M1 is a great product for those who couldn’t be bothered to be hands on with their finances and put extra money on their mortgage manually each month, but if you are a little proactive there are much better options. It’s too bad because their customer service is easily the best of all the banks I’ve dealt with over the years.

Max: I’m glad that you found your way through the glitz, to the heart of the matter, and were able to discover for yourself the reality of this financial situation. Please, continue to apply this skepticism with your CFP. It appears to me (and should to you) that his suggestion for you to move from your current banking mix to M1 was not based on your best financial interests.

Chris: Thanks for your candor. While M1 may be an advantage as you describe, I would hope that people would be a little more ‘hands on’ with their finances, and be more financially fit. I am also a bit upset by the subterfuge supplied in the calculator, as it does not really tell the consumer how the numbers placed in it are being managed.

He’s not my CFP right now. I am interviewing CFPs this week and he was one of the ones I interviewed.

Don’t worry, interviewing more :)

[…] Manulife – ManulifeONE Mortgage  (read my Manulife One Review) […]

[…] Brad, I wouldn’t use the Manulife One mortgage. I would stick with the existing mortgage and pay it down as fast as possible. The M1 mortgage rate is too high without any real benefit to those who can pay down their mortgage themselves. It’s really a big negative once you factor in the penalty you would have to pay to cancel your existing mortgage. […]

[…] Manulife One Mortgage Review […]

Hi
Thank you all for your thoughts and ideas. I got to this web site because I was unsure of the unconvential Manulife banking service. After a detailed analysis I have found that we will save about $3000 per year with the One account in our rather unique situation. We have a conventional mortgage that is coming due and want to lock in the rate for 5 years. The Manulife rates are slightly lower than what the banks are offering. We have a $100,000 loan for a small trucking business, and the Manulife rate is 1.5% lower than the truck loan. With the business and our fairly healthy paycheques we have lots of cash at times but need an LOC at other times. We now have to pay a $355 annual business review fee. And I now have to shuffle money amongst 4 accounts. So we will save significant money and my banking chores will be simplified. I am signing up tomorrow!

Here it is from the horses mouth! Manulife One is good for some people, but not the best for the Smith Manoeuver! As an advisor I get paid on the Manulife One. But if you really want the best, (right now) there is only one large Canadian bank which has the best product…no fee account, up to 10 ATM withdrawals per month, (any bank). But advisors don’t get paid and mortgage brokers don’t get paid! I still suggest people look into it if they want to to do the SM.

Hello Frugal Trader,

Not RBC (lots of limits on their product) As a financial advisor, I can’t tell you everything!
Unless of course you are my client! Feel free to call me.

Ps. the bank is helping my clients pay for part of their penalty, if they wish to break their mortgage.

Has anyone factored in the ability to carry/accumulate your expenses throughout the month on an accompanying Master Card and having it’s balance paid out at the end of the month automatically (with no interest cost) thereby having the balance of your “mortgage” remain lower thoughout the month until the final day in a program that calculates interest daily?

Every $1000 you put on your CC saves you $5 over paying out of the account at the beginning of the month. If averaged over the month, it saves you $2.50/$1000.

$150,000 at -0.85% difference in mortgage rates saves about $106.00 per month.

Your choice.

David

Brian…
Blogs are a form of knowledge transfer. People helping other people with their experiences and expertese. I don’t know why, but your post struck a nerve with me. If you want to help others in this format please do so. If you want to run a “teaser” campaign to drum up business, well, that’s where I have the problem. Just my opinion, but that’s how I feel.

Hello Rich,

Sorry I hit a nerve. Here is some important information people need to know about the Smith Manoeuver. Pages 75,& 76 of Fraser Smith’s book “Is your mortgage tax deductible?” talks about interest capitalized. My understanding is Manulife One does not do this automatically. You must do this your self once a month. They are working on a solution later this year. Most mortgage brokers have not read the book and have no banking product that has this feature, to offer. Also, most banks will not capitialize the insterest automatically!

I find myself overwhelmed by the amount of information I’ve read over the last few weeks regarding arguments for and against the M1 account and it’s alternatives such as a conventional mortgage and a HELOC.
I would like to post this information and hopefully some saavy and impartial individuals will comment and help me out on what my wife and I should do…

Our situation is as follows:
Mortgage matures Aug. 1/2007
Still owing: $100800
House is worth: $510000
– $66000 cash (most of which is earmarked for items to be purchased in the near future such as a new car and renos to the house)
– $4000 cash in savings and chequing accounts
– monthly income: $6700
– monthly expenses: $3750

I’m starting to lose sleep over this as time draws near to make a decision. I do like the M1 option in that it will save in interest and shorten the amortization to about 3.3 years as opposed to 6. But I’m not one for banking fees and the like.

Lastly, we would like to consider buying a vacation property some day as well so a LOC would be very helpful in achieving this…

Anyhow, I’m looking for any comments and hopefully suggestions.

BTW, our CFP did not recommend M1 nor a similar product that she sells based on the fact the that BOC is trending upwards?

Thanks in advance…

Carson

I looked at the M1 with a co-worker of mine recently and I can tell you that their “calculator” is garbage. There is no way that a LOC can shorten your mortgage from 6 years to 3.3.

Mike

Hello Carson,

Hear is the goods… if you want to save money build your net worth, go variable with a discount & HELOC (with a discount off prime as well) Go to a bank that will allow you to capitalize interest. (Smith Manouever) See my comments #46.

If you can’t sleep at night go fixed and forget about the Smith Manouever. If interest rates go up much higher…say prime at 7%+ your vacation property will become much cheaper very soon.

As far as inetrest rates go, I have done this for thirteen years, variable is almost always better. Lots of studies going back 40 years to show that you pay extra for the fixed rate.

Also, if you were worried about rates your bank/CFP could have rate protected your mortgage 120 days! M1 is 90 days! (Rates could have been fixed based on rates April 1st,or May 1st 2007) So you would have got a five year fixed at about 5.09% …what happened?

As for as M1 calculator is concerned, if you have lots of cash the numbers will look great…Why? The cash goes against the mortgage! I have sold the M1 mortgage but is not for everyone. Example, if you have a steady pay cheque little cash in the bank then consider the other banks. If you are self-employed where cash is bad one month and next month you can buy a BMW…M1 can be great! Plus corporate chequing accounts pay over 4%! This is not possible at any bank, unless your corporation has over $250,000!