There was comment in the popular Smith Manoeuvre thread about comparing the tax deductible mortgage plan (TDMP) to the traditional SM. Here are my thoughts on the issue.
What is TDMP?
The TDMP is a basically a way for someone interested in leveraging their home to invest to hand off the whole setup. That is, TDMP will arrange the readvanceable mortgage, investment account/investments along with arranging payments, and mortgage pay down. Coincidentally, their setup is very similar to the way that I have constructed my leveraged investment strategy.
What Does it Cost?
While not everyone has the time to watch their investments, automation can be a good thing. The automation with TDMP, however, comes with a cost (and other problems). From their site:
The TDMP Setup fee is $2750 + GST and recurring Cash Management fees are $39.95 per month. These fees are 100% Tax Deductible and are funded from the proceeds of the plan so you are never out of pocket.
While the fees are high (even if they are tax deductible), the biggest problem I have with TDMP though is their choice of investments. The TDMP invests in a high distribution fund, and uses the monthly distributions to pay down the non tax deductible mortgage. High distributions are great right? With a leveraged investment account, it really depends on the content of the distribution. Their 8% income fund has at least a portion of the distribution in the form of Return of Capital (ROC).
The TDMP withdraws all of the distribution and uses it to pay down the mortgage, similar to my modified Smith Manoeuvre strategy. As readers of MDJ know, withdrawing ROC from a leveraged investment account can mean tax trouble for the underlying investment loan. Basically as time passes, and the mortgage gets paid off, the investment loan will slowly become a non tax deductible loan due to the return of capital.
Over time, the investor will be left without a mortgage (hooray!) but with a large non-deductible investment loan in the place of a mortgage (boo!). So basically back to square one. Without the tax deductibility of the investment loan, the investor will be taking higher risk and will most likely face sub par returns after fees.
In my opinion, the only way that TDMP would make sense is if they use an income fund that payed distributions in the form of dividends only. Dividends are tax efficient and can be withdrawn from a leveraged investment account without any consequence to the underlying investment loan. That way, when the mortgage is eliminated, the investor will be left with a tax deductible investment loan.