One of my older posts regarding the Manulife One Mortgage is still generating a lot of discussion. Basically it’s a battle between the convenience of having all your banking and debt under one account vs. the extra premium that you pay for the privilege.

To quickly summarize the Manulife One mortgage, it’s a giant HELOC that encompasses your mortgage, chequing/savings and other debt. The biggest advantages being convenience and the ability to have your extra cash flow working against the mortgage. The disadvantages being the higher cost relative to getting a regular discounted variable rate mortgage.

Don’t get me wrong, I can see how these accounts can be very convenient to the entrepreneur with variable cash flow. It allows them to lower their monthly mortgage payments to interest only when cash flow is lower, and the ability to make lump sum payments when times are good.

However, for the every day person, is there really any advantage to the Manulife One product? From the many calculations done by the readers (check out the comments in the m1 mortgage thread), it’s apparent that the Manulife One mortgage is much more expensive than obtaining a discounted variable mortgage.

Below is a table based on a $250,000 $200,000, 25 year mortgage created by our resident calculator guru, Cannon Fodder:

Mortgage Type (based on 25 yr mortgage)
Interest Rate Monthly
Payments
Total Debt Paid Additional Cost
Semi-Annual Compounding 4.75% $1,418.64 $425,591
Monthly Compounding 4.75% $1,425.29 $427,589 $1,998
Manulife M1 4.75% $1,438.39 $431,518 $5,927
Manulife M1 w/payment at end of month 4.75% $1,443.95 $433,187 $7,596
 
Semi-Annual Compounding 5.75% $1,562.56 $468,765
Monthly Compounding 5.75% $1,572.77 $471,828 $3,063
Manulife M1 5.75% $1,581.48 $474,444 $5,679
Manulife M1 w/payment at end of month 5.75% $1,588.89 $476,666 $7,901
 
Semi-Annual Compounding (prime – 0.90%) 3.85% $1,294.80 $388,441
Monthly Compounding (Canadian Tire FS) 3.85% $1,298.97 $389,693 $1,252
Manulife M1 4.75% $1,438.39 $431,518 $43,077
Manulife M1 w/payment at end of month 4.75% $1,443.95 $433,187 $44,746

Here are a couple of key points about the table above, the M1 calculations include the monthly fee of $14/month (free for professionals). The last few rows are what’s really significant in terms of cost difference between a discounted variable rate vs the Manulife One mortgage. You’ll notice that for a $250,000 25 yr mortgage @ todays rates, you’d end up paying over $43,000 more for the M1 mortgage over a traditional discounted variable.

My opinion is that if you want the convenience of having a HELOC but want the best bang for your buck, then consider going with a discounted variable readvanceable mortgage. That way, you’ll get the best variable price for the installment portion along with a growing HELOC to use as you please.

Any thoughts?

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Disclaimer: I’m a Manulife employee and have an MOne

I find the table somewhat misleading. I agree that lower interest rate = lower interest paid, but what I disagree with is the apples to apples comparison of a HELOC and MOne.

The cashflow throughout the month argument really only covers the monthly fee, but what can really get you ahead with MOne is that since it contains all your savings, any excess money you have at the end of the month continues to pay down your mortgage. Sure if you have an extra 10 grand in your chequing/savings account, you’d for sure look at transferring it to your HELOC, but its the 5 bucks here, 100 bucks there that add up quickly in the MOne, which people probably don’t transfer to pay down their HELOC balance.

I absolutely understand the arguments and if a HELOC was used perfectly (ie keep $0 in chequing until day its needed) it becomes far superior but it never happens that way.

I’d be interested in seeing some of the calculations behind the figures above if they are easily available in spreadsheet. Also, what are these “monthly payment” amounts. There are no monthly payments with MOne.

Correction on my comment as I was unable to edit: “provided you have have of the cost of your home” – should read > provided you have half of the cost of your home as a down payment.

The real advantage is that if you are not working & want a mortgage versus renting; provided you have have of the cost of your home as a down payment, Manulife will give you a mortgage(either a fixed rate mortgage or an open line of credit mortgage where you set the payments each month @ whatever you want with a mandatory minimum payment to at least cover the interest)whereas the bank will not. Then as you pay your mortgage(on this open line of credit down) the interest you pay also becomes less, same as a credit card(the interest rate is always prime plus 1/2%.

I have the same opinion as you do. It’s quite simple. You can get at least a 0.5% discount off prime for a variable rate mortgage. For a mortgage balance of $200K, the M1 costs $1,000 more plus the monthly fee. Can you earn $1,000 in interest with $50 here and $100 here? I think not.

Fair enough. Yes, in the short term it costs more. In any given month or year, given the same principal, MOne will cost you more than a discounted variable rate mtg.

My perspective on it is that I’m more likely to pay down the principal faster with MOne than with other products, since I can do it 50 or 100 bucks at a time, whereas I’d probably piss it away otherwise instead of saving it up for lump sum mortgage paydowns.

This is a great topic. It is impossible to do a real apples to apples comparison as FT attempts to do. The products and how they are used is completely different. What has been missed in the comparison is the impact of direct deposits during the month since interest in M1 is calculated daily. I would encourage FT to go to the website and run their calculation with a few senarios and see what happens.

If you don’t like the $14 fee from M1, but like the concept, maybe the Canadian Tire option might look interesting to you.

Long time reader…first time writer…

I love the blog, it has single handedly created my interest in personal finance over the past half a year! Disclaimer – I am an Engineering grad student – soon to be teacher with no expertise or affiliation to the personal finance industry…

I have been researching the best mortgages to implement the Smith Manoeuvre for a the last couple months. I have not completely made up my mind yet (still have about 6 months before closing) but I think one of the better products out there at the moment is the National One All in One mortgage. Canadian mortgage trends has a great review of the product at http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2008/04/all-in-one-redo.html

I like the blend of an MOne account with the option of locking in your mortgage at a reduced variable rate.

In response to the Manulife 1, National Bank has upgraded their All-in-one product.

You can now have a global all-in-one (let’s say 200K HELOC) and include variable or fixed mortgage inside it. Therefore, you benefit from a line of credit that increases every time you are making a principal payment on your mortgage, a checking account and a fixed or variable (or both!) mortgages.

I don’t they are the only one offering this product (I think that BMO has a similar one) but it definitely overcome the MAN1 cost problem without taking over flexibility.

Oh.. I forgot, it is also perfect for a Smith Manoeuvre ;-)

I agree with FT and CC. This product is very expensive for a typical consumer with a large mortgage. I’m sure there are applications for this product but most people are better off staying away.

Their advertising and “calculator” are extremely misleading since they somehow assume that all potential customers are paying the banks posted rate for their current mortgage and therefore will save quite a bit by switching to M1.

Mike

from my understanding Manulife is an insurance company, I’m curious to see the benefits of working with this product from a legal perspective considering the bank act and the insurance act are 2 different things. I remember someone mentioning that is more difficult for creditors to come after your assets when the first person in-line is the insurance company

I know this might be out of scope of this article, any thoughts?

First of all, I should point out that those figures were for a $250,000 mortgage.

Secondly, the monthly payment is either the mortgage payment or the available amount that you put towards the M1 balance.

The argument for the M1 is that you can, without any thought or effort, allow all income that isn’t already accounted for go against the M1 balance. If that is a small amount it could easily become part of a routine that would be harder to envision with a traditional mortgage since you would have to make an online or in-branch/over the phone adjustment to your payments and it would be fixed. The M1 would allow this to ebb and flow depending on what expenses crop up that particular month.

However, if it is a large portion, then it certainly seems possible that one should be able to commit to a larger mortgage payment with a traditional mortgage. After all, if the M1 is to come out ahead in spite of the higher interest rate and the monthly fees, you are going to need to increase the amount that goes towards the principal significantly while also eliminating temptation to dip into that account to pay for certain unanticipated expenses.

To give you an idea of how much extra per month you would have to assign to a $250,000 M1 mortgage at 4.75% vs. a $250,000 semi-annual compounding mortgage at 3.85%, your M1 monthly payments would be $1589.04 over 20.4 years as opposed to the mortgage payments of $1294.80 over 25 years. This would obviously discharge the mortgage faster but the total cash outlay (including fees) would be identical.

That is almost $300 per month difference, each and every month for over 20 years, and represents almost a 25% increase over the traditional mortgage payments. For me personally, this is a difference that I would notice and, if I decided I was comfortable, would then commit to increasing my traditional mortgage payments. But I think differently than some (most?) people – perhaps someone on the other side of the equation could explain how they can honestly expect to apply significantly more money to their M1 balance but wouldn’t be able to commit to it with a bank mortgage that costs less?

If I then went and changed my $250,000 mortgage at 3.85% to $1589.04 monthly payments I would spend not much less than before – $347,359 vs $388,441 but instead of eliminating my mortgage in 25 or even 20.4 years, I would be done in 18.25 years. Where would my M1 balance be at that time? It would still have $38,425 in principal left to pay down.

This is the end of the factual section of this post. Below is a devil’s advocate position in favour of the M1 but with tongue firmly planted in cheek.
******************

So, let’s imagine that we are looking at the M1 vs. the traditional mortgage and we accept that if we treated the M1 like a traditional mortgage it will end up costing us a lot more. But, we decide we are going to treat the M1 differently. We will not commit to making mortgage payments ever again. We will instead hope that by not ensuring we make payments we will enjoy the freedom of having the M1 account automatically apply the difference between income and expense to M1 balance. We are confident that this will easily surpass 120% of what would be a traditional mortgage payment and that if we waiver from that course of action it will only be temporarily and not enough to lose the advantage.

If we are challenged that we are not disciplined enough to commit and there really is no structure we will counter that it is the structure of a defined mortgage payment which has obstructed our ability to pay down our debt faster. How can we be expected to consciously, and repeatedly take hundreds of dollars and apply it to our mortgage payment for so many years?

Once we see, after just a few months, that we have quite a bit more money coming in than we needed to spend, we will be as diligent as reformed smokers – debt will be our enemy and if we want to apply an extra $500 or $1,000 or $2,000 this month against debt, then we definitely will. And no bank in the land would allow us to prepay those kinds of amounts any time we want against a traditional mortgage, right?

Sure, they try to entice you with their teaser rates of Prime -0.9 but they will go up just as sure as the BofC rate will go up. But, we with our M1, won’t be concerned. We know that our M1 rate will go up just like the bank mortgage but we won’t care because we will have shaved thousands of dollars and years of payments of our balance something that was impossible to do with a traditional mortgage.

With the bank mortgage they tell me how much we can pay and when. The best a bank can offer is payments every 2 weeks – with the M1 we can pay it every single day. And that’s the key… we can pay it down every day just by not spending as much on other things, whether it is entertainment, clothes, electronics, whatever we classify as discretional spending that is a ‘want’ and not a ‘need’.

We are not going to change too much. The RRSP? Still contributing the same. Utilities? Of course. Car payments, gas, insurance? Naturally. We are talking about the little things that add up to hundreds of dollars per month or thousands per year. Like that decaf espresso with chocolate shavings. Or that hair salon appointment. We’ll take lunch to work more often. Movie theatres are expensive – we can have a family night in with a few of the latest movies for less than 1 tub of popcorn. See? We can do this and any changes we make are for the better. Do you think a bank mortgage would allow us to do that?

The bank also won’t let me take my money back out when we want even if it is for an emergency. With the M1 if we’re running a little short we can access the money immediately. And it won’t be like we’re borrowing the money at Prime because it is our money – we put it there in the first place so we can’t very well charge ourselves interest!

And although it is so easy to take the money out of the M1 we will have the discipline to ensure it is only for the important things and that we pay it back quickly. We will be very rigid on this and the reason we can demonstrate this discipline with the M1 when we couldn’t with the bank mortgage is because it is on our terms, not the bank’s. We will decide when and how much we pay back, or rather not spend, every month, week, day.

How can anyone not see the benefits to the M1? It is not just an ‘all-in-one’ account it is a personal improvement tool. By not spending as much now, we will end up closer to being financially independent in less time than we could with a bank mortgage. It simply would not be possible to do this with a bank mortgage. We know others have tried by having money automatically withdrawn from their main account so it can’t be spent, but those people are fooling themselves if they think that works. For every person who has successfully implemented this half-baked idea, we will show you a person holding an M1 account who guarantees us that their method will prove out in the end (since the M1 is pretty new we admit that there aren’t a lot – perhaps no one – who has actually paid off their mortgage with the M1 yet).

We will enjoy this endeavour along the way because the freedom the M1 imparts will allow us to put more energy towards debt reduction – without lifting a finger! It is similar to those exercise devices which allow you to shed pounds while watching TV on the couch. The bank mortgage, on the other hand, is like telling a teenager what to do and when to do it – how else would we be expected to react? M1 says we’re grown up enough to do this on our own and we appreciate the support. For those who say the cost could be higher, we say, “No pain, no gain!”.
*******************
In closing, let me just say that if the M1 does encourage people to change their spending habits for the better, then that is a tremendous, and all too rare, victory that will be with you until the end and you should be congratulated.

Thanks Cannon_fodder (and others). I appreciate the effort you’ve put into this (more so than the facetious comments at the end, but they did make me laugh).

Really making me reconsider the MOne decision. Might be time to revisit the fine print and see what my options are for moving my mortgage.

paul s,

I’m not sure if you mean the advantage gained by putting in money all through the month but the M1 calculator (and thus my results) are based on the, somewhat unrealistic, premise that the total difference between income and expenses goes in at the beginning of the month. In other words, if you put expenses at zero and you put income at your current mortgage payment, then that payment is applied from day 1, not at the end of the month (which is why I added a line to treat the M1 like the traditional mortgages where the payment is at the end of the month).

I initially tried various combinations of cash in/out flow during the month such as expenses every day but income only twice a month, but I found that the M1 calculator didn’t work that way and it was my intention to find out how it arrived at the numbers. The way the M1 calculator works is in the most favourable way possible.

If on the other hand you meant that the ability for additional “principal” payments can occur throughout the month, then at some point you need to quantify that to do a comparison. Once that reaches some level (perhaps an absolute number or a percentage of your existing mortgage payment) I think it is fair to question whether the total of those additional principal payments could also be consciously applied to a traditional mortgage whether through prepayments or committing to an increased mortgage payment.

My intent with the posting above is to show that it really is quite a significant increase that would be required to offset the additional interest costs (the monthly fee is not that large and you rightly point out that CTFS has a similar product – by the way, their interest and principal payment structure is different yet again). I believe that most people who could consistently live with the decrease in spending of that magnitude, but sporadically spread across the month, could also live with a commensurate increase in a structured mortgage payment schedule.

Reverend,

I appreciate that you were able to take my over the top “defense” of the M1 as exaggeration to the extreme.

I made an error with my comparison of what the M1 ‘payments’ would need to be and the time taken. Blame it on my playing with the calculator for some what-if scenarios (like payments at the end of the month, and no monthly fees). Unfortunately, the news gets worse.

In order to put out a total cash flow of $388,440 (comparable to the traditional $250k mortgage at 3.85% over 25 years) you would need to put $1629.19 every month (including $14) to the M1 account over 19.75 years – basically an extra $1,000 every 3 months. If you instead took a $250,000 bank mortgage at 3.85% and applied $1629.19 at the end (not beginning like the M1) every month, you would pay out a total of $343,759 over 17.6 years which is a savings of almost $45,000. I’ve double checked my figures to make sure.

Finally, the table at the top should not be comparing a 3.85% mortgage vs. a 5.75% M1 as it is in the last section. That was my fault for sending it to FT in that manner and I’ve since sent a version that shows a 3.85% mortgage vs. a 4.75% M1 account. My apologies to everyone for this mistake.

CF – excellent comment.

My philosophy with mortgages is that the interest rate is the only thing that matters (for most people). If you really want the extra “flexibility” of an M1 then get a regular mortgage at the lowest interest rate you can find plus get a heloc and carry a balance (you can move some of the mortgage to the heloc) and then do your “M1” style moves using the heloc.

Can the Smith Manoeuvre be preformed with a M1 Morgtage. If so can someone explain how?

As a M1 customer, I’m quite interested in the conversation. It’s been said on here many times that there is no perfect solution for mortgages, and that making sweeping judgements that one type is superior to others does not work for all people in all circumstances.

I know for myself I can see the benefits as I implement SM. If I was with my old Firstline mortgage (5 yr fixed) I would not have the flexibility to alter my mutual fund purchases each month, as my spouses income changes. My income is quite stable but hers can vary by as much as 25%. With a traditional mortgage I would almost certainly have to error on the side of caution and not contribute near my maximum % on most months as you should aim to with the SM. With the M1 account since I have flexibility in equity paydown I can alter these amounts quite easily. I think this is something that is left out of your conversations here, most people do not make extra mortgage payments on a consistent basis, as they cannot live with the risk of being short one month and not being able to claw those funds back.

When it comes to M1 fees, there is no arguement from me that they need to make a change, there is not justification in my mind that they can make for the $14 fee, as they make impressive amounts each month on interest, this fee needs to go, and hopefully with increased competition they will be forced too.

However there are benefits not listed so far, I can quite easily put all my monthly expenses on a credit card, then pay off before the due date, for that period I have had in effect an interest free loan (30 days) on that amount (usually around $3k). So for those 30 days I did not pay interest on those charges.

To summarize it’s not a perfect product, but I believe it’s flexibility, and ease of use with SM makes it attractive. If it can make a few improvements such as scrapping the fee, and having someform of discounted variable subaccount (even say with a max of 25K) then it would be almost perfect.

Reverend,

I was an M1 customer as well – up until blogs like these showed me the light. It was really easy to get out of M1 – I think there was a discharge fee of a couple of hundred dollars, and that was it.

Rev, did you just cancel your account today, I was looking at the thread conversation and it said you just discussed that?

My credit union (Cambrian) has done a great job of letting me “fake” an M1 account. I use a LOC as my chequing account; my paycheck automatically goes into it, bills automatically come out of it, I have cheques for it, and I have ATM access to it. Whenever the balance threatens to climb to zero, I pay say $5,000 from the LOC into the mortgage. The only hiccups are that Interac direct payment (which I never use anymore) can’t draw from the LOC, and mortgage payments still flow through a standard chequing account (handled with an automated just-in-time transaction).

I have a 30 yr mortgage, max annual prepayment 20%, plus unlimited prepayment in between terms. I plan on going for 6mo or 1yr terms in the coming years, so prepayment limits will never be a real issue for me.

So I feel I get the best of both worlds; the strengths of an M1 account with the majority of my debt at a sane rate.

Kris,

I think that (in a separate, but related thread discussing the M1) it has been highlighted that those with significantly variable incomes could realise benefits from the M1 flexibility.

You made an interesting comment about the credit card. I use my Aeroplan Visa card almost exclusively because I get so many points on it that it pays for itself many times over. However, there are certain expenses I can’t put on it (most utilities, property taxes, mortgage). But, because I pay it off every month, I, too, enjoy an ‘interest free’ loan.

What makes the M1 credit card more valuable in comparison? Is it only valuable if you carry a balance (which I assume would be at Prime rather than double digit interest rates typical of most cards)?

CF
Sorry I blacked out in the middle of your post and didn’t get through it :-). It’s funny sometimes how sarcasm doesn’t come across when it’s out of context on a blog.

Bottom line for me?

I had a traditional mortgage for many years. Hated dealing with the banks at renewal time. Scumbags that made life difficult. The reality for me is if I made bonus, that money NEVER went to the mortgage. It always went somewhere else.
With M1, it goes right to the bottom line and the interest I pay is less, automatically. Just one example. Gotta know oneself. I find setting targets for my balance each quarter gives me a reason to save. Call me simple if you must.

Cannon_fodder said: “Below is a devil’s advocate position in favour of the M1 but with tongue firmly planted in cheek.”

I almost spit beer over my screen! Enjoyed every word!

DAvid

Okay, no ill attempt at humour just more number crunching.

I thought it was a good idea, voiced by many (including FT), to perhaps consider a traditional mortgage with a variable rate well below prime in combination with a HELOC at prime. Would that give one more of the flexibility like the M1 but hopefully save some money?

So, I ran 6 scenarios through a spreadsheet to see how they compared.

I’m sure this won’t show up well so I apologize in advance. We are going to assume that we have a $250,000 mortgage and that we can get P-0.9 for a traditional mortgage and a HELOC or the M1 at P, which is 3.85% and 4.75% respectively.

To try and keep things more fair, since the M1 calculator puts the $ towards the mortgage on the first day, I’ve applied the same logic to the other scenarios.

Let’s assume you have mortgage payments of $1424.40, income of $7474.40 and expenses of $5300 (not including the mortgage). You plug in $1424.40 into the M1 and find out that in 25 years, your M1 mortgage balance would be 0. So, that gets you to thinking about different scenarios.

1. Mortgage @ ………………………3.85%
Payment ……………………….$1,424.40
# of Payments…………………….257
Total Cash Flow …………………$364,802

Not bad, and certainly better than if we chose the M1 and only applied that amount towards it on a monthly basis since it would end up costing $431,515 over 25 years.

But, we have quite a bit of leeway with our income-expenses. So, let’s bump up the payments a bit.

2. Mortgage @ ………………………3.85%
Payment ……………………….$1,705.30
# of Payments…………………….197
Total Cash Flow …………………$335,789

Definitely better. But, let’s put all of the money left over, after all expenses are accounted for, towards the mortgage. (I’ll leave the traditional mortgage to the end.)

3. M1 account @ ……………………4.75%
Income – expenses………………$2,174.40
# of Months………………………..154
Total Cash Flow …………………$335,789

If you look at the cash flow between #2 and #3 you can see they are identical (although if you also factored inflation, #2 would cost you less in today’s dollars).

Alright, now let’s try something radical. Le’ts get a mortgage @3.85% and a HELOC at 4.75%. We are going to assume that this HELOC will allow us to grow at a pace that our total debt load does not increase. What we are going to do is put all of our income against the mortgage and withdraw all of our expenses from the HELOC. Of course, our mortgage will be paid down as fast as possible, and once it is paid off, we then will begin paying down the HELOC with every penny available.

4. Mortgage @ ……………………….3.85%
HELOC @…………………………..4.75%
Income – expenses………………$2,174.40
# of Months………………………..151
Total Cash Flow …………………$326,530

An improvement, although not dramatic over the M1. But, I can see what is happening. About 18 months in, the amount of interest being paid for the HELOC is greater than the Mortgage. What if we then borrowed from the mortgage, which is at a lower rate, and paid down the HELOC every time we ran into this situation? Sure, as we get further along we are going to have to borrow to pay down the HELOC more and more frequently, but it would be more efficient in terms of interest costs.

5. Mortgage @ ……………………….3.85%
HELOC @…………………………..4.75%
Income – expenses………………$2,174.40
# of Months………………………..145
Total Cash Flow …………………$314,993
(Reborrow from mortgage whenever HELOC interest surpasses Mortgage interest for the month.)

Now, if you take this to the nth degree, you are pretty much really not using the HELOC at all and just applying the income-expense difference to the mortgage alone.

6. Mortgage @ ……………………….3.85%
Income – expenses………………$2,174.40
# of Months………………………..143
Total Cash Flow …………………$310,506

Best scenario in terms of total cash flow.

Between scenarios #3 and #4 there isn’t a lot of difference (although it would still take an additional $140 per month with the M1 to even things out). It certainly is possible that an individual could end up better with the M1 product because of its flexibility.

CF, to answer your question about the credit cards, I don’t actually use the Manulife CC as I’m not a fan of airmiles. I’ve actually gone with a cash back card from CIBC that I believe you reviewed on your blog. Like you I try to max all expenses on the card (yes utilities, property taxes can’t go on it), that way for one month this money is not accumulating interest in my M1 account until the day the Visa gets paid. In effect I saved prime on that $3-4K for a month, not bad, now I realize when the card gets paid M1 will accrue interest on this money, but by then I’m already sheltering next months bills, so in effect there is perpetually 2-3K that is never in M1, small savings but hey every bit helps right :) I’ve estimated that using this procedure saves between $13-20$ a month in interest on M1, and add that to the $30-40 I earn from the 2% cash back platnum card I’m in effect getting paid $40-50 bucks a month to use the visa for variable bills (food, purchases, cell, tv, etc)

Just for anyone out there interested as a M1 client this is how I’ve broken down my debt (these numbers are all approx of the real values)

Main M1 account- “Interest and Taxes”- Mortgage interest and property taxes accumulate here so I know the amount I might want to raise the value of my house when I move (I move every 2-3 years for work so important for me to track this)

approx $10K a year- high property taxes in near Ottawa :(

Sub account 1- Mortgage- amount outstanding after purchase of current house. Note all my income (Mine, spousal, misc) gets applied to this debt each month I don’t use it to pay down living expenses.

Sub account 2- Smith Man- All mutual fund purchases (mostly index funds). Note for anyone not familiar with M1 all these charges initially go thru the main account and have to be manually xfer here). It also includes the interest on the investments, as I am capitalizing the interest here seperate from the Mortgage interest, so not to confuse the too.

Approx- $600 per month

Sub account 3- Home business. Really just have started this account as my wife runs a small home business, but will use it to track her expenses to claim some of them. But the revenue will be applied against Sub Acct 1.

Approx- $500- 2K at most

Sub account 4- Education. Track all school expenses for myself and wife in this account (tuition, books, fees) useful for claiming later with the other reciepts needed. Also capitalize the interest here as well as I don’t want it affecting the mortgage interest figure in the main account.

Approx- 1-2K a year

Sub account 5- Living expenses- My visa card bill after being paid by the main account is xfer here, also utilities, insurance, car payments. Useful for seeing each month how much you need to live on. My goal is to xfer all income that is now paying the Mortgage subaccount to this subaccount after it is paid off.

Approx- visa 3-4K per month, utilities- $266, cars $600, insurance $170.

Any comments from anyone else using M1 and how they have it broken down, or anyone else who could think of other fun ways to chop up their expenses?

Kris B,
We just keep track of our expenses in a spreadsheet. Manulife One sub-accounts are simply a book keeping exercise, as they aren’t actually different accounts. For the Smith Manoeuver, having the account at arm’s length may help you manage and justify the interest cost, but it could equally be done in a ledger.

DAvid

DAvid, exactly that is why I choose to break things down into subaccounts so I can track those expenses seperately for tax season but also for knowledge.

It is entirely possible, but I don’t think advisable for someone to open an M1 and have all their debt in the Main account (this is by default the way it comes setup, but adding subaccounts is easy). If you don’t seperate your expenses from your mortgage debt it would be too easy for most people to realize they have not paid anything towards their house, and to lose control of their spending, a real danger with a secured LOC.

I also use seperate cash managment software, in my case Quicken, in which I can see my subaccounts (I realize they are not seperate accounts all they do is chop up the debt pie into smaller pieces) but I can then catergorize those subaccounts. For example within Living expenses I can categorize by food, gas, cars, what ever I want and this way it is all neat and tidy.

But to each their own, the amount you’re anal about tracking your expenses varies for each person, this works for me and my wife, each family is different.

Small error I believe I made about the M1 credit card, not airmiles but rewards pts I believe, either way I don’t use it. But no it is not at prime they simply automatically move the debt to M1 before the due date, but they will also do this with any other card as well.

The manulife credit card alos has an annual fee of $29.

Kris B. Could you provide some info on how you go about using the Smith Man.

Certainly I can give you a one month snapshot of how my money goes in/out (in general terms of course :)). And how I plan on handling tax refunds at end year.

Approx values: Total Income: varies between 4200-5000 per month
(deposit to Main)
(then xfer from Main to Sub 1)
Total Expenses: Variable $1500-2000 per month
(on Visa till due date)
(pay bill w/ Main)
(xfer from Main to Sub 5)
Fixed $1200 per month
(pay bill w/ Main)
(xfer from Main to Sub 5)
Interest $800-900 per month
(Mort int Sub 1)
(Invest int Sub 2)

Difference: Varies between $100- $1500
Average diffence $600-700 per month

This is where the investment part comes in, so I have analyzed our spending and follow a strict budget. I reliably (from experience) can count on 600-700 a month in “principal” being paid. for the M1 this is actually extremely easy to find out. All you do is write down what your available credit is at the first of each month, if it went up, well hey :) you’ve saved some money and paid down your debt. I take that exact amount and Invest it into my mutual funds. I happen to used index funds from ING streetwise account, and might also go with TD index funds. But the skies the limit, could also invest in my home business or a rental property, the point being is to track this expense and the interest.

Now about the interest, the M1 account automatically charges the interest for each subaccount to itself, but then also automatically xfers that amount from the Main account so that it is “paid”, personally I’d like the ability to modify this so it just leaves it in the subaccount, but I have to physical xfer the amount back to capitalize the investment interest within that subaccount. I don’t want it capitalizing with the mortgage interest, as that defeats the purpose of tracking them seperate, I might as well just put everthing in the main account.

Now when tax season comes and I claim the investment int, the tax refund will go (like all my other income) to pay Sub 1- Mortgage. As soon as that is done I will reinvest this available credit back into Sub 2- investments, thus the SM cycle is complete.

When the mortgage subaccount is finished I will instead pay the living expenses subaccount, which will be fairly sizable by that time, but hey that’s where budgeting comes in to limit your spending, it comes down to discipline there :)

For interest sake, so you know I don’t have a Fixed rate subaccount within M1, all 5 are at variable/prime. If you fix one, you are very limited in how you xfer funds to it, becomes like a normal fixed mortgage that you are “paying” out of the Main account. I would only do this for a portion of the mortgage if there was a substantial jump in rates 3-4% and the economy was in a recession for over 1 1/2 years.

To summarize, living expenses in Sub 5, Mortgage in Sub 1, Investments in Sub 2 (purchases and interest), and all income gets paid to Sub 1- Mortgage

I should point out that CF is a different person than myself… unless I’m schizophrenic.

Sorry :0 if that was my mistake, but you can see how someone could get the two confused

I missed it maybe, where did you get the 3.85% mortgage rate from?

paul s,

There are a couple of offers for 3.85%. Valueland mortgage brokers is putting people into 3.85% (perhaps with ING???) and Canadian Tire Financial Services (not available in all provinces) is advertising 3.85% on a variable rate and 4.99% on a 5 year fixed closed mortgage. There is even someone trying to drum up business by offering P – 1 but no verification of whether this is legit or what the caveats are.

If you go here (and go to the last couple of pages) you will see what people are getting in Canada. http://www.redflagdeals.com/forums/showthread.php?t=351105

Cannon_fodder
I saw the Cdn Tire offer. Hadn’t seen anyone else. Thanks for the link.

Thanks for the excellent explanation! I’ve been wondering about this product, and this has been a great help.

I clicked on your link to readvancable mortgages, and I found one change: I have an RBC Homeline: it’s a variable rate, 5 year open. maybe the product has changed since you wrote that post?

Lise,
The Homeline product can contain any of RBC’s mortgage product(s). The Open Variable is but one choice. Their advertising suggests a combination of mortgage products be used to manage interest rate risk. Thus, for example, you could choose a number of different mortgages totaling you mortgage amount, each with different terms, and be able to manage renewals regularly to adjust for your borrowing. This could allow those who wish to carry the Smith Manoeuvre at lower rates to re-mortgage that portion of their debt at a more competitive rate than the HELOC.

DAvid

Products such as these are based on the reality that the vast majority of potential customers will not fully understand what they, in fact, are buying. The concept of total cost is lost on the bulk of the population. And, as any financial marketing department is well aware, Consumer Ignorance is Highly Profitable.

Just wanted to put in an update on how the use of a credit card for expenses benefits someone using the M1 account. I looked at the last 2 months of my expenses and the breakdown is:

March: Credit card bill @ due date: $3600 approx
Dividend dollars earned on puchases: $35 approx
(less than 1% initially is offered)

Savings on M1 for $3600: $11.71 approx
(difficult to calculate you would have to add the total up daily, I decided for now to just to an average weekly balance)

M1 account fee: $14

April: Credit card bill @ due date: $4300 approx
Dividend dollars earned on puchases: $44 approx

Savings on M1 for $4300: $12.43 approx
M1 account fee: $14

So as you can see for two months having the balance out of the M1 pretty much cancelled out the account fee (would be better if it wasn’t there in the first place :)) and I was on the plus side by about $32 and $42. Not bad considering a normal cheq account at RBC charges about the same fee.

As a commissioned sales agent, I have opted for using 25% of my mortgage as an M1. Most of my mortgage is at the deep discount variable and the rest is M1. This allows my good months bad months to ebb and flow without the headaches of transfering savings back and forth. being the business my fee is only $6 and when I got it, I don’t think anyone was doing anything like it. I will revisit the competition now that I see more players have entered the market. Thanks everyone for a great discussion.

Kris,
You credit card example applies to all credit card users, though it may not be as obvious to those who do not use M1. I could similarly have my excess money in a savings account, or credit card bills timed to match my pay period (no interest cost at all). In either case, using someone else’s money even for a short time has some benefit.

Remember, monthly interest on $150,000 at a 0.5% difference between prime rate and M1 is $62.50 (+$14), so you would be ahead some $65 with the prime minus mortgage. The difference in our approaches is that you refer to ‘saving’ interest costs, while I claim to avoid paying them in the first place.

BTW, if you have an RBC mortgage, RBC Rewards Visa, and RBC chequing account, you pay no monthly fees.

DAvid

DAvid,

Perhaps Kris was meaning that the money sits in his M1 account and, in essence, his mortgage balance gets the benefit of having the $3,600 and $4,300 sitting there. If I were to think of my own personal situation, the best I could hope for is as you suggested – having money transferred to a high interest savings account and then using that to pay my CC bill. So, in both of our cases, we aren’t paying any interest charges for CC purchases, but in my case I only gain let’s say around 4% interest before tax, while with the M1 you save 4.75% interest after tax.

Does that sound right?

If your goal were to continue using the M1 for leveraged investing or SM.

Would it be possible to take out another secondary mortgage on your home with Canadian Tire FS and get the 3.85 interest rate and dump the money into the M1 account?

Now effectively the bulk of your mortgage is at 3.85% but you still are able to use your M1 for SM and the small part of your mortgage that is being charged the full 4.75% of the manulife account benefits immediately from the day to day deposits.

Cannon_fodder,
Let’s say I have my Credit Card come due on payday. If I’m budgeting closely, I have no excess cash – all goes to some expense or other. Since my carefully budgeted expenditures of $3600 ( or $4200) come due on payday, everything balances out. I do not have to find the cash to pay for my purchases through the month, and I really don’t see the expense of the credit card bill, as it consumes that part of my paycheque before I even see it. If, on the other hand, I have to somewhere find the money to make purchases through the month, I may have problems. If I get a Payday Loan, I will be charged a large sum for a loan to buy my bits and pieces for the month. Thus, by using my credit card to avoid the Payday Loan Office I save 30% on the amount I instead charged to my credit card, as I displace that loan amount to the day my credit card bill is paid. So given that I have managed my finances by avoiding the Payday Loan folks, should I exult in the $90 or $115 I ‘saved’, or just remember the appropriate use of Other People’s Money cost me $0?

I just have difficulty with the idea expressed by Manulife that small amounts of money paid down for a very few days then re-borrowed is such a big deal. The few dollars saved here and there is more than balanced by the reduced interest costs of a regular mortgage.

This is akin to your comments about paying down more on the M1 simply by choosing to spend less……

DAvid

The Reverend,

Did you complete your analysis yet? If so, are you happy where you are?

Wow, the discussion is still going. Well it’s not really a discussion. It’s the smarter than “yous” saving the stupid majority.

I’d explain how M1 has saved me thousands in interest, but nobody would be interested here.

I do agree that if you are the average paycheck earner, and IF you can get that 1% less interest on a variable rate, then you will save over the long run. No doubt the numbers are easy.

I did finally go back to the M1 calculator the other day, and I see they’ve changed it. Obviously dumbed it down for stupid folks like me.
Used the be able to specifiy your monthly money flow in and out of an account to get a reasonable accurate sense of how you might save.

Incidently, FT you are costing yourself money lots of money by having that cash sitting around every month. If you had M1 for the past three months you would have saved some real coin.

Paul s,
I believe the contributors here are attempting to make two points:
– The Manulife calculator paints a much rosier picture than is reality (for example, it currently assumes no increase in prime for the life of the mortgage). Folks should take a close look before assuming they will see all those ‘savings’ by switching.

– That there are other options that may cost you less over the length of the mortgage, and to not blind yourself to those options.

I think we are looking at mortgage interest from two different angles. You state how much you would save, while others ask ‘How much does it cost?’ Since the real bottom line is the total cost to borrow for your mortgage, that is what really should be compared.

On my $136,000 fixed rate 25 year mortgage with a 5 year term, I have saved at least $73,000 over the past 4 years (I have not included the savings of being in a fixed rate mortgage while Prime Rate rose). You?

DAvid

Well my experience with Manulife One has been very positive. I have had it for just over 2 years now and watching my principal decline every month is quite dramatic compared to my previous locked in mortgage. What I think people are forgetting is that every penny I don’t spend every day goes toward principle. My income is a bit up and down, so to be able to put large chunks against my debt simply by depositing my pay cheque is huge for me. Before it just sat in my chequing account doing nothing. Sure you can get a secured line of credit at a marginally better rate, but then you have to make traditional payments and budget how much extra you will have in a month to put down on the line of credit. The Manulife account does this all automatically. It has simplified my life and I can’t imagine having it any other way.

This is, indeed, a good discussion about Manulife One. Like Paul and Russ, I’m a very happy Manulife One user who is seeing real savings where before I received one annual mortgage statement that highlighted a gross amount of interest paid and very little principle.

This discussion has been very focused on the mortgage portion of the account. I think of M1 as a lifestyle account. I love being my own banker. I don’t have to beg for money. I borrow from myself (cheaply). On the financial planning front, Manulife One has helped me top-up RRSPs while paying down principle.

The biggest concern I have with all these comments is calculations. I’ve run the M1 calculator and seen quite a few prime-minus calculations that say M1 isn’t ideal. The problem with all calculators is that they’re static. Take all your bank statements and paystubs. Lay them out on your desk and take a picture. Now calculate to your hearts content. All calculators are a snapshot in time. Just as fixed and floating rates fluctuate so does your income unless you plan on never getting a raise, a bonus or a tax refund. Somewhere somebody wrote “rate is only half the equation. If you pay down principle you have less debt and therefore you pay less interest.” There’s no calculator involved in that statement. It just makes sense.

My income goes to one place. I borrow everything at Prime. I never have to ask for another bank loan for as long as I own my home. I’m saving more money than when I banked from one of the Bay Street banks so while I may never be as smart as some of the mathematician’s here, I’m extremely happy with the account.

Great discussion and I wish everyone the best in finding their own wealth and happiness.

ps. You can tell I’m not good at these disucssions. I submitted comments to the wrong blog post the first time. Sorry for the duplication.

DAvid:
Saved $73,000?? vs what?

Check the discussion on emergency funds. All the money people have sitting around getting basically zero interest after taxes could be reducing debt and saving interest on that debt every day. Too simple for people I think. People have the need to be “doing things”.

Paul s asks: “Saved $73,000?? vs what?”

Versus not saving $73,000, of course!

By taking a number of steps during my mortgage negotiation, and subsequently applying a number pf prepayment options available to me, I have ‘saved’ $73,000 over what might have been had I not taken those steps. This is the same argument you seem to be applying, by placing your paycheque against you M1 versus not doing so. I would rather discuss the costs of a mortgage, i.e. the premium you pay to the bank for the use of their money, but Manulife One users seem more interested in discussing their ‘savings’.

Saving money on a mortgage like you describe is like you buying a $100 item for 20% off at the Bay, and I buying it for $75 at Zellers every-day low price. You ‘saved’ $20 at the Bay, but could have purchased it for less at Zellers. I see no savings, but acquired the asset at a lesser cost.

I agree with you on the savings accounts, and have stated elsewhere that folks with debt should have no savings accounts — paying down the debt is more sensible. I have run the numbers on the use of a product such as M1 — it seemed a great idea when I first looked at it, but I decided it did not meet my needs. I wrote of my findings, and published them here: http://www3.telus.net/NFtoBC/MOneCmt2.pdf

It was through this cost analysis that I decided to pay my mortgage as though it was at a higher interest rate, and reduce the time I held that mortgage.

DAvid