Smith Manoeuvre
 January 19 2016     Posted by Siemens Group

The Smith Manoeuvre is a mortgage strategy pioneered by Fraser Smith. He contends that the main issue with how many Canadians arrange their financial planning is that they choose to first pay off their mortgage, and then commit to investing in equities to build a retirement fund. This doesn’t give the homeowner much time for their investments to compound and grow, leading to lower net worth at retirement than is possible.

The Smith Manoeuvre allows investors to build an investment portfolio while they pay down their mortgage by taking advantage of readvancable mortgages, which combine a closed portion with a Home Equity Line of Credit. For each dollar paid down against a readvancable mortgage’s principal, a dollar is added to the available Line of Credit limit. The amount of all principal repayments can be borrowed from the Home Equity Line of Credit and used to purchase a qualifying investment. Although this means that the total amount owing on the mortgage never reduces, with each payment a greater amount of the total loan is on the Home Equity Line of Credit. This is advantageous because the Canadian government allows investors to deduct the interest expenses on loans used to purchase qualifying investments. This means that as the strategy progresses the homeowner enjoys increasing tax deductions from their tax-efficient portfolio, until eventually their full mortgage amount is tax deductible.

The disadvantage of this strategy is that the total amount owed remains the same- many homeowners don’t like the idea of their principal not reducing. If the value of your investment portfolio increases at a rate consistent with historical stock market growth, that will mean that overall your net worth increases despite your debt load remaining the same; however if your investment account underperforms you can find yourself with an investment portfolio valued at less than the amount used to borrow for that portfolio.

Although the Smith Manoeuvre isn’t for everyone, it’s worth considering if you are comfortable accepting a degree of risk in exchange for potentially higher rewards. If this is an option you’re interested in, we would be happy to discuss the relative merits of different lenders’ readvancable products and refer you to an investment expert who can discuss the investment portfolio side.

Even if you don’t wish to commit fully to the Smith Manoeuvre, using a readvancable or multi-tiered mortgage to fund investment can be a great way to ensure that your affairs are arranged in a tax efficient manner. Be sure to ask us about these products if you are considering purchasing an investment property or you have an investment portfolio that isn’t already in tax-efficient vehicles (such as a RRSP or TFSA).