The Smith Manoeuvre

[Bend it like Bourgeois]

Saw this in the Globe ...Monday I think... and checked out the website.

In a nutshell, The Smith Manoeuvre employs refined debt conversion techniques to transform mortgage interest into tax deductions. The method has a remarkable snowball effect that generates large and growing annual tax refunds, and enables the homeowner to knock years off the life of a mortgage and build an impressive financial portfolio at the same time. It is the most efficient way for families to raise the resources they need to secure both their house and income in retirement.

Has anyone seen this concept before? I get how it works, I'm just not sure if there's a genuine advantage in having more retirement dollars but still the equivalent of a mortgage in debt.

http://www.smithman.net/

[ken0042]

It sounds a little fishy to me. If it was for everybody, then every reputable accounting company would be offering it.

My guess it involves setting up a business, and the house is the business address. However if you aren't actually conduction business, and the gov't catches you, then you have to repay a whole lot of money.

[ericschand]

I agree with ken. It sounds very fishy to me.

It is probably a take on the old "take your equity on your home
and invest it" advice, and use the term advice loosely.

The idea is that if you own more than 25% of your home,
(ie. you house is worth $200,000 and you have a mortgage
less than $150,000) you can take the $50,000 and invest
it. Well, not the whole $50,000, banks can lend up to 75%
of that amount.

You invest it, gaining tax breaks and such.

The loan you get from your bank is interest only, you pay
no principal, unlike your mortgage where you pay both
interest and prinicple. The principle amount is due
in full at the expiry of the loan. So if it's 20 years out,
and you owe $37,500, you give it to them then, paying
only interest during the 20 years.

If you invest and make money, hey, you stand a chance.
If you invest and lose money, or break even, you are screwed.
The only people making money then are the bank and your
financial advisor (in fees).

You have to make a lot of money off your investments
for it to work.

And no, it's not a recommended practice, I asked my real
estate lawyer when I purchased a house, and he laughed
and laughed, then got serious and said to stay away.

ers

[flamingchina]

As my dad the accountant says:
"You don't get something for nothing, you can't get out more than you put in, and if it looks to good to be true, it is."
Same thing with that charity thing that was going around a couple of years ago that revenue canada was prosecuting people for.

[greyshep]

Hmm. When I read the title of this thread I thought you might be talking about the Ryan Smyth manouvre. You know...slash or lift the stick out of the opposing goaltenders hands as a shot comes from the point.

[Bobblehead]

I read a bit about it, and you use the additional tax savings (from claiming the interest paid on an investment loan) to pay down additional principle on your mortagage, which then allows you to increase your loan and voila!, you have converted non-deductable mortgage interest into deductable investment interest. But it is risky, as others said, may financial advisors only do it for wealthy clients (i.e. the ones who won't be destitute if it fails), and if you make a mistake (incollateral setup or other spots) then CRA can deem the interest is still being for the purchase of your principal residence and disallow the tax claim.
If you have a good financial advisor and a high threshhold for risk, then it may be for you, but you don't get something for nothing.

[Tiger]

How it works is say you have a mortgage on the house (say 200000) and you have a lump some of money (say 50000) you can put 50000 to pay off your mortgage, take out a 50000 loan and invest that. so you still have 200000 debt but 50000 of that is now an investment and the interest from that is tax deductable.

now if you have a business and accur say 20000 in a year instead of paying off the business expense, you pay off 20000 off your mortgage, and borrow the 20000 again to pay the business now the interest of 20000 of your mortgage is tax deductable.

[photon]

You never get something for nothing, but it does work, I had this on my condo for a while and I do it currently on my house, plus I'm thinking of doing it for another property. No business is required. A good financial planner and tax accountant should be familiar with the strategy enough already, and most banks offer a HELOC now.

Basically you get a Home Equity Line of Credit rather than a traditional mortgage (which precludes high ratio). That allows you pay interest only on the borrowing. I have mine at prime - 0.5.

Then you take the money that you would normally pay towards the principle on your payments and direct that to some sort of investment. Over time that investment grows, you cash it in, pay off a portion of the line of credit, reborrow the money and reinvest it. Now that portion of the interest on the line of credit is tax deductable because it is borrowing for the purposes of investing. Keep doing it until you've got your whole house "paid off", but it isn't really paid off, you have investments worth more than the value of the house.

I get how it works, I'm just not sure if there's a genuine advantage in having more retirement dollars but still the equivalent of a mortgage in debt.

Well I wouldn't recommend anyone who hasn't maxed out their RRSPs to do it, I haven't run the numbers in place of RRSPs but I doubt it would be a good idea.

But yeah this makes a few assumptions. To work your investments do have to grow. You have to be VERY disciplined to not give into the temptation to pay interest only "just for this month, or just this few months till we get back on our feet". If you have problems organizing your money this is NOT the strategy for you.

I like it for a number of reasons. First, at today's rates isn't not very hard to find investments that beat prime and you don't even really need to do that to gain the benifits.

Second, if you pay down the mortgage of your house, every dollar you've put towards the principal is dead weight. This way not only do I get the gain of appreciaton of the house, I also get the interest on the money that would normally just sit there as "equity", plus the tax breaks.

Debt = Good It's just the wrong kind of debt that is bad. Good debt is debt that is working for you.

There are other ways to get your mortgage tax deductable as well (like getting it held inside your RRSP) but I haven't explored those options much.

[amorak]

I am planning on doing this now that I have the requisite downpayment in my home. Any suggestions (photon) on a broker/planner who's adpt at a conservative application of the SM?

I am planning to just do Cdn dividend EFT investemnets, along with some diversification.

Every monthly payment into the readvancable mortgage is then instantly transferred into more ETF, so you slowly convert your mortgage into a tax deductible structure.

[fredr123]

I think slava was conversant in this manoeuvre, amongst others (according to the ladies anyway).

[Misterpants]

"Was that a knuckle?"

[Bertuzzied]

You go behind the net and you shooooot it off your goalie's leg into your own net killing the dynasty.

[Slava]

I have used this for a number of clients through the years and I get the "it sounds fishy to me" angle that some of you espouse. The thing is that if this is done relatively conservatively and prudently then it is effective and you are not getting anything for nothing.

Instead you are re-structuring the debts you currently hold and how you carry them. In effect you might never pay your mortgage down with this line of thinking, because you gradually transition that "bad" mortgage debt to "good" leverage debt.

I suggest that people work with someone to do this who knows what they are doing. There are some variations of the SM out there that involve a lot more borrowing and a lot more risk as a result. These high power versions don't appeal to me personally and I dissuade clients from going that route. Its a lot of additional risk that is really not necessary for most people.

I'm happy to answer any questions people have either by PM or here (if they are general in nature...I can't say whether you're a good candidate for this in a thread or anything like that!).

One thing I would suggest to you amorak is that you consider some investments that are more tax advantaged than a straight dividend ETF. I don't know you, and don't know anything about your situation, but there are ways you can legitimately save yourself a few bucks if you look around at investment vehicles...

[MoneyGuy]

I have done a version of this for well over a decade. Done properly, it works. My conservative wife dislikes it (she dislikes any kind of debt), but I'm her advisor so she tags along. She doesn't like to open the loan statement each month and sometimes asks me to remind her why we do this. We otherwise have no mortgage and haven't had one for over 17 years now. Our total leveraged amount is well into six figures. I know that number will scare some, but I'm comfy with it. My advice is, if you're considering doing this with an advisor, ask him/her if he/she is leveraged. If not, keep looking.

[CaptainCrunch]

[macker]

Many things can go wrong with this type of planning such as divorce, loss of job, home values decreasing and investments not performing to the level that the advisor arbitrarily tells you that they will perform at based on historical norms which may no longer apply to the same degree that buy and hold may no longer be the best investment strategy depending on the market. This is about as buy and hold as you can get as once you are locked into this it can be quite the manoeuvre to get out of. The stock and bond markets are volatile enough as it is...why add to it... Advisors make a lot of commission on these so be careful and as moneyguy says make sure they are leveraged themselves as a starting point but also see how they are regulated as many advisors with an insurance license are pushing these and they aren't regulated to the level that a mutual fund licensed advisor etc. etc. is. It is scarey to think that you can go write a simple exam one day and the next day go and have someone leverage their home on a below average investment with large fees. I would like to hear more specifics about anyone that has used this Manoeuvre and what investments they have used and how the performance has been as it isn't as simple as people make out and it is a long time to lock your money/home equity away in the ever changing markets. Many advisors in this city have crashed and burned doing this manoeuvre in the past so why would it be any different in the future and how can you know for certain what CRA is going to do in the future. Too risky.

[bizaro86]

This can make sense if you have both 1) non-registered investments and 2) a mortgage.

There is no reason the investment involved has to be a high-fee insurance or mutual fund product either, although that's what some advisors push for obvious reasons. You could do the same thing with real estate, individual stocks, or an operating business.

Regards,

Michael