THE SMITH MANOEUVRE:
The average Canadian homeowner often looks for basic ways to save money any way they can. Some strategies might include buying in bulk, turning down the thermostat or forgoing expensive purchases. With the price of just about everything going up and the economy possibly entering a recession, it has become all the more important to venture beyond our basic financial strategies and explore some new ideas. With this in mind, we hope you enjoy Part 3 of our series on the mortgage industry. In this article, we continue our interview with Bill Badran, mortgage broker and financial advisor, to discuss the ins and outs of the “Smith Manoeuvre.”
Are There Any Financial Strategies You Would Recommend To Our Readers?
I believe one of the most powerful and effective financial strategies available to Canadian homeowners is the Smith Manoeuvre. The original concept was developed during the mid-1980s by Canadian financial strategist Fraser Smith, who brilliantly synthesized the approach in his 2002 book “The Smith Manoeuvre.” It has been used by thousands of Canadians for nearly 40 years.
The theory is a debt-conversion strategy, which, if it goes according to plan, should create larger tax refunds, accelerate mortgage repayment and, through the investment component, build larger savings and retirement funds. These strategies and “manoeuvres” were further refined and popularized by Fraser’s son, Robinson Smith, President of the Smith Consulting Group and author of the best-selling book “Master Your Mortgage for Financial Freedom.”
Can You Explain The Basics Of The Smith Manoeuvre?
The Smith Manoeuvre is a process that enables the homeowner to, in effect, put their existing monthly mortgage payment to work more than once, and it does not require that they furnish any additional funds. The borrower must request a “readvanceable mortgage,” which has elements similar to a conventional mortgage with a HELOC (home equity line of credit) and requires at least a 20% down payment. The borrower can access the portion of the existing equity in their home beyond the 80% loan-to-value ratio.
In Canada, mortgage interest is not tax-deductible, however the interest paid on loans for investments can be used as a tax deduction. Under Canadian law, interest payments on reborrowed funds from a HELOC can be tax-deductible, so long as the reborrowed funds are used for investment purposes. The interest can then be used as a tax deduction, allowing the borrower to eliminate mortgage debt much faster, while building up a non-registered investment portfolio. When a borrower pays their monthly mortgage, the portion of principal that is repaid in that month is simultaneously borrowed again under a line of credit and invested.
What Are The First Steps To Get Started?
First, it is essential to use a Smith Manoeuvre Certified Professional. I should warn you that there are many seasoned industry professionals who have a limited understanding and even provide inaccurate information regarding the Smith Manoeuvre. Many brokers are not well versed in the manoeuvre and lack clarity on the required steps; some have not even heard of it. As there are many “moving parts” to the manoeuvre, it is recommended to have two bank accounts, so there is a clear separation between transactions.
Can You Explain “Accelerators?”
Yes, accelerators are sometimes described as a “snowball effect.” There are a number of accelerators that may be available to the homeowner, which will create further gains as well as greater tax deductions. I refer to them as “cash-flow diversion,” “debt swap,” “cash-flow dam,” “DRIP” (dividend reInvestment program), and “prime the pump.” By using these accelerators, a more aggressive investor can truly maximize the potential benefits of the Smith Manoeuvre. The manoeuvre is considered especially effective for Canadian taxpayers who are self-employed and not taxed at source.
By reinvesting the line of credit funds and taking advantage of Canadian tax deductions on the interest, a savvy borrower can profit from these investments, while simultaneously deducting interest when filing taxes, increasing the potential tax refund for that year. That refund can then be used to pay down the loan principal, which then creates more credit to invest. With the Smith Manoeuvre, the borrower's debt does not increase over time, because for every dollar of the mortgage principal that is repaid, another dollar is borrowed under the line of credit.
Bill, thanks so much for your insight into this impressive financial strategy. There’s a lot of information to process here, and I imagine some of our readers may have further questions about this topic. Would you be open to fielding more inquiries?
Absolutely. This is a complex process and it requires a proper consultation for anyone who’s serious about learning more about it. I’d be happy to answer anyone’s questions.
At TEAM BROADY, we love to see our clients flourish financially and benefit from our experience and our professional relationships. We can be reached today at 514-613-2988 or by email at email@example.com. Please do not hesitate to reach out to us if you’d like Bill Badran’s contact information or about any real estate questions regarding your home buying / selling needs.