The Smith Manoeuvre is a financial instrument that savvy Canadian investors have been using for years. Put in very simple terms, you borrow against your mortgage to invest and use the returns to pay down your mortgage and grow your savings.
This strategy helps you get ahead of the game. My parents paid down their mortgage first, and then went to their financial advisor to ask how to save for retirement. The advisor told them to borrow against their home equity to invest. By borrowing earlier to invest with this strategy, you can increase your wealth by 10-15 extra years of incremental growth for your savings and investments.
And that incremental growth is nothing to sneeze at. In fact, even if you have a few slow years, an investment professional can help you get a return that averages out to 5% to 15%.
However, be aware if you are risk-averse or very quickly approaching retirement, the Smith Manoeuvre may not be for you. Of course there is never a guarantee of a return, and there is a chance that you may experience losses in the market instead of gains.
There is also a tax benefit to the Smith Manoeuvre as you can write off the investment loan interest.
Many use the refunds obtained from the tax credits to pay down the principal on their mortgage faster. In short, there would seem to be no down side to the Smith Manoeuvre unless there is a giant market crash, in which case most financial strategies will fail anyway.
Who Employs The Smith Manoeuvre?
The Smith Manoeuvre is regularly employed by thousands of Canadians. Most of the clients that First Foundation has helped with this strategy fall firmly into the middle class. The wealthy generally do not have mortgages, but they do borrow to invest regularly in order to stay wealthy. You can invest like they do with The Smith Manoeuvre.
How it Works
First, you need at least 20% equity in your property, so you'll want to take a leaf from my parents’ playbook and pay down your mortgage a little faster to get to this magic number. Once it's near 20%, give us a call so we can get the ball rolling and find you the right mortgage product. We will get you a re-advanceable mortgage, which is just a fancy term for a mortgage with a line of credit tacked onto it that you can borrow against when needed.
Remember that the idea isn't just to take the funds from the line of credit and invest them; it's to take the tax refunds that result as a part of the strategy and your investment returns to pay down your mortgage even faster.
The faster you pay down the mortgage, the more money you have to invest, and the whole thing snowballs until you wake up one morning and your mortgage is paid off.
Partner up for The Smith Manoeuvre
In order to make The Smith Manoeuvre work, you need to put together a team of professionals that know the strategy and know their respective professions. A financial advisor can help you find the investments that will most likely produce a return, a Chartered Accountant can help you take advantage of the tax credits properly, and a mortgage broker like First Foundation can help you find a re-advancable mortgage at a low rate of interest.
A decent financial advisor will also be aware of the fact that you cannot invest in a registered product (such as an RRSP) in order to get the tax credits that you need to get the refunds that you want. First Foundation regularly partners with financial advisors and accountants all over Alberta, so we'll be happy to suggest some professionals who are familiar with the ins and outs of The Smith Manoeuvre.
To get more information on the Smith Manoeuvre, give us a call . We'll sit down with you and help you evaluate whether this strategy is right for you. First Foundation brokers have been counselling clients who are following the Smith Manoeuvre for years, making us your go-to experts in Alberta.
Editor’s Note: Originally published February 20, 2013, this post was updated and revised May 18, 2015.