There has seem to be an anti-Smith Manoeuvre movement across some Canadian finance blogs as of late. For readers out there who don’t know about the Smith Manoeuvre, you can read about the strategy here. The SM is basically a financial strategy to convert your non-tax deductible debt (like a mortgage) into good tax deductible debt (like an investment loan).
Here are some of the arguments against the Smith Manoeuvre:
Maxing out your RRSP and investing for the long term will outperform the Smith Manoeuvre.
- I will agree with this statement due to the fact that your RRSP can grow tax free where the Smith Manoeuvre, even with tax deductible interest, is taxed on the dividends and capital gains. However, I don’t believe the SM is a replacement for your RRSP, but a replacement for your non-registered portfolio. The optimal strategy would be to maximize your RRSP, then if you have any money left over, pay down the mortgage, which in turn would increase your HELOC balance. Take the money from the increased HELOC balance and put it into stable dividend paying blue chips. For those of you who don’t understand what I’m talking about, you’ll have to read my article on the Smith Manoeuvre again.
- There is a increased risk involved with leveraging your investments, so before you attempt any of this on your own, you better be pretty darn comfortable with investing. Either that, or find a good financial planner to put you in tax efficient, low-cost ETF’s or mutual funds.
Paying off your mortgage then start investing in a non-registered portfolio will out perform the Smith Manoeuvre.
- I will argue against this because with the Smith Manoeuvre you are paying down your mortgage at an accelerated rate AND investing in a non-registered portfolio at the same time. Time and compound interest should make the difference. Not only that, you pay NOTHING out of pocket to maintain your HELOC. You simply withdraw the interest owed monthly from your HELOC and re-deposit it. The only issue is that in order to make the SM work, you’ll have to reach an investment return that is greater than the interest that you are charged. For example, today’s HELOC will charge 6%, if you’re in a 40% tax bracket, your effective interest is 3.6% after your tax deduction.
- If you have a non-registered portfolio before you start the Smith Manoeuvre, all the better! Sell your investments, and pay down your mortgage, then re borrow and re-purchase the stocks again! Now you have a head start in paying off your non-deductible mortgage AND you can use the HELOC funds to repurchase your investments.
There is simply too much risk in betting your home on the market
- I will agree to this to a certain extent. You are in effect leveraging your home to invest in the market. HOWEVER, you are also using fairly stagnant home equity that would just sit there otherwise. I think it really depends on how aggressive you are with investing and what stage of life you are in. As a young investor, I feel that now is the time for me to be aggressive.
Do you have an argument against the Smith Manoeuvre? Comments are now open for discussion.