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Ask the Readers: Smith Manoeuvre Advisors?

I’ve been getting numerous emails from readers looking for Smith Manoeuvre or leveraged investment advisors in their area.  The problem is, I don’t know any, but I’m wondering if you could help me out?

Are you a Smith Manoeuvre advisor?  Or, do you know any Smith Manoeuvre advisors in your area?

If so, please contact me via email with the following details:

  • Full Name.
  • Contact Information (phone/email).
  • Advisor/Financial credentials.
  • Areas that you service.
  • Investment/Mortgage products that you can provide.
  • Years working as a Smith Manoeuvre advisor.
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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 60 comments… add one }

  • Cris November 26, 2010, 1:39 am

    So, any advice on how to find SM advisors?

    FrugalTrader, are you planning any updates for this post?

  • Duncan April 5, 2011, 12:47 am

    Just a quick follow up as promised over a year later- If you read my past comments on this article, you can see my strategy has really paid off. ( I’m always happy to share my financial planning strategies to anyone who’s interested!) – Check my blog at http://dmacpherson.com

    What are your thoughts moving forward?

  • LuBoy April 28, 2011, 2:19 pm

    Hello everyone,

    Pretty interesting article and comments, my congrats!

    I have some questions regarding a topic that seems to me somewhat similar to a SM strategy. My condo mortgage term is almost due; I wanted to sell it and buy a house. When I went to my FI to discuss my options, they recommended that I : (i) keep the condo as rental investment and renew the condo mortgage (ii) get a HELOC on the condo and use it to finance the downpayment of the house (iii) get a mortage for the house (purchase price – downpayment). The house will be my primary residence with a basement that I plan to rent as well. According to them, on the condo mortgage / HELOC combination, I can get tax deduction on both: the interests payment of the condo morgtage + the interest payment on the HELOC used to finance the downpayment of the house.

    1. Does this arrangement make sense for you? What advantages / disadvantages / risks do you see on it? Can I really deduct interest payments on the HELOC following this strategy?

    2. They also offered two options for the condo mortgage / HELOC combination:
    a) Renew the condo mortgage and get a HELOC = 80% Condo Value – Condo Mortgage and then use it to finance the house downpayment. (mortgage rate ~prime – 0.85% and HELOC rate ~ prime + 1%)
    b) Get a HELOC for 80% Condo Value and use it to pay the condo mortage and then to finance the house downpayment. (HELOC rate ~ prime + 0.5%)

    What option would you pick and why? Why would I pick option b) over a) and pay 1.35% more on the mortage component? Am I missing something, perhaps some tax aspects?

    Off topic: For tax purposes on the investment property, I can deduct condo mortgage interest payments, mgtm fees and insurance from the rental income and have to pay taxes on the outstanding balance. However, as I am paying the condo mortgage, the interest payment gets reduced and so the tax deduction, which leaves me paying more taxes every year. Any suggestions on how to optimize this? Perhaps by taking option b) on the condo mortgage / HELOC combination (see question 2)

    Thanks a lot in advance,


  • Ed Rempel May 1, 2011, 1:43 pm

    Hi LuBoy,

    If you borrow against your condo to buy a home that will be your principal residence, the interest is NOT deductible.

    This is one of the most common errors made by people with rental properties. Just to be clear, interest is deductible because of the purpose for which the money was borrowed, not what was used as security or the type of loan.

    The extra amount you borrow to buy your home will not be deductible, since the purpose of borrowing is to buy a principal residence. Whether this amount is a mortgage or a credit line. does not affect whether or not it is deductible. A mortgage will be at a lower rate.

    The first question is whether or not keeping the condo as a rental is a good idea. It will likely make you some money over the years, but generally condos don’t make very good rental properties. Older, multiple unit buildings are usually much better investments.

    This also depends on what you would do otherwise. Having a rental vs. not having one is probably better. If you are looking at the Smith Manoeuvre, there are multiple ways to do it. If you have a rental, you can do the SM on both. Or if you don’t have a rental, you could use the extra equity and possibly an investment loan to invest a similar amount, except in the stock market instead of keeping the rental. The stock market has far higher long term growth (6 times higher return in the last 30 years), so this strategy could give you far higher returns without the hassle of being a landlord.

    The second question is, if you keep the condo, how should you structure it? I would suggest:

    1. Since your mortgage is coming due, refinance it with a readvanceable mortgage that allows multiple mortgages and credit lines.
    2. Keep your existing balance as a mortgage portion. This amount needs to be kept separate, since it will be the only tax deductible amount.
    3. Borrow enough for the 20% down on your home against the condo, and then make that amount a separate mortgage portion.

    As for rates, the prime -.85% is probably the best mortgage rate now, but you can get the credit line portion at prime +.5%. The prime -.85% is only in 5-year closed mortgages. You should only lock in for 5 years if you are quite sure that you will not need to refinance or want to sell for at least 5 years. The 1-year fixed is also a good option. We are getting 2.64% today.


  • David Kwan November 9, 2011, 6:23 pm

    Hi Ed,

    I see you’re quite active helping reader of this blog and I have a question.

    I am getting a $80k non-automatically readvacement HELOC from HSBC at P+.75, also with a $352k variable-close mortgage at P-.79 mutures in 2016 (very recent renewal) biweekly payment of $700 which around $400 gets into the principle.

    Here is my plan,
    I moved into a new house in a new community, corner lot, with raised basement. So, we got lots of sunshine. So, I am thinking of putting the HELOC into a microFIT project, which going to cost me about $65k. Since local hydro company (Hydro Ottawa in my area) guarantee to buy my generated electricity at $.802 per kW for the next 20 years.

    So, with the investment of $65k, I will get about $880 per month (or 1.35%/month or 16%p.a.), as business income. So, the cost of the project surely tax-deductible with no problem with the CRA. Since the 16% is not compounding, and so I have an additional thought.

    I will put the $880/month income towards any investment for additonal growth or income for the next 20 years or so.

    So I have the following questions:
    1) Does the general plan make sense?
    2) I understand I have to declare money from Hydro Ottawa as interest each year, rather than deferred. Does it make sense to use as SM strategy?
    3) With the additional investment of $880/month, does it matter now return of capital is part of the distribution since the “borrowed fund” is for microFIT project.

    Thank you so much.

  • Ed Rempel November 11, 2011, 2:42 am

    Hi David,

    Interesting strategy. Does it make sense?

    Here is how I see it from several different perspectives.

    1. Tax – It appears that tax deductibility of the interest should be no problem. The MicroFIT project is essentially a business. You are buying equipment that probably would be worth nothing (or less because of the cost of removing it) at the end of 20 years, but the income is all business income, not return of capital (as far as I know). You are just receiving income for selling power.
    2. MicroFIT project – I’m not an expert on the MicroFIT projects, but anything with a 16% return must be high risk. You need to understand the risks before you proceed. We have met a few people that looked into them, so my knowledge is just indirect, but I have heard that some people could not go on the grid and received nothing, some received lower rates, the power created varied based on weather and the exact directness of the angle towards the sun, there were questions about the costs of insurance and maintenance, are you really going to stay in this home for 20 years, what control do you have with only one possible customer, and what is the cost of removing the obsolete equipment at the end of 20 years? My understanding is that the $880/month is not guaranteed and that there are various costs and risks that you should be aware of.
    3. Use as SM strategy? – You could enhance the strategy by doing it as an SM strategy. If you would get a readvanceable mortgage instead, then you could capitalize the interest payment, so that you do not have to pay the credit line interest from your cash flow. You could use that money to pay down your mortgage more quickly and reborrow to invest.
    4. Add Cash Dam – If you had a readvanceable, you could also pay the MicroFIT income onto your mortgage each month and also reborrow that to invest. This would convert most or all of your mortgage to tax deductible.
    5. Interest rates – The best rates we are getting today on readvanceable mortgages is prime -.65% on the mortgage (slightly higher than your rate) and prime +.5% on the credit line portion (lower than your rate). While the net interest cost in month 1 would be slightly higher, the benefit of converting your mortgage to tax deductible from both the SM and Cash Dam would easily make this worth it.
    6. Investment – How does the MicroFIT compare to other investments? Once you understand the full cost and risk, I expect you will find that your expected rate of return is quite a bit lower than 16%. It is also fully taxed as business income, so even if the return is 16%, if you are in a 40% tax bracket, you would pay 6.4% tax, making your net 9.6%. A long term average return on the stock market is 10-11% and capital gains tax would be only 2% (which can mainly be deferred many years into the future). In other words, even if the return is really 16% and risk reasonable, the after tax expected return is only slightly more than the stock market.

    Does that answer your questions, David?


  • JG December 21, 2011, 1:31 pm

    Hello, Does anyone have a SM set up with Scotibank, I would like to know details about them letting capitalize the interest/if not how did you overcome this?
    Second part of the question is, as most banks would not let capitalize the interest, and provided you withdraw every month the amount due from the HELOC to say a chequing account and from there pay back to theHELOC, would there be any tax implications on this. Thank you.

  • Ed Rempel December 21, 2011, 9:46 pm

    Hi JG,

    We have a few clients with SM at Scotia. It works, but requires more manual transactions each month than the readvanceable mortgages at several other banks.

    There are several types of their STEP mortgage that have different options, so you need to be clear on the options that you will have.

    The biggest problem was that you needed to go into the branch every month to get your credit line increased, but most of the setups today have an automatic credit line increase.

    The other issue is that you cannot invest directly from the credit line. Therefore, it may take manual transactions to invest monthly and the money to invest may have to be transferred to a separate chequing account.

    They don’t automatically capitalize interest, like the other banks, but you can get around this with “guerrilla capitalization” – which is essentially the strategy you mentioned. Pay the interest from your chequing, but then immediately take the money back by taking the exact same amount from your credit line to the chequing account.

    You need to be able to show that they money borrowed was the money that was used to pay the interest on the investment credit line. If so, then the credit line normally remains 100% tax deductible.


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