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The Smith Manoeuvre and the Readvanceable Mortgage

April 23, 2013

To Smith or not to Smith, that is the question. I agree with the originator, Frazer Smith,  that it is a great way to leverage your house as an investment anchor even if I do not agree with his investment strategies.

Almost everyone has heard of the Smith Manoeuvre, but many are not sure what it is. Even more so they are not sure of the advantages and disadvantages. There are also variations on the Smith Manoeuvre  that may be more effective and safer than the original.

The Smith Manoeuvre is an investment  ~ tax strategy that allows you to write off the interest you pay on your mortgage while using a Home Equity Line Of Credit (HELOC) attached to your mortgage as a source for investment.  Essentially it converts your non-deductible mortgage debt into deductible investment loans. One of the first pitfalls is that the investment returns will cover the loan payments.

Essentially it is a loan with two parts, 1) a home mortgage and 2)an attached HELOC.  Some banks do them and some do not.  As you pay your mortgage, your line of credit is advanced by the same amount. So if you have a $500,000 readvanceable mortgage, $300,000 as mortgage and $200,000 as line of credit, you will always have a mortgage of $500,000.  As you pay down your mortgage, your line of credit increases to where you will have a HELOC of $500,000.

One of the good things is that you only pay on the amount of the HELOC that you have used. Therefore it is great for education costs, emergencies, investments, etc.  And if you do an investment that uses all available credit, the revolving payments from your mortgage will be building a fund immediately for unforeseen circumstances.

The original Smith Manoeuvre focused on investing  in Mutual Funds, a strategy I can not recommend as today’s front-runner Mutual is tomorrows also-ran. The Smith Manoeuvre can be a solid strategy if you invest in something that will not disappear with a downturn in the market.

I know a number of people who are working at entry level jobs, normally done by a high schooler as a part time job, because they trusted someone else with their life savings. Therefore I advocate a different strategy for the Smith Manoeuvre that gives the homeowner a much greater control over their investment. Nothing is guaranteed, but the odds can be improved.

If the bank tells you you can afford a $500,000 readvanceable mortgage and you are in a $350,00 house with some paydown, you have a decision to make.  Do we go for the big house and buy lottery tickets to take care of our retirement. Or do we negotiate with the bank for a readvanceable mortgage and invest in something that will be paid for by Others Peoples’ Money.

A $200,000 investment in a commercial holding when properly leveraged can give a substantial return. The nice thing about it too is that should you and your partners go for a commercial loan (almost inevitable), the bank will double and triple check your numbers on the investment. This will give you a much warmer feeling if the bank OKs it as they believe it is a solid investment.

If you want to invest in a house it can be done. Depending on where you are in Canada, $200,000 will not buy a rental house unless the vendor will carry part of the mortgage. A stringent analysis of the local housing market is essential for either case as with any investment. The major difference with investing in real estate is that the investor is in control of most of the factors in the equation.

For those who don’t want to bother with caring for an extra property, either hire a property manager or invest with whatever investment company you are comfortable with.  Talk to an accountant who is familiar with this procedure before you take the plunge. After the fact is not a good time to find out the strategy you want to use is not tax deductible.

All of these strategies work better if you are paying the bank less. Contact me at 250.766.2106 or

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