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Smith maneuver questions

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Deal Fanatic
Nov 9, 2013
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Smith maneuver questions

I'm soon to buy a home and I've been reading a bit about the Smith Maneuver and I have a couple of questions. Firstly though, from what I understand you basically use your home equity (max 65%) to obtain a line of credit to invest in stocks. This is therefore tax deductible, which gives you a refund. You can then use this refund to pay down your mortgage. Mortgage repayment is even faster if you go for divvy stocks and use the dividends to pay down your mortgage.

So here are my questions:
- as you pay down the mortgage you unlock the equity and use it to buy more stocks with the LOC - once your mortgage is paid off then you have essentially a LOC worth 65% of your home you need to pay back. What then? Throw your divvies at that? If you then spend the next 10-15 years paying that off, is your nest egg really growing?

- if you are using your dividends to pay down the mortgage and then possibly the HELOC, how does your portfolio grow? Capital appreciation only?

- presumably over the long hall your portfolio is worth more than the debt on the HELOC due to cap appreciation. But what if something happens and it isn't? Is this the biggest risk to the strat?

Thanks for the insight guys!
61 replies
Deal Expert
May 30, 2005
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1) You can either throw your investments into it, like you suggested, or you could continue doing what you've been doing and just pay the interest every month. The idea is you should be net positive even after doing this, after tax deductions, so it would be worth it for you to continue borrowing that 65% until you no longer want to manage your portfolio and just want to relax and enjoy life.

2) What do you mean by "only"? Capital appreciation is quite powerful.

3) That's the risk that you must take to do Smith Maneuver. However, considering that you get a tax deduction on the interest, the chances of this is relatively low. Just put it in something safe and it should be fine on the most part. For example, today's HELOC rates are 3.5%; assume you're in the 31% marginal tax bracket (>$44K annual), that means your actual rates for the interest is 2.4% after tax deduction. Heck, most GICs give you about that amount, which has zero risk. Dump it in a Index fund and you'll net 6% easily.
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Aug 2, 2010
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Jon Lai wrote: 1) You can either throw your investments into it, like you suggested, or you could continue doing what you've been doing and just pay the interest every month. The idea is you should be net positive even after doing this, after tax deductions, so it would be worth it for you to continue borrowing that 65% until you no longer want to manage your portfolio and just want to relax and enjoy life.

2) What do you mean by "only"? Capital appreciation is quite powerful.

3) That's the risk that you must take to do Smith Maneuver. However, considering that you get a tax deduction on the interest, the chances of this is relatively low. Just put it in something safe and it should be fine on the most part. For example, today's HELOC rates are 3.5%; assume you're in the 31% marginal tax bracket (>$44K annual), that means your actual rates for the interest is 2.4% after tax deduction. Heck, most GICs give you about that amount, which has zero risk. Dump it in a Index fund and you'll net 6% easily.
You may net 6% easily over the very long term in an index fund, ie 15 yrs+. However you could just as easily invest it in an index fund and then find a few years later the market crashes and end up with a loss on paper and then need to have the fortitude to wait it out which could be two or three years or more. If you don't believe me just take a look at the S&P 500 index chart over the last 15 years. It has gone down 50% and up 100% twice in that period.This is what spooks most people. It's fine to say now oh I'll just stay invested but when the market drops that much people make unwise decisions like cashing out because they simply just can't sleep at night. And then their paper loss becomes a real one.

Just like Peter Lynch, one of the best investors of all time, said in his famous book 'One up on Wall Street', "most people who invested in my fund lost money because they bought when my fund was doing well but panicked and sold when the fund was down".
Sr. Member
Nov 5, 2013
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eonibm wrote: You may net 6% easily over the very long term in an index fund, ie 15 yrs+. However you could just as easily invest it in an index fund and then find a few years later the market crashes and end up with a loss on paper and then need to have the fortitude to wait it out which could be two or three years or more. If you don't believe me just take a look at the S&P 500 index chart over the last 15 years. It has gone down 50% and up 100% twice in that period.This is what spooks most people. It's fine to say now oh I'll just stay invested but when the market drops that much people make unwise decisions like cashing out because they simply just can't sleep at night. And then their paper loss becomes a real one.

Just like Peter Lynch, one of the best investors of all time, said in his famous book 'One up on Wall Street', "most people who invested in my fund lost money because they bought when my fund was doing well but panicked and sold when the fund was down".
Care to give your source on that S&P in the past 15 yrs "gone down 50% and up 100% twice in that period". As I see it, the "most" down, or total annual return, was 2008 (-37%), and most up were 1995 (+37.58%), and 1997 (+33.36%), dividends included.
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May 30, 2005
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eonibm wrote: You may net 6% easily over the very long term in an index fund, ie 15 yrs+. However you could just as easily invest it in an index fund and then find a few years later the market crashes and end up with a loss on paper and then need to have the fortitude to wait it out which could be two or three years or more. If you don't believe me just take a look at the S&P 500 index chart over the last 15 years. It has gone down 50% and up 100% twice in that period.This is what spooks most people. It's fine to say now oh I'll just stay invested but when the market drops that much people make unwise decisions like cashing out because they simply just can't sleep at night. And then their paper loss becomes a real one.

Just like Peter Lynch, one of the best investors of all time, said in his famous book 'One up on Wall Street', "most people who invested in my fund lost money because they bought when my fund was doing well but panicked and sold when the fund was down".
Typically a mortgage lasts 25 years, it's not like you're only doing Smith for a few years...
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Nov 9, 2013
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Jon Lai wrote: 1) You can either throw your investments into it, like you suggested, or you could continue doing what you've been doing and just pay the interest every month. The idea is you should be net positive even after doing this, after tax deductions, so it would be worth it for you to continue borrowing that 65% until you no longer want to manage your portfolio and just want to relax and enjoy life.
So you mean just carry the balance on the HELOC for the rest of your life, paying interest but not principle? I suppose when you sell your house you can use that to pay off the 65%. Seems counter intuitive to me to go into retirement with a significant amount of debt, but you're right you should be net worth positive.
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Jan 2, 2012
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treva84 wrote: If you then spend the next 10-15 years paying that off, is your nest egg really growing?
I really don't understand this question. SM is simply leveraging to invest, no matter if you currently have a mortgage or if your home is already paid off. You are simply taking your HELOC, and investing it with the expectation that your after-tax investment gains will grow faster than your after-tax interest rate.

Also you don't need to do dividend paying stocks. The main goal should be getting the best possible return based on your risk tolerance, and many people use SM to invest in non-dividend paying stocks to try and get the highest possible total return. IMO though dividend paying stocks are a better choice since they are a bit safer in that even in years the markets are sharply negative, at least you have the regular dividend payments coming in to cover the HELOC interest, and also you can slowly bleed down your mortgage.

In the end you should be using SM to invest in things you are comfortable in. If you can't accept the possibility that your funds could go down and you could owe more on your HELOC than you have in your SM portfolio, then you should just avoid the SM altogether or only do if it makes sense with GIC rates of return.
Deal Expert
May 30, 2005
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treva84 wrote: So you mean just carry the balance on the HELOC for the rest of your life, paying interest but not principle? I suppose when you sell your house you can use that to pay off the 65%. Seems counter intuitive to me to go into retirement with a significant amount of debt, but you're right you should be net worth positive.
Again, I said that's just another option. HELOCs are one of the cheapest forms of credit, so if one wants to use leverage to invest, it's one of the best options out there.
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rob444 wrote: I really don't understand this question. SM is simply leveraging to invest, no matter if you currently have a mortgage or if your home is already paid off. You are simply taking your HELOC, and investing it with the expectation that your after-tax investment gains will grow faster than your after-tax interest rate.
The context of my comment was as follows: Let's say I invest in dividend paying stocks with an average distribution of 4%. Lets say my HELOC interest rate is 3.5%. If I'm putting my 4% divvys to my 3.5% HELOC then I'm only coming out pos 0.5%. Of course, this doesn't take into account capital gains, but that's essentially what my comment meant.

I am comfortable with risk, I think it's just my "debt is bad" line of thought that's leading to the conflict in my brain. Up until this point in my life my debt has been student loan debt which I've been feverishly trying to pay off as it has delayed certain milestones in my life (i.e. buying a house). I think my mind isn't used to the idea of carrying debt as leverage to increase net worth (although, that's what I've been doing with student loans, increasing my human capital). Thanks for the replies guys.
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Feb 19, 2010
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Wow. OP and others sure make this sound like a guaranteed way to get ahead. Why can I foresee OP starting another thread down the road, after the stock market takes a tumble, asking for advice about how to get out of all the debt he's in with an underwater investment portfolio or a pile of realized losses for having sold everything?

Put as much money in the stock market as you can afford to lose.
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Dec 24, 2006
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Conquistador wrote: Wow. OP and others sure make this sound like a guaranteed way to get ahead. Why can I foresee OP starting another thread down the road, after the stock market takes a tumble, asking for advice about how to get out of all the debt he's in with an underwater investment portfolio or a pile of realized losses for having sold everything?

Put as much money in the stock market as you can afford to lose.
I don't see how you got to the conclusion of anyone saying it was guaranteed.

Others are pointing out to the OP what the SM best case scenario is.

rob444 wrote: ... In the end you should be using SM to invest in things you are comfortable in. If you can't accept the possibility that your funds could go down and you could owe more on your HELOC than you have in your SM portfolio, then you should just avoid the SM altogether or only do if it makes sense with GIC rates of return.
eonibm wrote: ... However you could just as easily invest it in an index fund and then find a few years later the market crashes and end up with a loss on paper and then need to have the fortitude to wait it out which could be two or three years or more.
Sounds more like helpful, this is what it is but here are some warnings of why it isn't for the faint of heart.

OP: Remember, nothing in this world is guaranteed, especially on the market
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Oct 9, 2008
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If you are NOT a seasoned self-investor. DO NOT do even think about doing the Smith Maneuver on your own. You will most likely need the help of a Financial Planner, this will come with fees which you should take into consideration.

Fact of the matter is, if you decide to use this type of loan, you will have to have a firm grasp of stock market trends and volatility. During the 25 year amortization period, you may see yourself in 1, 2 or even 3 stock market crashes. Since you're leveraging into the stock market, you MUST be able to ride these crashes out.

Picture seeing your investments go down over 50% in value, will you be able to not sell and ride it through?

For perspective, I've been investing for almost 10 years and I cannot stomach the inherent risk using his maneuver. The tax deduction is actually very small, you're essentially betting the farm on the stock market and hoping that over your amortization period, you're consistently buying good stocks even during crashes.
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Jul 11, 2008
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treva84 wrote: The context of my comment was as follows: Let's say I invest in dividend paying stocks with an average distribution of 4%. Lets say my HELOC interest rate is 3.5%. If I'm putting my 4% divvys to my 3.5% HELOC then I'm only coming out pos 0.5%. Of course, this doesn't take into account capital gains, but that's essentially what my comment meant.

I am comfortable with risk, I think it's just my "debt is bad" line of thought that's leading to the conflict in my brain. Up until this point in my life my debt has been student loan debt which I've been feverishly trying to pay off as it has delayed certain milestones in my life (i.e. buying a house). I think my mind isn't used to the idea of carrying debt as leverage to increase net worth (although, that's what I've been doing with student loans, increasing my human capital). Thanks for the replies guys.
your 3.5% interest is tax-deductible, meaning on only pay something like 2.4%. that means you're coming out positive 1.6%.
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treva84 wrote: The context of my comment was as follows: Let's say I invest in dividend paying stocks with an average distribution of 4%. Lets say my HELOC interest rate is 3.5%. If I'm putting my 4% divvys to my 3.5% HELOC then I'm only coming out pos 0.5%. Of course, this doesn't take into account capital gains, but that's essentially what my comment meant.
Capital gains is the main reason you would do the SM.
Just looking at dividend yield and nothing else, is not the right way to analyze this.
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pace wrote: your 3.5% interest is tax-deductible, meaning on only pay something like 2.4%. that means you're coming out positive 1.6%.
Exactly. If you're making >250k per year in salary, I can see this being quite lucrative but for the average Canadian it's very risky for marginal tax deduction.
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Conquistador wrote: Wow. OP and others sure make this sound like a guaranteed way to get ahead. Why can I foresee OP starting another thread down the road, after the stock market takes a tumble, asking for advice about how to get out of all the debt he's in with an underwater investment portfolio or a pile of realized losses for having sold everything?

Put as much money in the stock market as you can afford to lose.
Wow. How insightful. Thanks for the comment :facepalm:

Pace, thanks for pointing out the tax implications; obviously something I didn't consider.

Rob444, valid point as well. Thanks.
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pace wrote: your 3.5% interest is tax-deductible, meaning on only pay something like 2.4%. that means you're coming out positive 1.6%.
You also need to consider the tax rate of your dividend payments. Assuming you're just buying eligible Canadian dividend stocks, you'll get a tax credit which will make the effective rate lower than your marginal tax rate.
Jeenyus1 wrote: Exactly. If you're making >250k per year in salary, I can see this being quite lucrative but for the average Canadian it's very risky for marginal tax deduction.
With today's low HELOC rates, the actual tax deduction you are getting is almost secondary to simply having access to cheap credit to invest with. Over the next several years if interest rates rise, people will need to really think twice about whether the risk is still worth it. Everyone will have a different breaking point as to when it goes outside your comfort zone. i.e. if this was back around 2007 when prime rate was 6%, I probably wouldn't even have considered doing SM.
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Nov 27, 2009
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btw, those who are implementing the smith maneuver currently, are all these mortgages (Scotia STEP, BMO Readiline, TD Heloc, etc) collateral mortgages? Does this have any issue if you wish to sell the property and move?
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Musabbir wrote: btw, those who are implementing the smith maneuver currently, are all these mortgages (Scotia STEP, BMO Readiline, TD Heloc, etc) collateral mortgages? Does this have any issue if you wish to sell the property and move?
No, the HELOC moves too, using the equity of the new house.
SM simply transforms a portion of the equity of your house into a liquid asset (cash).

Rod
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Oct 14, 2012
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Can I check a few things that aren't clear to me?
@ treva84 said "you basically use your home equity (max 65%) to obtain a line of credit to invest in stocks. This is therefore tax deductible, which gives you a refund. You can then use this refund to pay down your mortgage."

I'm not sure I get this part. Does the Smith create any "refund?" I didn't think there was any refund at this stage at all, just that you can claim the interest you have to pay on the LOC as an investment cost when you do your taxes.

You can't use Smith to invest in your RRSP can you? I thought if you did you did not get any tax credit on the interest you have to pay on your LOC? So since not investing in your RRSP, no tax refund exactly?

Also
"I invest in dividend paying stocks with an average distribution of 4%. Lets say my HELOC interest rate is 3.5%."
For this part, the investor can claim the 3.5% interest on the LOC as a cost of investing on his/her tax return in April; this means the actual interest rate is lower than 3.5%.
And although the Div Paying Stocks are in an unregistered investment account, and he/she has to claim those on their taxes; if they are eligible Cdn Corps, they get a somewhat more favourable tax rate which helps a bit to make the rate a bit better than the (4% less income taxes)
And the combination of those 2 might mean that the gap is bigger than the 0.5% that it first looks like, although you'd have to check the taxes situation to see by how much?

Also, can you use Smith to invest in a TFSA and therefore not pay any tax on the 4% div paying stock distributions? Or does using it for your TFSA eliminate the tax credit on the 3.5% HELOC interest (which would defeat the purpose of the Smith.)

I guess I should go read this somewhere but I was hoping someone here might clarify this. (Personally I'm too risk averse to borrow this way to invest.)

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