It’s a Great Time to Begin the Smith Manoeuvre

In 2017 house prices climbed once again in many parts of Canada. Of course the hot spots were Vancouver, the Lower Mainland and Fraser Valley, and Toronto condos. Even Montreal is getting warm.

Chances are if you bought in these areas even a few years ago, you have gained substantial equity in your home.

The Smith Manoeuvre is a great way to access this equity, use it to fuel your investment portfolio, and set yourself up for a nice retirement. Executed properly with a disciplined investment strategy, the Smith Manoeuvre can make you quite wealthy over time.

With enormous amounts of dead equity sitting in homes after this colossal price run-up, this year is a great year to begin the strategy. According to the Bank of Canada (that's the bank for banks), nearly half of all outstanding mortgages will be renewed this year! If you are one of the 47% of Canadian homeowners who will be walking into your bank sometime in the near future, you should seriously examine if the Smith Manoeuvre is right for your financial situation.

This way you can set up the proper mortgage/HELOC structure and shop around for a good rate while avoiding any cancellation penalties that might occur if you were breaking a mortgage mid-term.

Read my complete Smith Manoeuvre guide with detailed Step-by-Step instructions here.

Factors to Consider

Meeting the Equity Requirements

To begin the Smith Manoeuvre, you must have at least 35% equity in your house. While there are ways around this, I think it begins to get too risky if you're reaching for more money.

Maintaining at least 35% equity gives you a nice cushion to withstand stock market movements, especially when starting the strategy. This could prevent you from being in a negative net worth situation.

It's easy to calculate your equity percentage. Simply take your outstanding mortgage balance and divide by a reasonable house valuation. If the resulting number is lower than 0.65 (or 65%), you have at least 35% equity in your home. It's time to put this equity to work!

Being Financially Stable

If you're living paycheque to paycheque, hitting the line of credit every now and then for surprise expenses, are unable to pay off your credit card, or can't seem to save any money, the Smith Manoeuvre is not for you.

The Smith Manoeuvre is a form of leveraged investing. That means taking on more risk. It would be absolutely reckless to start a Smith Manoeuvre if you are not in complete control of your finances.

While over time the strategy should make you a lot of money, there are periods when stock markets drop 50% in a matter of months. The Smith Manoeuvre could wipe you out.

I believe the best candidates for the Smith Manoeuvre strategy are people who are financially stable and are already investing. This might be in a TFSA, RRSP, or some other account. It also works well if you are working a job that promises a pension—like a government defined benefit plan.

No Near-term Income Shocks

The Smith Manoeuvre is based on stock market investing. If you are able to put $100,000 of home equity to work using the Smith Manoeuvre HELOC account, you would buy about $100,000 worth of stocks or ETFs in your Smith Manoeuvre investment account.

However, we know that stock markets carry risk. It's entirely possible that a year after starting your strategy, your investment account could have dropped to just $50,000. If this happens, it's a nice time to try pump as much money as possible into your strategy and buy stocks or ETFs at a discount.

For this reason I think it's best to make sure you don't start the Smith Manoeuvre just before an income shock. Income shocks happen when you are pregnant and will be going on a reduced pay maternity leave. Or if your company is laying off and employment prospects are shaky at the moment. You get the idea.

When these events happen, people are often not prepared financially and can find themselves running into short-term debt situations. While accumulating debt is never a good thing, it's even worse if your investments are also tanking.

You might be tempted to access your Smith Manoeuvre HELOC to cover your daily expenses when it's needed most for investment purchases and this is a bad idea. It also means you are complicating your accounting situation for tax calculations every year for a long, long time.

Understanding Investing

Before implementing the Smith Manoeuvre it is very advantageous to have some familiarity with investing—particularly self-directed investing via stocks or ETFs.

You should have a self-directed TFSA going (I use Questrade which has free ETF purchasing), or maybe a RRSP. If you haven't invested yourself yet, but are using an investment advisor, it is easy to get started. Questrade has great tutorial videos to show you how to purchase stocks/ETFs in a step-by-step manner. Use Limit Orders and enjoy the learning curve!

It's also important to understand the nature of investing. After several years of comfortable to high investment returns, it's easy to be numb to loss. You must realize that you can lose a substantial amount of your investment account during market downturns. Despite this, you must be invested in something that generates income at all times! If not, you will run into tax problems.

You can pair Smith Manoeuvre investing with a momentum strategy. For example, you may buy XIC.TO if it is positive over the past 12 months but switch to XBB.TO if it's not. This could shield you from some downside risk but will potentially reduce your returns, especially after accounting for taxes on capital gains.

Understanding Personal Finance

You should also have a good understanding of personal finance. This means managing your bank accounts, paying your bills on time, avoiding unnecessary interest costs, and doing your own taxes (if you don't own a business).

The Smith Manoeuvre requires detailed accounting and tracking of money movement. A huge benefit of the Smith Manoeuvre is saving tens of thousand of dollars in tax over your lifetime.

It also requires moving money between a number of accounts. Your regular bank account, your Smith Manoeuvre chequing account, your Smith Manoeuvre investment account, and your HELOC. These need to be done in a timely manner every two weeks or month (depending on your mortgage payment cycle).

Check out the Smith Manoeuvre HQ and read all about it. If you have any questions, please ask! This strategy can make you much better off financially with no additional cash outflow.

Comments & Questions

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9 Replies to “It’s a Great Time to Begin the Smith Manoeuvre”

  1. Just make sure you have five years living expenses in the bank before you attempt this!

  2. Mr. Rich Moose says:

    Seems a bit excessive to me. For most people that would be $250,000+.
    I would say if you have more than 35% equity in a house, have a full TFSA, are saving money every month, and understand basic investing you will probably be fine.

  3. I do not own a house but rent(all in$500/mth), but have a mid 6 figure portfolio that returned $90,000 last year and would not try the Smith Manoeuvre even if I owned a house. Why? The high valuations of the markets and rising rate environment makes for a possibility for a correction in both housing and markets could really bite. Also no job is ever secure believe me I have been there( had a job for life as it was and then it was not), now if housing and markets correct and you get the call for the HELOC in a down environment it could get ugly.
    We can agree to disagree.
    As for 5 yrs living expenses that is around $60,000 for me anyways.
    Awesome blog, great articles, keep it up!

  4. Mr. Rich Moose says:

    Great job controlling expenses! $12k per year is tight.
    The SM is definitely not for everyone. Risk comfort is a big factor. Leverage amplifies everything.

  5. A couple I knew back in the day that leveraged their home to buy into the market, when the markets collapsed in 2007 along with the value of their home( bought condo for $400,000, the developer ran into trouble and auctioned off identical condos as theirs for around $170ish, basically lost $230ish overnight),bank called their HELOC.
    Their investments were under water, their home was under water and the savings they had was not even close to covering any of it . Watched them go through the process of losing it all, it was something I would not want to experience, they were very knowledgeable but were over extended.
    Risk is often misunderstood, everyone thinks they understand risk going up but when things are going down 50% and your leveraged 2-1 not so fun and it can happen to the best of us.
    I keep my costs low as it enables me to be financially independent, run with a balanced portfolio that could lose 50% and it would not affect me in the slightest and keep $60,000 in a cash like account to weather the storm if need be for five years.

  6. Great site Mr. Moose. I’m wondering if you ever created a spreadsheet to evaluate the impact that the smith manoeuvre would have on your finances. If so, would you mind sharing it?

  7. Daren (Editor) says:

    Thanks Mat for visiting the site. I’ve been a renter for the past few years now as I believe house prices are substantially overvalued relative to their utility, even in my just moderately overpriced area (compared to southern BC and Ontario). Obviously as a renter I am not in a situation to use the SM myself, so I haven’t done any personal calculations lately.
    Do you have a more specific question about the financial benefits? I may be able to shed some light on it for you.

  8. Hi Mr Moose, thanks again for your great site. I have a question on the mechanics of the investment for Smith Manoeuvre and specifically how to manage potential capital gains. Suppose I invest $100k from HELOC and follow a momentum strategy. Upon signal change I need to sell to change investment and can trigger a capital gain. Can I use part of the proceeds of the sale to pay the taxes as long as I am always invested at least $100k, or do I need to keep reinvesting the total amount every time I change investment to continue to qualify? Thanks for clarifying.

  9. Daren (Editor) says:

    It’s my understanding that if you borrow money to invest (say your $100,000) and you invest it all, it will be completely deductible so long as you don’t use loan source money for personal expenses like tax.
    If your investment increases to $110,000 and you owe some tax on your gain, you may pull up to $10,000 from the account and still deduct interest on the full $100,000 as long as you reinvest the remaining $100,000+ promptly. (In theory no different from selling all assets, paying off the loan, and re-obtaining a new $100,000 loan).
    However, if you pull $15,000 from the account only the interest on $95,000 would be deductible going forward.
    If you sell at a capital loss, reinvest the entire amount to keep the full loan deductible. For example if your investment shrinks to $90,000, you sell at a capital loss, and you promptly buy a different investment, you can still deduct the interest on the full $100,000 loan.
    Hopefully this helps.

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