The Smith Manoeuvre: Steps 8 & 9

Step 8: Use Dividends to Pay Off Mortgage

The Smith Manoeuvre investment account will hold stocks or ETFs which pay some form of CRA-approved income (usually dividends). These dividends will not be directly used to purchase more stocks or be "DRIP-ed".

Instead the dividends will be deposited straight into your Smith Manoeuvre chequing account. This dividend income is going to be used to top up regular mortgage payments and reduce your outstanding mortgage principal (Portion 1 of the HELOC).

The dividends can be incorporated into your regular mortgage payments which you make from your Smith Manoeuvre chequing account. Remember, a good mortgage will allow you to double your payments penalty free.

If you run out of room to double-up payments, the dividends can go toward those annual lump-sum payments on your mortgage. A good mortgage will allow annual payments equal 15-20% of the original mortgage balance penalty-free which go straight toward the mortgage principal.

If you're anticipating to be very aggressive in prepaying your mortgage through extra investment contributions and dividend income, you might be better off with a higher interest Open Mortgage which allows penalty-free, unrestricted mortgage payments. Using 1-year fixed mortgage terms is another option as you could make massive lump-sum payments every year when the mortgage term expires.

Regardless of the mortgage structure, you want to put all extra money to work in the Smith Manoeuvre as soon as possible without paying the bank any penalties for being a good saver.

Step 9: Borrow Back and Reinvest

Whether by lump-sum payments or larger than required regular payments, the extra principal payments on Portion 1 of your HELOC mortgage will cause the available credit in Portion 2 of the HELOC to increase by the same dollar amount. Remember, your HELOC revolving loan should be re-advanceable; this increase in credit availability should happen automatically.

You will again borrow back this money as soon as it's available. To do this, make a transfer from Portion 2 of the HELOC to your Smith Manoeuvre investment account. Then purchase more of your desired investments.

Try to keep your investment cycle moving as fast as possible, especially once you make the transfer out of the HELOC. You want to keep all the interest tax deductible; don't have piles of cash sitting idle in your Smith Manoeuvre investment account. Try ignore that stock market noise and just invest systematically.

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