How To Invest Using Your Home Equity | Smith Manoeuvre Explained
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- čas přidán 2. 08. 2024
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The Smith Manoeuvre is a strategy to invest using the equity in your own home. It is not a strategy, however, for risk-averse investors. Before using this strategy, it's extremely important to have a good understanding of it so that you can avoid any mishaps.
If you have any further questions about this video's topic or any financial planning questions in general, I encourage you to find a certified financial planner in your area or book a consultation with us to get your savings plan on track. You can learn more about our services at www.parallelwealth.com/planning or email Info@Parallelwealth.com
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0:00 - Introduction
0:53 - What Is The Smith Manoeuvre?
2:19 - Re-Advanceable Mortgage
5:34 - Strategy
7:26 - Setting Up The Smith Manoeuvre
8:20 - Risk vs. Reward
9:33 - Time Horizon
10:31 - Considerations
14:22 - My Personal Strategy
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DISCLAIMER: The videos and opinions on this channel are for informational and educational purposes only and do not constitute investment advice. Adam Bornn is not registered to provide investment advice and as such does not provide recommendations - those looking for investment advice should seek out a registered professional. Adam is not responsible for investment actions taken by viewers and his content should not be used as a basis for investment trades.
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Thank you. Nice summary of the book I am currently reading “ Master your mortgage for Financial Freedom” ( Smith Manoeuvre). This video makes it more understandable.
That’s what I did…. Very good strategy. I retired at age 29. Shouldn’t be afraid of good debt.
I did a similar idea. I saved the extra 15% for the first two years of our mortgage payments. Then every 2 years near our anniversary I would put down the 15% extra payment for year 1 then the day after the anniversary date, I would put the 15% extra for year 2. Then I would borrow the money to replace the funds removed from the investments so the interest paid could be tax deductible. I did this without even knowing there was such a term as the Smith Maneuver. Paid our mortgage off in 9 years this way. I always invested in good dividend paying stocks with a DRPP plan.
TIME, as you pointed out, is probably the most critical factor of whichever variation of this strategy you apply. In mid 2009 my wife and I borrowed from our HELOC, and bought several hundred shares of Microsoft, and several thousand shares of Sirius XM (which was 30 cents from $3 two years earlier). It wasn't a huge investment (given the extremely low stock prices at the time), but we were a bit nervous (using leverage for this first time). But, we were in our early 40's and knew that we had enough TIME to ride the ups and downs until retirement. We still have all those shares, and have long since paid off the HELOC. I'll begin to sell those shares, before withdrawing from RRSP and starting CPP (to minimize capital gains tax), while also adding into our TFSA's, each year, as room opens up. TIME was/is the key!
Jax, thanks so much for your input. it was really important and helpful!👍
I'm glad you clarified that you can't deduct the interest if you invest in an RRSP or TFSA as this can be overlooked by people. It's important to run the numbers for yourself individually as if you do have TFSA room, it may be more advantageous to not take the interest deduction if all the income is being generated tax free. Your deduction should never outweigh your revenue from the investment so you're likely better off earning the income tax free and not getting a deduction at all. That said, if you are maximizing your RRSP and TFSA already, this is another method to maximize the amount of capital you have in the markets.
You can't invest the initial amounts in registered accounts, but there is nothing preventing you to invest the dividends or other gains into registered accounts. Doing so, would allow someone to max out their TFSA/RRSP over time while doing the SM.
@@Jside68 now that’s something I would like to see the numbers on. After tax numbers
My house was paid off so in 2017 I took out a 200K mortgage on my house at 2.14% and invested it in a syndicated mortgage, paying 12% per annum. I kept it there for two years and received $48,000. My mortgage interest was only $7700 so I netted more than $40,000 before tax. I put some of it into my RRSP because I am still working. Best decision ever, apart from buying my house in Mississauga of course.
Glad that this worked out so well for you! There may be an alternative way to view your strategy. You got a mortgage at 2.14% indicating that you are a very good credit risk. The lender expected no trouble from you. You participated in a mortgage at 12%. About 5 times what you paid. That indicates that your money was loaned to a very high risk borrower. Your investment looks like a very high risk one on first view.
I did the even lazier version of the Smith. Pay off my condo I bought 15 years ago (spent 20k when I bought for 70k), then borrowed 200k against it and put into investment account that I use margin so an even larger amount is deductible...used gains in that to buy other property that have deductions as well.
Condo isn't even 80% LTV either so I will probably do another 150k on it (for total 350k) and do same process if the market crashes a bit....if not I'm good.
Wow. Super video as always. I’ve learned so much from you. I especially love how you added the “My Personal Strategy” section. Thanks 🙏
Great video, i wish it was a few weeks earlier, LOL. But very well done and looking at different approaches. Thanks again Adam!
Ask and you shall receive! Mentioned this topic on your last video and here it is! Like I expected, you made this complicated topic easy to understand. Thank you very much Adam! I really hope I can work with you one day. I’m 36 and have around 25 years left until retirement. Hopefully you’ll still be doing financial planning in 10-15 years! 🤞
I have much more than 15 years left! Looking forward to it!
Hello Adam, Thank you for the response and a shout out to Lee for the followup with regards to the Capital gain implications.. The additional information is appreciated Lee.
Younger sub here than mentioned (35). I will look into the sm. Great advice as usual. Keep up the great work!
Great explanation of this concept. Thanks
Awesome video! Would be great to see a follow up video with the rental property accelerator.
Thanks for the great content!
Adam, this was such an important presentation, especially at the 10 minute mark discussing considerations. Also, reading many comments below was very helpful as people explain the strategy and reasoning they used. After a lot of researching this manoeuvre and the other strategy to borrow for investment to put into a non registered trading account while melting down the RRSP, the message is clear, I don't have enough "time" left to use either of these strategies. If I were in my 30's or early 40's and financially in a certain employment situation, ready for the risk to ride out the ups and downs of the stock market, then that would have been the better "time" to consider these strategies. It was a good journey to understand these strategies, helping with making the best decision so to not jeopardize retirement and into the golden years⭐️😉 Another "home run" presentation Adam. So important to listen to all your video's. ANd cheers to all the comments that add to the knowledge. 👍💯
Cool, thanks
Helpful thank you. Interesting to hear the 2nd mortgage method that your family has used.
Thanks for the clear explanation! Particularly explaining the investment loan piece! There is lots of hype and videos on S.M. but none of the videos I watched explained properly the investment loan part. Keep up the good videos!!!
Glad it was helpful!
I really like your personal strategy especially for folks who might be needing to move within the next 3-5 years. Much easier and cheaper to break that variable rate mortgage also.
I would like to hear more about how you are paying the second mortgage monthly? Are you using money from the investment? Dividends? Personal money?
Thanks for the video Adam.
One thing you forgot to mention (and I may perhaps be incorrect) but the investments you make must be dividend paying investments in order to write off the interest. It does not work on investments that use a buy low, sell high approach with no dividend or distribution payouts.
You are in fact incorrect with that statement. Your investment must have the potential to generate income. Non-dividend paying stocks still have that potential.
@@davew8445 interesting.. Do you know how long of a buffer the CRA will give you before they deem the investment as not fulfilling its potential?
Great info! Just to clarify, are you investing with bcv (BCV Asset Management Inc) or BCV (Bancroft Fund) ?
BCV Asset Management.
This is a sound strategy as long you have a consistent source of income to pay the original mortgage.
I think you should update this video for a turbulent market and increasing interest rates. Thanks for the post.
We just did one on home equity last week - a little different but similar and updated
The only thing is you will never get a tax refund (TODAY yes, but normally no) Your investments are taxable, so you must offset the interest paid to the interest earned... BUT I have been going this since 2018
I think the main difference and negative of your personal approach is the additional cashflow required to make it work. With the SM you can utilize your newly available principal/equity/LoC each month to pay the interest accumulated and then invest the remainder.
I think people forget this aspect and it's key. People open a 50k heloc and invest it all and then feel stressed to create cashflow to pay it, but with SM your already determined mortgage payment creates more LoC room that you take and then use to pay the interest and invest. No additional cashflow required beyond your original mortgage... So no dividend or tax refund is required... Those can be used to accelerate things but aren't required!
Can you speak to this @parallel wealth
@Parallel Wealth - Adam! I have a question for you. Once I get to the point where I have successfully migrated my mortgage into the HELOC side - so $0.00 owing on the mortgage, and only a sum owing in the HELOC, can I then create a new mortgage product for all or some of the balance in the HELOC which would continue to be tax deductible? My primary motivator would be to reduce the interest reate. Any thoughts on this strategy? I like the idea of reducing the interest rate, and also having a plan to eliminate the debt altogether - over time.
Great video! Have you heard of any advisors or accountants or the like who will handle the nitty gritty of the smith maneuver as its own service for a reasonable fee?
I haven't, but assume most would assist with in because a mortgage broker gets paid on amount borrowed...so borrowing more pays them more. In essence they should be willing to put time into it.
@@ParallelWealth I agree with Adam, however there is now a Smith Maneuver accreditation program and there might be some additional value in working with someone who has it.
Thank you for this video. I’m thinking of doing the smith maneuver and didn’t know it can’t go into TFSA. I will proceed with caution and perhaps only do it for my rental property.
Are you able to deduct interest against income or only capital gains?
With your personal strategy (which is intriguing! Although I am thinking of doing it by paying 10% annual lump sum prepayments each year, and then immediately drawing on a new mortgage segment to invest), how do you manage the mortgage payments that are due on the additional mortgage segment you are using for investment purposes?
You can either have a monthly draw from the investments or if your income supports the extra payments. Either way works.
Thank you for the video as always. If I understand this correctly, you borrow from your HELOC to invest. I understand that the interest on your HELOC is now tax deductible. However, your HELOC is not free. It is a loan with interest tied to it. I have seen quite a few of these Smith Maneuver videos and I don't hear people say that with every month that they borrow from their HELOC, they now have a mortgage AND a HELOC payment to make. So their monthly outlay goes up every month. Did I understand that right? Thanks again!
Correct, and I can pay that out of personal income/cashflow, dividends from the investments or other. You have to look at the spread between costs and benefits and determine if it's a good solution for you.
One mention that I've heard Robinson himself say is this:
Let's say your monthly mortgage payment is $1,500. ($1,000 to principle/$500 to interest). Reborrow $1,000 on the LOC side, invest ~$995 of it inside a non-reg, deduct interest, etc etc.
The $5.00 that we're keeping behind inside the SM checking account will be used to service the monthly interest on the LOC. Take the increased result of the tax refund as a result of doing the SM, plop it on the mortgage, rinse and repeat for the plain-jane SM. End result: no additional out-of-pocket cash required, LOC interest remains serviced, with a slight additional interest cost to you, keeping your equity working.
The second solution he is talking about, the one he is using. Can he write off the interest like the smith manoeuvre ??
What are you thoughts on New Zealand removing interest deductions on investment properties? Do you think Canada would ever follow suit given how much housing prices have gone up?
Who knows...I mean anything is possible. There is a large debt to pay and although their stated goal is to pay down through immigration and growth, they will naturally go after low hanging fruit.
Great. I had not been thinking of that. I was thinking lately of how the capital gains amount may be increased. It never ends does it? I just know we have a lot of debt to pay in Canada and Trudeau needs to find new ways to tax us.
Given the significant increase with respect to interest rates since you made this video, do you still view the SM or use of a 2nd mortgage as a good idea? Given the state of the markets, I suspect it will be hard to make the gains required to cover the cost of borrowing and make some decent profit. I think the SM and/or use of a 2nd mortgage was probably a great idea over the past decade but seems super risky now but maybe I'm missing something?
Hi there, I'm not a financial advisor. However there is some mis-information in this video. The primary piece being that the investment has to out perform the interest on the re-advanceable mortgage. I think it is more accurate to state that the investment has to outperform the interest time your marginal tax rate. For example, I live in BC and the marginal tax rate is up to 53.5%. Therefore if your interest rate was 6%, the effective cost of borrowing is 6*(1-0.535)=2.79%. You have to make this decision, however there are many investments that can beat that in the long term. The video guy had low rates, but his investment dropped 27% in the last 12 months. Maybe it's a better time than ever to get into the market now that everything has dropped!!!🤠
What if you don’t have a re-advanceable mortgage, is something scotia would add apart way through the term? A normal heloc wouldn’t work? what about just borrowing to invest from an unsecured LOC wouldn’t that qualify as tax deductible?
Can I borrow using my corporation cash against my home equity instead of HELOC? I think this way you can write of the interest Plus your not paying 8% to the bank?
We can do it for a portion of our mortgage, not a hole mortgae
I don't think I understand the requirement for a readvancable mortgage vs a regular HELOC. Can't you do this in a HELOC as well, it will just be capped by the size of it?
Does a readvancable mortgage mean the HELOC grows as you pay down your principal? So if I had a regular HELOC of say $50k that wasn't readvancable, I'd be able to take advantage of the Smith Manoeuvre, but only up to an investment size of $50k as my loan capacity wouldn't increase as I gain more equity in my home?
I like your strategy to borrow against the new equity on your house when the mortgage gets renewed at the 5 year mark. My question is why the need and cost to have a 2nd mortgage?? I am doing the same thing, but did it with only a single mortgage. What am i missing?
It's 1 mortgage with 2 separate pieces to it. You have to separate it off if you plan to deduct the interest.
I’m wondering if the current interest rates would be a reason to hold off on doing something like this?
Most likely yes
Why worry if the interests on a borrowed money are greater than investissenement return, the interests are always tax deductible
Question, the heloc is joint with my spouse but one of the brokerage account is only under my name while others are jointed. Will I have a problem to split the dividend income 50/50% at tax time since the t5 will only have my name?
The account needs to be joint in order to split the income.
I have seen a couple videos on this but I still don't understand how do you deduct the interest? How does this part work?
On your taxes thwre is a line for interest expense.... Deduct the full amount from the heloc for that year
Hello Adam, thanks for the information as usual a lot to digest. However, I have a question regarding borrowing to invest. I understand from your video that the amount borrowed must be in a non-registered account in order to write off the interest. However, lets say I borrow $100,000 to invest and whatever I make on that $100,000 non-registered investment, I then pull out and deposit into a TFSA. Can I still write of the interest paid on that initial $100,000 non-registered amount? Thank you
Yes.
Keep in mind as well that you'll have to pay capital gains on those investments in the non-reg account once you cash in.
No.... You can pull out dividends.... But if u sell shares thats a whole other story
@@markvanderhelm922 capital gains (losses) on the sale of a share; preferential tax treatment on eligible dividends, re-invested or not. Either way, once the sale triggers, or dividends are distributed, there's a taxable event.
Tax man will get his share doesn't matter how smart you do the things.
Hi Adam
We paid off our mortgage and now we want to buy an investment property. What's better for a person in early 50? HELOC or mortgage for down payment? The investment property we are looking for pay itself for the mortgage.
Mortgage will give a lower rate, so would always go with that unless you plan to sell short term and need flexibility - which doesn't sound like the case here.
@@ParallelWealth Thanks a lot
This was interesting. 1.3% is low for sure. I've had a HELOC at Prime minus 0.5% for many years and have thought about taking some funds from it to invest in RRSPs and not worrying about the interest write-off, rather taking and reinvesting the income tax refund.
I’m 58 and have about 60000 equity in my house. I plan on retiring at 70. Is there any point in using this strategy?
Not enough equity yet
how to write off the interest if you borrow the equity to invest in rental property ( as down payment )?
Track the details and then enter when filing taxes. Hire an accountant to do this.
Curious on the HELOC vs. the 2nd mortgage option: Will not the interest rate on the 2nd mortgage be higher since the lender will now be at 2nd position? And so it will be comparable to a HELOC anyway?
It's not a second mortgage with regards to being registered as a second position. It's a second mortgage piece on your property - but still a first position mortgage. Hope that makes sense.
I have heard that borrowed money should be invested in income generating investments and not capital gain. So it is said that in order to deduct interest on borrowed money it should be invested either in an income generating business, a rental property, or dividend paying stocks.
Dividend paying stocks can still have cap gains. Ppl like income generating on borrowed money so there is cashflow to pay the interest.
@@ParallelWealth I think what Ravi means is that you cannot deduct interest expenses on investments that will never earn anything but capital gains. Should CRA audit you and have investments not earning income, odds are they will deny interest deduction on those investments.
@@chrisskyllas1309 Correct, no tax deduction for interest expense on capital gain only. Has to investment income, like dividend, options, etc.
You dont want ETFs or REITs, as they can pay out ROC, which makes a mess out of the accounting for the SM.
At 7.7% interest rates for line of credit , does it still makes sense the smith Maneuver?
I would say no, not at these higher rates
I used HELOC to buy LSPD as it dipped 20% due to short seller news. I can claim the interest when I sell LSPD and generate capital gain.
@11.30 Why the tax has to be paid on capital gain every year if it is not realized?
You are correct - no tax on unrealized capital gain.
@@OlegScherbina but, keep in mind dividends collected (whether reinvested or not) will be subject to tax, albeit taking into account the favorable dividend income tax credit.
How old is too old to consider this? You said nearing retirement…how near. I’m probably 15 years away.
Within 10 years would be my personal opinion.
So that means I am paying interest on principal loan and one heloc loan and heloc interest is tax deductible ?
Yes.... But you can also have the heloc pay its own interest. It will gey maxed out faster, but your tax deduction will be higher, and you aren't out of pocket any more than before you started the SM.
Risk/reward not worth it for my comfort level.
Hi Adam. Great video. I've done a fair amount of research and I'm quite familiar. with the Smith Maneuver and the associated risks. A couple specific questions for you (which you may or may not know the answers to). 1) I'm a single income household w/ a joint mortgage. Thinking long-term, if this non-registered portfolio grows over the next 15-20yrs and pays substantial dividends in retirement, would it make sense to set up the non-registered account jointly so that my spouse and I can split that dividend income in retirement? I'd assume yes, and if so, would we have to split the interest deduction evenly now or would I be able to solely deduct that on "Schedule 4 Part IV Line 221"? 2) I know this is likely a personal question, but with the dividends and the tax refund from the SM, is it more advantageous to use those funds to make prepayments to the mortgage amount (thus increasing the readvanceable mortgage/HELOC and speeding up the process) or would you use those to fill up an TFSA?
Bith are good options.... TFSA or pay down mortgage
You said « a re-advanceable morgage is not s Home Line Of Credit » but at 7:41 you say « lets rename Re-advanceable morgage to HELOK for simplicity » ?!
It is or it is not
The problem is that in the end: the house will still be clear of morgage which is a lot of hundreds of thousands of dollars wasted…