Is The Smith Manoeuvre a good idea?

Three years ago I had the opportunity to interview Robinson Smith, son of Fraser Smith, who has been advising thousands of Canadian families on the implementation of The Smith Manoeuvre. 

In that particular interview, we spent a lot of time going back and forth about why The Smith Manoeuvre is very attractive, the advantages of utilizing this strategy for Canadians, and the potential risks. 

Robinson was quite open with me and provide great insight in the interview which I really appreciated. 

Fast forward to now, with the interest rates being highest in the last ten years, reaching levels that we haven’t seen since 2008, is The Smith Manoeuvre still a good idea? What happens if the Bank of Canada continues to raise overnight interest rates, causing the mortgage rate to go even higher than today? 

With that in mind, I thought it’d be a great idea to bring back Robinson and do another Q&A interview with him.

Welcome back Robinson, appreciate you taking the time to do yet another Q&A. Could you explain why Canadians need to consider The Smith Manoeuvre strategy? 

As you know, Bob, we Canadians are some of the highest tax-paying citizenry on the planet and as I may have mentioned last time, we pay around half of our income in taxes leaving us the other half to pay for life. 

Currently, we have been seeing relatively high inflation which further adds to the financial burden we Canadians face. Throw on top of all that the fact that we have enormous housing costs in this country and we have a recipe for disaster when it comes to us being prepared for our retirement. 

We are simply unable to save any amount of significance in order to be able to slow down or retire at a reasonable age. In fact, we have been witnessing this for years now. We have many, many senior citizens working in what should be their retirement – not because they want to, but because they have to. Any given day you can find an article about how unprepared we Canadians are.

This stems not only because of how expensive life is, but also because of mindset and inertia.

Many Canadians still believe what they were told many years ago by someone older – maybe a grandparent or parent – that it is best to be completely mortgage-free by retirement age. The effect of this is that throughout their working lives, they concentrated on paying out their mortgage. 

Due to limited resources, because they were throwing dollars at the mortgage, they couldn’t invest for their future. Many of us know someone who lives in a big house, mortgage-free, yet has to watch their spending because they are living on a fixed income. It’s a situation that is very common, yet not at all comfortable.

These Canadians suffered a very expensive opportunity cost. They let their equity grow year after year and because they were not investing it, it was earning them less than 0% return due to inflation, whether low or high.

Canadians need to explore The Smith Manoeuvre now more than ever.

The Bank of Canada has raised interest rates multiple times in recent years, causing mortgage rates to go up. What’s your view on the current conditions we’re seeing?

Yes, the past few years have certainly seen some disruptive events – COVID, the Ukraine-Russia war, and global supply challenges to name a few. 

These global events beyond the control of our various forms of government are largely to blame, but we can’t ignore the fact that government policy also played a role in ensuring inflation and interest rates soared. Of course, it would be a tough job to manage all these issues while trying to keep the economy in check but some governments got it a little wrong…and some got it a lot wrong.

So here we are having to deal with an interest rate environment that increased extremely quickly which has made it difficult for all Canadians, whether they own their home or rent. 

Granted, the Canadian housing market is unique in the fact that housing prices and expenses have risen so quickly over recent years, but I find it interesting that in order to maintain a healthy economy to protect Canadians, the Bank of Canada has to destroy Canadians – increasing interest rates affect everybody – homeowners, renters, business owners, employees – and when we see such a rapid increase in rates, we all feel the pain. Some lose their homes, jobs, their businesses, and personal relationships also suffer due to the increased stress on our finances.

The good news is that inflation is abating by most measures which will lead to a pause in rate increases hopefully sooner rather than later but the effects of the recent increases will still be felt for years to come.

Should Canadians continue to use The Smith Manoeuvre strategy given the high HELOC rate we’re seeing now? Does the strategy still work when the HELOC rate is over 7.25%? 

The Smith Manoeuvre is very robust and offers Canadians financial improvement whether rates are high or low.

We need to remember that my father, Fraser, developed the strategy back in the mid-1980s when interest rates were double-digit. 

If it didn’t benefit Canadian homeowners then, we wouldn’t be talking about it now.

If we look at a low-rate scenario, the homeowner implementing The Smith Manoeuvre may free up brand new, fresh cash to invest each month of $1,200, for example. However, because rates are low, the resultant tax deductions and tax refunds which allow the homeowner to prepay their mortgage each year will be on the lower end of the spectrum. That significant monthly investment with ‘found money’ does fantastic things for them over the years. 

Now, if rates go up and are relatively high, while they may have less to invest each month, say $1,050 instead of $1,200, their tax refunds get larger, which means they have more to prepay their mortgage each year, which in turn means the faster that expensive non-deductible mortgage debt is gone. And when we’re talking about non-deductible mortgage debt, the faster it is gone the better.

How can Canadians protect themselves if the Bank of Canada continues to raise rates? 

When implementing The Smith Manoeuvre, the goal is to pay as much against your mortgage as often as possible. The more you can apply cash against this bad debt, the sooner it is gone, the faster you are increasing your tax deductions, and the faster and sooner you are investing for long-term growth.

And prepaying the mortgage also has the effect of accelerating the reduction in how much of the monthly mortgage payment goes to expensive interest and therefore accelerating the amount of that payment that goes against the principal. 

By prepaying your mortgage, when it comes time to renew, you can ask your bank to extend the amortization back out to the original timeline which will have the effect of reducing the dollar amount of your payment relative to what it would otherwise be without the amortization extension. This can go a long way to easing the payment shock that higher rates can cause.

Now, your readers may be asking how exactly they can come up with the money to prepay the mortgage after reading the above about how tough it is to find extra cash. The answer lies in the fact that if you are implementing The Smith Manoeuvre, not only are you reducing your tax bill which sends more money into your pockets, but you are also building up an investment portfolio over time which can start to send you income, such as dividends. 

The wonderful thing about this strategy is that it frees up money you didn’t know you had access to.

High rates generally mean high inflation. And we need to fight inflation – the higher inflation, the faster we are losing value on the equity in our homes. We need to put our equity to work in order to fight inflation and actually benefit from high rates.

In your view, do you see the inflation rate settling down, causing the Bank of Canada to lower the rates? How would that affect Canadians using The Smith Manoeuvre strategy? 

Just like everyone else out there, Bob, I don’t have one of those crystal balls everyone is always talking about, so any estimates are just somewhat-informed guesses. 

We have seen inflation come down to within the band that the Bank of Canada likes to be in but housing and food are still increasing much faster than anyone would like. I do think, however, that the Bank of Canada will pause now – if not, then one more minor increase next time they meet. Then they’ll hold or hover for around a year before starting to come back down. 

The caveat here, of course, is that anything can happen at any time.

When rates do come down, however, those homeowners who are implementing The Smith Manoeuvre will see their tax relief lighten a bit but will also see they have more to invest each month as we touched on above.

If margins are relatively cheap from discounted online brokers like Interactive Brokers, how is The Smith Manoeuvre any different than having a margin account? 

We need to remember the goal of The Smith Manoeuvre – to convert expensive, non-deductible mortgage debt to beneficial tax-deductible debt. The way to do that is to pull out the equity in your home as fast as you are creating it with your regular mortgage payment and any regular or periodic prepayments. 

When you do pull out that equity, you invest it in assets that have a reasonable expectation of generating income – that is the test for deductibility. Where you invest these new funds is up to you and, in addition to many other ways to invest it, you could stock your online brokerage account with these funds. The decision of where and how you invest is up to you (preferably with consultation from an investment professional!)

How do I learn more about whether The Smith Manoeuvre is right for me or not?

Anyone looking for more information on the strategy can visit www.smithmanoeuvre.com. 

On the site we have my book available, ‘Master Your Mortgage for Financial Freedom’, as well as a course for Canadian homeowners who are looking for even more information and also The Smithman Calculator where people can plug in their own numbers and values to see their projected results as regards reduced amortization, tax benefits and investment portfolio growth.

Through the website they can also get connected with Smith Manoeuvre Certified Professionals (SMCP) that we have across the country – it is very important to do this right, so we strongly suggest people get guidance from one or more of the specifically-trained mortgage brokers, investment and insurance advisers, tax professionals and real estate agents. These SMCPs are all members of a network and can work seamlessly together and with you on your Smith Manoeuvre journey.

Thank you Robinson again for coming back on here and providing an updated view on The Smith Manoeuvre strategy. It’s interesting to remember that the strategy was developed in the 1980s when the interest rates were very high and the strategy has been battle-tested over the years.

Please note that I have no ties to Robinson and the SMCP across the country. This is simply an updated interview with Robinson as macroeconomics have changed since we published our first interview three years ago.

Are you utilizing The Smith Manoeuvre strategy? If so, how are you finding it? If not, why not?