Since Canadians can’t deduct mortgage interests in our income tax filing, many Canadian homeowners use Smith Maneuver as a legal strategy to enable them to make their mortgages tax-deductible. Essentially, Canadians would borrow money against their home equity, use the money to invest in the stock market, and deduct the borrowing interests.
It’s a very straightforward strategy and is considered low risk for many Canadians.
But what happens when the stock market is free falling and interest rates are rising? Is Smith Maneuver still as enticing as before?
I can’t answer that question, but it certainly would hurt when your borrowing cost is increasing and you’re losing your principal because of the falling stock market.
Therefore, I think Canadians should really think twice about utilizing Smith Maneuver in the current environment. Canadian should also keep in mind that Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is looking to tighten mortgage-HELOC rules.
According to the Globe and Mail article, in the first two years of the COVID-19 pandemic, readvanceable mortgage borrowing increased by 34% and the combined-loan products have a total value of $737 billion in the first quarter of 2022. This sharp increase has caught the OSFI’s attention.
It is possible that OSFI might mandate banks and mortgage lenders to rein in limits on how much homeowners can borrow against their homes, or force them to requalify for increases to their HELOC.
This not only can impact people looking to use Smith Maneuver as a way to propel their financial independence journey, but this can also hurt banks and mortgage lenders since readvanceable mortgages are now a staple product for them.
Whatever the OSFI’s decision might be, a storm is brewing and can cause more financial distress for many Canadians.
Be careful when you borrow money to invest. There’s no such thing as a risk-free free lunch. There’s always risk when you borrow money to invest. The key is to manage your risk and have multiple backup plans.
Good reads from the PF community
Here are some good reads I’ve come across from the personal finance community. Enjoy!
I always enjoy learning new things from other like-minded people in the PF community. That’s why I really enjoyed reading Fritz’s 4 lessons from 4 years of retirement and learning a few things from someone ahead of us on the FIRE journey – “Dedicating your time to discovering your Purpose is the best use of your time in retirement. If you’re lucky, you’ll find something. If you’re really lucky, you’ll find several somethings. Don’t be surprised if the “something” you find only lasts a few years. I’ve discovered that in my own retirement, and it’s one of the reasons I’m writing less. Enjoy the flexibility of moving between things that bring you a sense of purpose, and never stop seeking out new opportunities. Your Purpose will evolve, but it gets easier to find as you spend more time seeking it.”
Jim and his family from Route to Retire used to live in Panama as expats but now they’re back in the states. To keep life interesting, they have decided on another road trip across the US. My parents used to take me and my brother on a lot of month-long summer road trips when we were growing up. One year we drove from Vancouver to New Orleans and back. But Jim took road tripping to a completely different level, including setting up a sleeping quarter in their car and having space in the trailer for a portable toilet! – “With our 2020 road trip, we envisioned sleeping in Walmart Supercenter parking lots here and there. Because they’re open 24 hours, if you’ve got to pee, you head inside whenever you need to and do your thing. What we didn’t anticipate was that with the pandemic, Walmart shortened the hours of most – if not all – of their supercenter stores. That meant that from usually 11 pm until 6 or 7 am, you were on your own. We made it work though and would just pee right before the place we were staying was closing. But when you gotta go, you gotta go. The same goes for when you’re camping or even on the road. Being a guy, it’s a little easier for me to stealthily do a #1 than it is for Lisa and Faith.”
Mike from The Dividend Guy Blog examined 6 companies that lost their magic touch – “Disney (DIS) and magic should come together, right? However, the pandemic hurt Disney a lot, up to the point it suspended its dividend in 2020. Despite the fact that things seem to get better, Disney is still down. What’s happening and should investors keep their shares?”
Mike has also been pumping out a lot of great videos. For example, I really enjoyed his video on how to avoid dividend cuts with these 3 tricks. Who knows, maybe one of these days Mike will let me appear on his Youtube channel and we can nerd it out and talk about all things dividend investing.
We all strive to become better investors. Miranda discussed 3 things you can do to become a better investor. She hit all the key vital points and I can’t agree more – “Carefully think about what you want to accomplish with your money. Do you want an investment portfolio that creates income? If so, you might want to consider including dividend stocks. Are you hoping to amass $1 million before you retire? Your investment strategy for the long haul had better reflect that. Think about what you want your money to accomplish, and be realistic about how investing can help you with that. Once you understand your own motives, you will be able to make better investing decisions. And remember: You don’t need just one purpose for your money. You can have multiple goals. Your investment portfolio will have to be structured to reflect your different goals and timeframes, though.”
There have been a lot of talks on the I word – inflation lately. People are worried that inflation will ruin their retirement plans. Joe & Mark at Cashflows and Portfolio went through some ideas on how you can take advantage of inflation – “We fully believe in history: rising inflation can be a headwind for equities. But history also says some equity sectors are better at combating inflation than others. Sectors that do well during higher inflationary regimes are ones that can mitigate rising input costs by passing on the higher prices to consumers. The energy sector stands out in this category. That makes investing in Canada’s home bias to some energy sector companies a smart play. Furthermore, since monetary policy in Canada is linked to combating higher inflation, financials could benefit. Recall 40-50% of Canada’s top-60 performing companies are historically banks, life insurance companies and energy companies. Do with that information what you will!”
Finally, something not personal finance related. Since Mrs. T is originally from Denmark, we are quite into the Eurovision song contest each year. This year, the hit of our house is Subwoolfer’s (Norway) song – Give That Wolf a Banana. The song gets played multiple times a day in our house. Someone, please save me ha!
Have a great weekend everyone!