The Smith Manoeuvre Mortgage
So I am planning to buy a house in the next couple of months, and have been in the mortgage searching mode lately. On a seemingly random mention from a co-worker, I started looking into this concept that allows you to make your mortgage interest payments tax deductable. The concept is actually not that complicated, and is based on the fact that interest on investment loans is tax deductable. The mortgage strategy itself, and the steps to get it all set up turns out to be much more complicated than the concept, this actually causes this type of mortgage to remain in the shadows more often than not.
As you can imagine, the thought of converting my mortage interest payments into tax deductable interest payments is very appealing. This results in a significant reduction in income taxes come tax season. So I began reading up on this as best I could (truth is that there isn’t a whole lot out there on the topic). I was fortunate enough to come across a website called milliondollarjourney.com, a blog about someone who was in my position but time shifted in the past. I have acquired a great deal of knowledge just from this website.
I have begun to keep a list of details, important notes, and other random facts about the Smith Manoeuvre (SM) on my wiki. I plan on keeping up with adding new questions, and answers to the questions that i discover as I continue my SM research. All in all I can see this being a very beneficial wealth management strategy.
For the skeptics, I agree, that this is not fool proof, there are some conditions to the strategy. The most important fact to note is that there is additional risk involved with this mortgage strategy since you are leveraging the equity of your home to build an investment portfolio. A market crash can severely shrink your portfolio’s net worth, and those without sufficient risk tollerance will be tempted to pull out. It is absolutely imperitive that you understand that this is a LONG TERM wealth management strategy. This mortgage strategy is based on the premise that on average, market conditions will improve year to year. Just as those who were planning on retiring at the end of 2008 will likely have to wait a few years before they liquidate their portfolios, the same could apply to those who apply the SM.
With a properly balanced portfolio, preferably strongly biased with higher yielding dividend stocks, one can expect that on average, over the course of the mortgage (which we can assume takes about 25 years), your portfolio will have a modest appreciation (hopefully somewhere between 6% and 10%). The idea is that 25 years of compounding and increasing dividend returns will be more than enough to cover your investment loan (should you choose to close it). And once you have finally converted the mortgage on your house, you will be left with a rather large investment portfolio. The short version of the SM is making your house’s equity work for you.
That’s a quick rundown of the SM, there are of course many intricacies to the strategy, but the basic ideas are outlined above. I will likely keep things updated as I arrive at conclusions and what not. For the time being, I will leave with my plans for potential institutions. There are two mortgages that seem very attractive, one being the FirstLine CIBC division) Matrix mortgage, which I have already given my approval of. The other is the BMO ReadiLine mortgage. I plan on researching the ReadiLine mortgage tomorrow afternoon and evening. Once I have this decision made, I can start grinding out property listings to finally pick a place to live.