How can you use equity in your home for investment purposes?
Mortgage professionals and financial planners like to trumpet the famous Smith Manoeuvre, as coined by Fraser Smith (1938-2011) In a nutshell, this program shows you how to free up equity in your home for investment purposes, and to do so in a tax-efficient manner.
I give full credit to Fraser Smith for popularizing a concept which had been around for decades, and even getting an entire industry and nation to name it after him. Here is an extract from his obituary at the Canadian Mortgage Trends website.
“Fraser’s nationwide prominence started with a compact but powerful book he published in 2002 called The Smith Manoeuvre. The book illustrated how regular Canadians could use techniques previously employed by the affluent to accelerate mortgage paydown and build a larger retirement portfolio. “
His mission was, ‘To give every Canadian homeowner the opportunity to make their mortgage interest tax deductible’,” said his son Rob Smith. The Smith Manoeuvre soon became a household name in the financial planning industry and Fraser’s book became a national bestseller.”
I hate to burst the bubble – as a matter of fact I am huge fan of (a) anyone who has the guts and patience to write a book (b) anyone who can take an everyday concept and coin it as his own, but the notion of tax-deductible investment loans has been around for decades.
When I started out as a fresh-faced stockbroker in the mid-eighties, this was already de rigeur. The guys at Investors Group, Financial Concept Group, Regal Capital Planners and the Principal Group were already into this concept in a big way. Fraser Smith himself was peddling the strategy as a financial planner in Vancouver at that time.
One person who embraced this strategy was The Honourable Michael Lee-Chin, who was making his mark as a young buck in the Hamilton office of Investors Group in the late seventies, before becoming regional manager of Regal Capital Planners in 1979.
I recall irking one particular University of Waterloo professor client, who I had been courting for several months. One day he dumped me and said he was refinancing his home and pouring all the proceeds into mutual funds with Michael. The tax benefits were simply too good to pass up, especially when you factor in the rules for tax free capital gains back then were far more generous than today’s.
I urged caution, suggesting this was a risky venture that could jeopardize his family’s future; after all, there was no guarantee the stock market would continue to go up and up. He wanted no part of my conservatism, and parted my company with a harrumph.
The professor had the last laugh as the stock market continued on a raging bull tear, and the strategy looked brilliant, and my fears for him ‘groundless.’
Today the notion of leveraging your assets to invest is alive and well. Many financial planners and mortgage broker agents specialize in the strategy. Lenders often pay a modest commission, even for a Home Equity Line of Credit, and fund companies pay well for investments in their products.
True, there were hundreds of long faces in 2008 and 2009 when the markets for stocks and real estate took a bit of a beating, but that was in the past, and Fraser Smith’s legacy continues to shine on.
For me and myself, I don’t buy into the needless complications of the Smith Manoeuvre as written and espoused, but I am ok with borrowing to invest tax efficiently to some extent, and the cheapest source of money will always be the equity in your home.
If you would like to read others’ opinions on the Smith Manoeuvre, here are a few links: