# Starting the Smith Maneuver.



## FunkyBeats (Apr 5, 2009)

Hello All,

I've recently acquired enough capital in my primary residence to set up a HELOC and start the smith maneuver. I plan on doing this with RBC as they hold my mortgage. My investment plan is to buy XIC or XIU monthly through Questrade and re-invest any distributions (ROC) into the ETF. I have a high annual income and plan on holding the investments for >10 years.

I would like to solicit any advice or criticism of this approach any of you are willing to offer. 

Thanks,

FB.


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## Eclectic12 (Oct 20, 2010)

FunkyBeats said:


> Hello All,
> 
> I've recently acquired enough capital in my primary residence to set up a HELOC and start the smith maneuver. I plan on doing this with RBC as they hold my mortgage. My investment plan is to buy XIC or XIU monthly through Questrade and re-invest any distributions (ROC) into the ETF. I have a high annual income and plan on holding the investments for >10 years.
> 
> ...


Sounds good ... and you are aware of ROC needing to be re-invested, which some people overlook.

Likely, you are also probably aware that the commissions generated by the trades are not interest deductible and can't be in the HELOC but I'll mention it for completeness.

Also - if you want to help make it easier to be audit-proof, setting up a separate brokerage account number for the SM investments (if you have other investments in the same brokerage) and doing the same in the HELOC allows a much clearer paper trail. 

I'd also recommend learning as much as you can. 

If an opportunity like Mar 2009 presents itself, having some ideas of what to add helps. Being prepared meant I was able to jump on bargains. Out of something like twelve stocks bought between Nov 2008 and Mar 2009, two are down (40% and 10%) and the remaining seven are up between 30 to 300% (five are in the 100 to 300% range). That's on top of dividends that cost me half what someone buying before/after paid.


Good Luck.


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## BarryD (Nov 8, 2010)

While we're talking SM, I'll toss my deal to date for opinion.

First off, I live in Windsor, ON which is bizzaro world housing wise compared to just about the rest of Canada. You'd be amazed what 250K can buy. Anyway...

My place is worth about $100K today, paid $98k five years ago. A typical Joe Average working class house. I started this last July thru IG, prime + 1. My LOC is $75K, I owed 65K. 

Since then I've used this account for day to day banking, pay, bill paying, beer, normal stuff. The LOC is down to about $43K. I've not bought anything with the LOC. I would have owed $38K at the end of 2013 to the bank at prime + .25 at renewal, assuming no interest rate increase. There's about 20K out there in cash redeemable stuff outside IG's grasp.

I look at it as a way to pay the LOC inside of 3 years and the interest I'll not pay a bank as future earnings. I'm 48, putting a dent in unused RSP space...doing just fine. I'm not interested at all in risking my pile of bricks when interest rates are going up slow but sure VS unknown returns
in a depressed housing market. And I play penny stocks in a TFSA......


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## Eclectic12 (Oct 20, 2010)

BarryD said:


> While we're talking SM, I'll toss my deal to date for opinion.
> 
> First off, I live in Windsor, ON which is bizzaro world housing wise compared to just about the rest of Canada. You'd be amazed what 250K can buy. Anyway...
> 
> ...


Hmmm ... you'll have to explain what you mean. 

When you say that you setup a LOC and used it for day-to-day banking etc., this sounds more like a credit for giving all your business to one company (mortgage, chequing, savings, LOC etc.). Or maybe you are referring to transferring a higher mortgage rate onto a low LOC rate (which could rise in the future). 

The Smith Manoeuve, on the other hand is using leveraged investing to make the equity in your house work for you. The key idea is that your mortgage interest is not tax deductible while interest to buy investments is. The plan is to convert the non-deductible into deductible interest as quickly as possible, while building assets and paying off the mortgage more quickly.

Here is a link:
http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-1.htm 


Cheers


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## Four Pillars (Apr 5, 2009)

FunkyBeats said:


> Hello All,
> 
> I've recently acquired enough capital in my primary residence to set up a HELOC and start the smith maneuver. I plan on doing this with RBC as they hold my mortgage. My investment plan is to buy XIC or XIU monthly through Questrade and re-invest any distributions (ROC) into the ETF. I have a high annual income and plan on holding the investments for >10 years.
> 
> ...


I did something like this in the past - here are all my thoughts: http://www.moneysmartsblog.com/leveraged-investing/


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## FunkyBeats (Apr 5, 2009)

Thanks for your comments, guys.

BarryD, I can understand your point of view that reducing non-deductible debt is a good investment strategy and I intend on doing the same. With the SM I will continue to reduce my mortgage. Whereas you would not be comfortable borrowing to invest using your house as collateral in my situation I don't see it as a large risk. I can float the interest payments from my cash flow if the investments were to tank. This will allow me to weather some volatility so that I should never have to sell at a loss. Since I would be buying an ETF that tracks the index I think the odds of the rate of return over 20 years to be negative are very low. I also have a very good pension plan (OPG) to rely on so when you look at my portfolio in terms of balance when I retire about 66% will be guaranteed indexed income and the remainder will be a mix of SM and another leveraged investment that I am currently making money on.

I don't feel that I'm taking on undue risk. What do you guys see as the risk here?

Thanks,

FB.


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## andrewf (Mar 1, 2010)

I agree. It's not much of a risk at all. Many people buy houses leveraged 10:1, and many people find that unremarkable and not especially risky. The main risk is that equities tend to be volatile, but then the same argument could be used not to invest in equities in your RRSP, etc.


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## cannon_fodder (Apr 3, 2009)

Eclectic12 seems to have jumped in at a similar time as I did. While my timing wasn't perfect the SM has proven very beneficial. 

I tapped into all the home equity I had and bought only dividend paying stocks. I set up a portfolio that paid out more than the interest costs. That way I felt protected should my wife or I suffer a job loss. 

I also used margin as I was confident we would see the market eventually come back. 

Less than 2 1/2 years after implementing the SM we discharged our mortgage (which shaved off an already shortened time frame by 1 1/2 years) and our SM portfolio has tripled in value. 

That's more to do with the phenomenal opportunity the GFC presented to us (and having the fortitude to not panic and sell at the bottom). 

My goal was to create a portfolio that generated enough dividend income to fund retirement spending without needing to sell shares.


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## Eclectic12 (Oct 20, 2010)

cannon_fodder said:


> Eclectic12 seems to have jumped in at a similar time as I did. While my timing wasn't perfect the SM has proven very beneficial.
> 
> I tapped into all the home equity I had and bought only dividend paying stocks. I set up a portfolio that paid out more than the interest costs. That way I felt protected should my wife or I suffer a job loss.
> 
> ...


Congratulations on your successful SM!! 

It's a nice change to hear success stories as opposed to the more comon "what is the SM" type questions.

While I'd like to take credit ... LOL, it was more fortunate timing. The mortgage broker offered the HELOC for the SM and I said "why not". After researching the SM, the crash provided a nice opportunity to jump in with a discound and downside protection!

I'm more conservative (too many of my friends have been good workers but let go due to economy/bad management) so I'll likely be done with the mortgage next year.

I plan to keep the HELOC working for me for years to come.


Cheers


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## FunkyBeats (Apr 5, 2009)

*ETF trading fees*

I was doing some reading on canadiancouchpotato.com and the advice they were giving was to not set an ETF for monthly purchases due to the trading commissions. They indicated that you should try to keep your trading cost to 1% or less of the value of the stock trade. My question is: I believe that by waiting and making one lump sum purchase a year to reduce trading costs will cause me to miss out on too much upside on the ETF. Twelve trades a year only costs ~$120.00. What are your thoughts...?

Thanks,

FB.


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## Four Pillars (Apr 5, 2009)

FunkyBeats said:


> I was doing some reading on canadiancouchpotato.com and the advice they were giving was to not set an ETF for monthly purchases due to the trading commissions. They indicated that you should try to keep your trading cost to 1% or less of the value of the stock trade. My question is: I believe that by waiting and making one lump sum purchase a year to reduce trading costs will cause me to miss out on too much upside on the ETF. Twelve trades a year only costs ~$120.00. What are your thoughts...?
> 
> Thanks,
> 
> FB.


It's up to you if you think $120 is ok. Alternatively, you can purchase less often - every second month/quarterly etc.

Or use TD e-funds. They are very cheap and there are no transaction costs. These are likely more appropriate for a small portfolio, if you don't want to spend any time out of the market.


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## andrewf (Mar 1, 2010)

My suggestion elsewhere has been to buy the most underweight ETF each purchase. This keeps you constantly rebalancing.

It depends on your contribution rate. If you are saving $500 a month, there's not harm in following this strategy.


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## FunkyBeats (Apr 5, 2009)

I would be saving more than $500 a month so although the e-series looks good, I think I would like to have the flexibilty of a questrade account. I could transfer funds from my HELOC to the account and make monthly purchases of XIC or any other product that suits my needs.


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## Four Pillars (Apr 5, 2009)

FunkyBeats said:


> I would be saving more than $500 a month so although the e-series looks good, I think I would like to have the flexibilty of a questrade account. I could transfer funds from my HELOC to the account and make monthly purchases of XIC or any other product that suits my needs.


If you're contributing $500/month, buying ETFs is ok. But like Andrew said - just buy one ETF at a time.

If it were me, I would just let the cash accumulate for a while. However, you are obviously a very keen investor, so go ahead with the monthly purchase.

I think you'll find that when your portfolio is much larger (hopefully), you won't care so much about the timing of the purchases.


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## FunkyBeats (Apr 5, 2009)

*HELOC Fee*

So I met with my contact at RBC and to set the HELOC up there is a $460.00 fee. This is to discharge my current mortgage with them and set up the new mortgage that includes the homeline HELOC. Has anyone had any experience getting around this fee?

Thanks,

FB.


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## Eclectic12 (Oct 20, 2010)

FunkyBeats said:


> So I met with my contact at RBC and to set the HELOC up there is a $460.00 fee. This is to discharge my current mortgage with them and set up the new mortgage that includes the homeline HELOC. Has anyone had any experience getting around this fee?
> 
> Thanks,
> 
> FB.


In my case, I was getting the mortgage through a broker who asked if I wanted a HELOC as well. I said yes and there were no fees.

The only way I am aware of that you might be able to get around it is if you move the mortgage + HELOC to another institution (say CIBC or TD) who is willing to pay the fee to get your business.

$460 is a fair chunk of change so I'm not sure which institutions would be willing. I'd call around to check.


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## andrewf (Mar 1, 2010)

Why not wait until your mortgage renewal?


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## FunkyBeats (Apr 5, 2009)

andrewf said:


> Why not wait until your mortgage renewal?


That is one of the options, but I would lose out on two years of time in the market and two years of conversion of bad debt to good debt and two larger tax returns.

I think I need to do some math and determine if I can realistically recoup the one time fee through the leverage it will open up to me.

Thanks,

FB.


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## cannon_fodder (Apr 3, 2009)

andrewf said:


> Why not wait until your mortgage renewal?


That's what we ended up doing. Of course, many banks allow you to renew the mortgage prior to the end date of your existing mortgage (e.g. 3 months in advance).

Due to that, we were able to have all fees waived to setup our readvanceable mortgage. Ironically, a Smith Manoeuver mortgage actually nets the bank MORE fees than a typical mortgage because your debt not only doesn't go down, but you end up transferring more debt to a typically higher interest rate HELOC.

In other words, they should be falling all over themselves to sign you up.


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## Spidey (May 11, 2009)

I don't think the OP has provided near enough information to gauge the risk or appropriateness of leveraging. Unfortunately most people are tempted to leverage when markets are frothy which IMO is the opposite time they should be considering it.

I have leveraged in the past and it has worked out very well. I still carry a HELOC but I, personally, wouldn't be adding to it in current market conditions. In fact I'm using all available dividends to pay it down and I pay the interest separately from employment income. I would, however, likely add to it if we had a significant market correction. Here are my personal rules for leveraging:

- no consumer loans
- RRSPs, TFSA and RESP (if applicable) should be maxed out
- market at bargain levels (this is a judgment call, but perhaps a drop of at least 25% from previous levels and low P/E and P/B ratios).
- amount borrowed should be no more than an expensive car loan per income earner (eg. 2 income earners, perhaps a total of $50,000 - $80,000 depending on income) 
- preferably mortgage paid off, or at least have the capability of continuing payments if either spouse lost their job and the loan had to be paid from a single income.


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## andrewf (Mar 1, 2010)

Good tips, Spidey. I would say, however, that if you are mortgage free, limiting your borrowing to $50k might be overly conservative. After all, if you have a $500k house, and you borrow $50k to invest, you are only leveraged 1/11th.

On the other hand, if you have a bond allocation, it's pretty questionable whether you should be borrowing to invest.


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## Eclectic12 (Oct 20, 2010)

cannon_fodder said:


> That's what we ended up doing. Of course, many banks allow you to renew the mortgage prior to the end date of your existing mortgage (e.g. 3 months in advance).
> 
> Due to that, we were able to have all fees waived to setup our readvanceable mortgage. Ironically, a Smith Manoeuver mortgage actually nets the bank MORE fees than a typical mortgage because your debt not only doesn't go down, but you end up transferring more debt to a typically higher interest rate HELOC.
> 
> In other words, they should be falling all over themselves to sign you up.


The mortgage rate versus the HELOC rate will depend on various factors. Since my mortgage was when interest rates were supposed to go up, it is 5.8% while the HELOC, originally was about 5%, dropped to a low of 2.25% and is currently at 3.00%. So in my case, I'm reducing the interest rate.

When I check a few broker web sites, maybe one or two rates are at or lower than the HELOC.

Note that the HELOC was offered/accepted when the mortgage was setup so there were no fees.


Cheers


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## Eclectic12 (Oct 20, 2010)

Spidey said:


> I don't think the OP has provided near enough information to gauge the risk or appropriateness of leveraging. Unfortunately most people are tempted to leverage when markets are frothy which IMO is the opposite time they should be considering it.
> 
> [ ... ]


+1 as well.

That's where I was lucky to have the HELOC thrown in with the mortgage a year or two before the 2009 crash. 

It is a lot less stressful when most of your purchases have to drop between 100 to 300% before you are in a loss position.


I like more of you other rules except maybe the "max RRSP, RESP and TFSA".


Cheers


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## Jungle (Feb 17, 2010)

I believe Fraiser Smith actually suggested to liquidate your registered accounts, put the balance on your mortgage, re-borrow it back on an equity loan, purchase the same investments again and deduct interest on the loan. 

This could be interesting if one contributed to a RSP at a higher tax rate, then withdrew at a lower tax rate. 

Of course, you would loose that contribution room forever.


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## andrewf (Mar 1, 2010)

I forgot to mention that: largely, RRSP/TFSA status have little to do with the decision to use leveraged investing. It's not as if the decision to do leveraged investing takes away from your cash flows available for RRSP/TFSA contributions.

Edit: I don't know about withdrawing from RRSP. The tax-free compounding is pretty valuable, especially if you are still fairly young. Depending on the mortgage rate, it's hard to argue against using TFSA to pay down mortgage or other non-deductible debt.


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## cannon_fodder (Apr 3, 2009)

Eclectic12 said:


> The mortgage rate versus the HELOC rate will depend on various factors. Since my mortgage was when interest rates were supposed to go up, it is 5.8% while the HELOC, originally was about 5%, dropped to a low of 2.25% and is currently at 3.00%. So in my case, I'm reducing the interest rate.
> 
> When I check a few broker web sites, maybe one or two rates are at or lower than the HELOC.
> 
> ...


That makes sense if you get them at different times or the mortgage is fixed and the HELOC is variable. When we went in to renew our mortgage we changed it from a traditional mortgage to a SM mortgage with variable rates on both the mortgage and HELOC portion. Thus, they were inexorably tied to the BofC prime lending rate and moved in lock step.

We were fortunate that BMO was one of the banks that honoured the Prime rate on the HELOC throughout the financial crisis. I heard many people complaining that their HELOC went from Prime to Prime + 1%.


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## cannon_fodder (Apr 3, 2009)

Jungle said:


> I believe Fraiser Smith actually suggested to liquidate your registered accounts, put the balance on your mortgage, re-borrow it back on an equity loan, purchase the same investments again and deduct interest on the loan.
> 
> This could be interesting if one contributed to a RSP at a higher tax rate, then withdrew at a lower tax rate.
> 
> Of course, you would loose that contribution room forever.


Frasier Smith said to do this with non-registered investments. So definitely don't do this with RRSPs.


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## Eclectic12 (Oct 20, 2010)

cannon_fodder said:


> That makes sense if you get them at different times or the mortgage is fixed and the HELOC is variable. When we went in to renew our mortgage we changed it from a traditional mortgage to a SM mortgage with variable rates on both the mortgage and HELOC portion. Thus, they were inexorably tied to the BofC prime lending rate and moved in lock step.
> 
> We were fortunate that BMO was one of the banks that honoured the Prime rate on the HELOC throughout the financial crisis. I heard many people complaining that their HELOC went from Prime to Prime + 1%.


Yes - the mortgage is fixed and the HELOC is variable. Thought I hadn't heard of the SM at the time so it was a more of a "if they are offering for free, it is another option in the toolbox".

As for HELOC's being changed - I've seen lots of complaints about line of credit's (LoC) being changed but none so far for HELOC's. So I guessed it was a function of the mortgage regulations. I haven't made a study to find out out for sure.

From my perspective - since my mortgage company stuck to the agreed rate, possible changes have been less of a concern as the question now is how to minimize the percentage of the "mortgage portfolio" to liquidate to finish off the mortgage before renewal.


Cheers


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## FunkyBeats (Apr 5, 2009)

*Changing houses*

If you are planning on moving to a more expensive home would you not have to be careful not to borrow the full HELOC amount as you would need some of the equity to meet the down payment requirements for your next purchase (To avoid CMHC fees)?

Thanks,

FB.


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