Explaining the Smith Manoeuvre

As a seasoned financial planner, I've seen numerous strategies for wealth accumulation, but few are as intriguing and potentially lucrative as the Smith Manoeuvre. This financial strategy, exclusive to Canadian homeowners, turns non-deductible mortgage interest into tax-deductible investment loans. In this blog post, we'll explore how to implement the Smith Manoeuvre, its benefits, and important considerations.
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The Smith Manoeuvre is an efficient strategy to invest for your retirement without using your cash flow. The long term benefits can be significant. Starting with home equity of only 20%, the expected benefit from the basic “Plain Jane” version of the Smith Manoeuvre over 25 years is roughly equal to the value of your home today. Starting with a lump sum or doing a more aggressive version can yield higher benefits.
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From experience, many people have trouble saving enough to achieve financial independence with the lifestyle they want by just saving what they can from their cash flow. Adding the Smith Manoeuvre often bridges the difference, so you can have the future you want without major sacrifice now.
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The Smith Manoeuvre involves re-borrowing the principal amount paid down on your mortgage and then investing it. The key here is that the interest on investment loans is tax-deductible in Canada.
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Implementation Steps

Get a Re-Advanceable Mortgage: This mortgage type combines a declining mortgage and a rising line of credit (LOC). As you pay down the mortgage, the credit limit on the LOC increases.
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Invest Wisely: Funds from the LOC should be invested in tax-efficient investments. The most effective are equity investments such as stocks or equity mutual funds.

Convert Mortgage Interest into Tax Deductions: The interest on the borrowed money from your LOC, now used for investment, becomes tax-deductible.
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Rinse and Repeat: Continuously pay down the mortgage with your regular payments, re-borrow the principal, and reinvest, maximizing the tax-deductible interest.
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The benefits to implementing this manoeuvre as part of your financial strategy include tax efficiency, diversification, and high returns on long-term investments which almost always surpass the cost of the mortgage interest over the long-term. 

Keep in mind, as always, that investments can fluctuate in value, and make sure that the Manoeuvre passes your risk tolerance tests. The Smith Manoeuvre should not be implemented for short-term gains - this is a long-term strategy move, usually implemented as part of a retirement plan. We recommend committing to a minimum of 20 years, so there is a high chance of success for you.
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The Smith Manoeuvre can be a powerful tool for wealth building, but it's not without its risks. It requires discipline, a long-term perspective, and a solid understanding of investment and tax principles. It requires tolerance of many ups and downs in the market, and the patience to not panic sell. 

The idea of ‘borrowing to invest’ is problematic for some people, but the benefits can be substantial. However, it's crucial for the Smith Manoeuvre to be part of your comprehensive financial plan that includes retirement planning, emergency funds, and other investments & life goals.