Smith Manoeuvre Maintenance

People often ask about the steps required to perform the Smith Manoeuvre.  We've talked about the initial setup procedures before (see above link), but there's also ongoing maintenance to consider.

The example below shows the monthly steps required if you use FirstLine's Matrix mortgage.  The Matrix is one of the more popular Smith Manoeuvre mortgages so it's a fitting example.  These steps will differ slightly with other mortgages.

We've also included a hypothetical timeline to show the typical dates that transfers take place.

1. February 1:  FirstLine automatically debits your bank account on the 1st of each month for your mortgage payment.  (assuming you make monthly payments)
2. February 3:  FirstLine increases your line of credit (LOC) by the amount of principle you paid in your mortgage payment--typically by the 3rd of each month.
3. February 3:  You log in to FirstLine.com and electronically move these readvanced funds from your LOC to your bank account.
4. February 6:  The funds typically arrive in your bank account within 72 hours.
5. February 6:  You invest these funds online as you normally would.  (Some clients save another step by setting up their investment account to automatically debit their bank account each month. The debited funds are then automatically invested according to a pre-designed investment plan.)
6. February 8:  FirstLine automatically debits your bank account for required interest-only payment on your LOC.  This happens 21 days after your statement is printed.  (Statements are printed on the 18th of every month.)

That's basically how it's done.  After you do it initially, it takes about 5-10 minutes of your time each month to do the transfers. 

In addition, if you're self-directing your investments, you'll need to add whatever time is required to monitor those investments and find the best places to put your money to work. 

As always, we'll remind you that the Smith Manoeuvre is not suitable for everyone.  Moreover, we recommend using a qualified financial/tax advisor for the investing and tax aspects.  Consulting with a financial planner often entails no out-of-pocket expenses, saves you a lot of time, and may well provide better results.

Comments

[Brian Poncelet, CFP]

Great Step by Step Points!

I would also add always use your tax refunds from the SM to pay down your mortgage. If you are in a 40% tax bracket you only need 4% to make money on your investments.
Also, use corporate capital class funds, so you can switch without capital gains!

On a 25 year mortgage you will have "converted your interest" in about 21.5 years vs. 25 years saving thousands!! Some people looking at this should have a long time frame to work with and be comfortable with interest rates going up and markets going down.

Good work!

regards,

Brian Poncelet, CFP

[Canadian Mortgage]

Helpful info...Thanks Brian....

If you're time permits would you mind explaining for our readers why those in a 40% tax bracket only need 4% to make money on their investments?

Thanks!
Rob

[Brian Poncelet, CFP]

Hi Rob,

When you borrow at 6% (prime) you can deduct 40% (if this is your tax bracket) 6 - 2.4 = 3.6%. So 3.6% is your cost of borrowing.

When you take the tax refund, lets say its a $1,000, you really need to earn $1,400 before tax...so this extra payment on your mortgage adds up over time. Thats why using your tax refunds makes this so excellent.

My thoughts are not using the tax refunds (spending it) makes the SM less powerful and not really worth it.

regards,

Brian

[jeff paul internet millions]

I must say you'll need to add whatever time is required to monitor those investments and find the best places to put your money to work.