2

What are the pitfalls of the Smith maneuver?

It seems too good to be true and almost makes a case against fully paying down your mortgage :)

What is the catch?

6

The catch is that you're doing a form of leveraged investing. In other words, you're gambling on the stock market using money that you've borrowed. While it's not as dangerous as say, getting money from a loan shark to play blackjack in Vegas, there is always the chance that markets can collapse and your investment's value will drop rapidly. The amount of risk really depends on what specific investments you choose and how diversified they are - if you buy only Canadian stocks then you're at risk of losing a lot if something happened to our economy. But if your Canadian equities only amount to 3.6% of your total (which is Canada's share of the world market), and you're holding stocks in many different countries then the diversification will reduce your overall risk.

The reason I mention that is because many people using the Smith Maneuver are only buying Canadian high-yield dividend stocks, so that they can use the dividends to accelerate the Smith Maneuver process (use the dividends to pay down the mortgage, then borrow more and invest it). They prefer Canadian equities because of preferential tax treatment of the dividend income (in non-registered accounts). But if something happened to those Canadian companies, they stand to lose much of the investment value and suddenly they have the extra debt (the amount borrowed from a HELOC, or from a re-advanceable mortgage) without enough value in the investments to offset it. This could mean that they will not be able to pay off the mortgage by the time they retire!

2
  • Ok, but what if i use smith maneuver on a property that i own and rent out as an investment? Is there any risk then?
    – Victor123
    Mar 17 '15 at 21:18
  • 2
    @Victor123 The Smith Maneuver serves to gradually convert non-deductible loan interest into deductible loan interest, over time. If you already took out a mortgage in order to buy your investment property, then that interest should already be deductible. If you don't have such a mortgage (i.e. the property is owned outright) but were to take one out to use the proceeds for investing in income-generating investments, the interest could still be considered deductible. You don't need the S.M. to accomplish that. S.M. presumes existing non-deductible interest. Mar 17 '15 at 21:26

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.