Ed Rempel, a certified financial planner (CFP) and accountant, is a regular comment contributor to the “Smith Manoeuvre” articles on this blog. He has come up with a twist to the Smith Manoeuvre strategy that maximizes the tax and investment return on your leveraged portfolio.

He calls this strategy “The Rempel Maximum“. If this is the first time you are hearing about the Smith Manoeuvre, it is basically a financial strategy that converts your non-deductible mortgage into a tax deductible investment loan. You can read more about it my article “The Smith Manoeuvre: A Wealth Strategy“.

How exactly does “The Rempel Maximum” work?

  • The “Rempel Maximum (RM)” is a variation of the Smith Manoeuvre (SM) that maximizes both your tax and potential portfolio return while using $0 of your own cash flow. When you use the SM, you will get a small increase in your HELOC balance as you pay down your mortgage which is then used to invest. With the RM, instead of using the small increase to invest, you use the increase to fund your investment loan/HELOC.  This may result in obtaining an additional investment loan depending on the size of your principle payment.  More on this below.
  • This way, you get the tax deduction from the HELOC along with the tax deduction from the investment loan. Canadian tax rules state that you can deduct the interest from a loan that supports an investment loan.
  • On top of that, you’ll have a large balance to work with initially to take advantage of compounding returns and time.

How is it implemented?

  • You’re probably wondering how large of an investment loan can you obtain? According to Ed Rempel:

For example, if your mortgage payment pays $500/month of principal ($6,000/year), you divide the $6,000 by the interest rate (say 6%), which gives you $100,000. You increase the credit line limit on your readvanceable mortgage to 80% of your home value, which is often done for free at the major banks. Then you borrow and invest up to the credit line limit. If there is less than $100,000 available, then you finance the rest from an investment loan.

  • Based on the above example, the banks will give you [principle payment/interest] as your maximum investment loan including your HELOC. Depending on how much equity you have in your home, you could end up with a fairly large investment loan.

What are the risks involved?

  • This strategy uses the maximum leverage available to you based on your principle payments or how much your credit line is readvanced with every payment. Needless to say, the investor must be aggressive, comfortable with risk, and experienced with investing.
  • As you probably already know, leverage amplifies your returns, good or bad.

What are the potential returns? How does it compare to the regular Smith Manoeuvre?

  • Using the maximum available loan amount potentially means higher returns or bigger losses. If you are investing for the long term 25+ years, then your overall losses will most likely be minimized.
  • Below is an example from Ed Rempel:

They have a home worth $400,000 and a mortgage of $200,000 at 5% and are paying $1,169/month (25-year amortization). They can reborrow at prime of 6%, the investments average 10% long term and they are in a 40% tax bracket. Each mortgage payment pays down $336 of principal x 12 months / 6% = $67,200. Since they have more than the $67,200 in available credit in their SM credit line, they can borrow this $67,200 to invest. The interest payment is $336/month which can be paid entirely from the SM credit line each month. Additional benefit of the Rempel Maximum over the SM: After 25 years: $410,000* Total benefit of the Rempel Maximum: After 25 years: $718,000

Who should use this?

There are 3 criteria that a person should consider before implementing this strategy:

  1. The investor must be experienced and comfortable with risk.
  2. The RM works best if your initial HELOC balance is small. ie. Someone who is just starting the Smith Manoeuvre with a little over 25% in equity.
  3. The investor must be in this for the long term, 20+ years.

Summary:

The Rempel Maximum is a way to maximize the potential returns from implementing the Smith Manoeuvre through the additional tax deduction and increased leverage. This can be an extremely powerful and lucrative strategy if used properly over the long term.

If you are considering using this strategy twist to the Smith Manoeuvre, make sure that you are comfortable with the maximum leverage applied to your portfolio. Feel free to ask your questions in the comments section, Ed Rempel has agreed to help explain the details if requested.

110 Comments

  1. Ed Rempel on July 1, 2014 at 11:47 pm

    Hi Lance,

    Good to hear. Claiming a loss after a 40% drop may lead you to miss the big opportunity. A 40% drop in the stock market is almost definitely a historic buying opportunity. They are rare. There were only four 40% drops in the last 100 years (top to bottom), so your main focus in a buying opportunity like this with an asset you intend to hold until retirement should be on how much more you can buy before it bounces back.

    Claiming a capital loss is obviously a plus, but can be tricky. FT is right that you have to be aware of the superficial loss rules. If claiming the capital loss means you are out of your investment for 30 days at the bottom or the market, you should probably not do it. You may gain a tax deferral on claiming the loss, but could easily miss out on a big part of the recovery. The stock market has historically usually bounced back sharply after the bottom of large drops.

    We were able to do this at the end of 2008 with mutual funds, because we can switch to an identical mutual fund in a different form for 30 days. This allowed us to claim the capital loss without ever being out of our investment. In that case, it is a clear plus, but in most other cases, it can be very tricky and can take your eye off the huge buying opportunity.

    Ed

  2. Ron on August 22, 2014 at 12:30 am

    Hi Ed,

    I’m planning to use SM (or RM) with dividend stocks because I like the flexibility of extra income if I need for an unforeseen expense. Otherwise, I would withdraw the dividend and contribute to my RRSP (I’m on a high tax bracket). I’m in Ontario, so my understanding is that the tax refund by contributing the SM / RM dividend to my RRSP is higher than the dividend tax, avoiding the “tax bleed” and leaving me with some extra money (that could be used to pay the mortgage and then reborrowed and reinvested) . Plus I get the tax refund from the tax deduction by using SM or RM. Wouldn’t this strategy produce a higher tax refund than just tax deferred investments (when contributing dividends to RRSP)?

    Thanks.

  3. David on February 2, 2015 at 11:39 pm

    Hi Ed,

    Very interesting points and thanks for all the valuable knowledge you’ve shared. It’s refreshing to see, let alone in the comment section of an article :)

    DK

  4. David Keays on April 20, 2015 at 1:37 am

    Hi Ed,
    Quick question, I’m seriously considering this strategy in my next mortgage term and am curious which lender’s you find the easiest to manage with this strategy? You seem critical of Scotia’s STEP and Manulife ONE on the automation side of things, which are the good one’s in your experience? I think that only leaves BMO’s doesn’t it?

  5. Ed Rempel on July 26, 2015 at 10:16 pm

    Hi David,

    I just noticed your email here. Scotia has improved, but still has issues. Manulife One is the only one that will pay me for a referral, but is super-complicated. TD only readvances 65%. CIBC was always the only bank with no readvanceable mortgage. They have a new one now, but we have no experience with it yet. That leaves 3 banks with decent offerings in terms of mechanics of their mortgage.

    We regularly compare rates, fees, mechanics & service. Today, we are getting the best rate from BMO with a rate of 2.19% (sometimes lower) and recommending 2-year fixed.

    Ed

  6. Victor Pidkowich on January 23, 2016 at 2:54 pm

    Hi Ed,

    Iv been absorbing your materials around the SM, as well before finding this blog have spent the last 10 months calling people all across Canada about this, especially lenders.

    This RM strategy is refreshing. Im aiming to do the RM or SM on 2 investment properties which I have possession on in March 2016. I understand the corporation vs personal thing and dont feel comfortable expressing the info here publicly but I will have access to HELOC products.

    In talking to lenders across the country I cant believe the difference in responses even talking with 2 different Scotia branches can have.

    I noticed your offer for Referral service some posts ago :

    “If you want a referral to a good contact at the best SM mortgage for you, we are still offering a free Ed’s Mortgage Referral Service. Just send us the answers to the 10 questions at: https://milliondollarjourney.com/ed-rempels-picks-for-the-best-smith-manoeuvre-mortgage-ii.htm , and we’ll figure out which SM mortgage is best for you today and refer you to our contact with that bank.
    Ed”

    I was hoping you maybe still do it or if your interested in hoping on the phone with me and Id be a happy to pay for your time. Its 2016 and this landscape has shifted so dang much and id be humbled to absorb some of your wisdom. Maybe we can even use me as an example for a blog post :) Id be open to that for sure to share the value to the community and bring this up to speed around the SM and your superior RM method.

    Talk soon.

    PS I also left a message on your firm’s voicemail.

  7. Tom on February 7, 2016 at 8:30 pm

    Hi Ed, Appreciate your contribution to this discussion. Do you have any suggestion who is offering the better personal loan rates for investing?

  8. Ed Rempel on September 5, 2016 at 2:20 pm

    Hi Victor,

    Thanks for the kind words.

    The Rempel Maximum can be a great strategy to build wealth long term. It is higher risk & higher potential reward than the Smith Manoeuvre, because it involves more leverage.

    The Rempel Maximum is closer to an apples-to-apples comparison with a rental property, since it involves borrowing to invest a large lump sum. The Smith Manoeuvre is investing a small amount regularly.

    I still offer Ed’s Mortgage Referral Service. It is a free service and focuses on the best mortgage & rates for the Smith Manoeuvre. It is on my blog under “Contact”.

    Ed

  9. Ed Rempel on September 5, 2016 at 2:33 pm

    Hi Tom,

    I assume you are referring to personal investment loans, as opposed to a HELOC?

    There are several banks offering them. The interest rates are similar (roughly prime +1%). They use the investments as collateral, instead of your home. Almost all are “No Margin Call” loans, which is a critical feature.

    Doing the Smith Manoeuvre with margin call loans or margin accounts is far more risky. If even once in the next 20 years you get a margin call and are forced to sell at a market low after a crash, you can much end up losing money on the strategy.

    The various banks offering investment loans tend to have similar interest rates, but differ a lot in other feature. The 2 main ones are the amount they will lend you (which range from 30% to 100% of your net worth) and the type of payment (P+I or interest only).

    At this point, the banks only take mutual funds or segregated funds (mutual funds from insurance companies) as collateral for an investment loan, not individual stocks or ETFs. Most will only work with financial advisors.

    An investment loan is usually used for advanced Smith Manoeuvre strategies, such as the Rempel Maximum. They are higher risk and not suitable for everybody.

    If you want help with this, tell me on Ed’s Mortgage Referral Service (on my blog under “Contact”) what you are trying to do, Tom.

    Ed

  10. SST on September 5, 2016 at 5:12 pm

    Hey, Ed — thanks for mentioning your new blog, on this blog, so much. Just wondering if, on your new blog, you make mention at all about the penalties and fines* imposed against you from the MFDA due to your misconduct of behaviour?

    People who are thinking of dealing with you probably should know who they are dealing with (e.g. why you “all of sudden” shut down your mutual fund biz and opened up a fee-only blog). Yeah, that’d be cool if the investor had full transparency of their “advisor”.

    Thanks, dude!

    *(have you paid your $125,000 fine yet?)

  11. Ed Rempel on September 5, 2016 at 6:33 pm

    Hey SST,

    I see you have read my new blog.

    Yes, I tell every client the story. Can’t discuss it on the internet. I paid my dues. All I can say in my defence is that my heart was in the right place. I was trying to help the guy.

    It has turned into a marvellous opportunity for me. It’s surprising how life turns out sometimes. It was always a pain for me (and a delay) having to get every blog post approved. Starting my own blog was always overwhelming.

    Now I find blogging to be very rewarding. I sincerely try to make a difference in someone’s life by sharing valuable information and answering questions. And there are so many kind people out there that make the effort to express appreciation when they find an article or an answer to their question helpful.

    Ed

Leave a Comment





This site uses Akismet to reduce spam. Learn how your comment data is processed.