Over the past year so, MDJ has posted many articles on the topic of using a HELOC to invest in equities aka: The Smith Manoeuvre.

As I’ve been receiving quite a number of emails regarding the Smith Manoeuvre lately, this article compiles all the posts into a single Smith Manoeuvre Resource. Hopefully, you’ll find it useful.

The Basics

The Contrarian

Readvanceable Mortgage Options/Reviews

Smith Manoeuvre Variations

Calculating Smith Manoeuvre Returns

Tax Considerations

Leveraged Investing

FAQ

Feel free to bookmark this page as I will be updating it as new SM articles are written.

49 Comments

  1. joe on February 7, 2017 at 1:42 pm

    “Hi Tony,

    If it’s all invested, all the interest should be tax deductible. I wouldn’t do your strategy, though. Using a margin account for the Smith Manoeuvre is a bad idea.”

    this was written some time ago now by Ed Rempel. I was wondering why a margin loan is a bad idea for the Smith Maneuver. Probably because of the possibility of a margin call?

    I am thinking about borrowing on margin for investing. And I was wondering whether there is any other downside? I will not be borrowing any near what I could borrow on margin and can cover a margin call, if required.
    thanks for any comment you might make
    joe

  2. Ed Rempel on February 8, 2017 at 1:25 am

    Hi Joe,

    if you don’t mind, let me clarify. Borrowing to invest is a risky strategy, but the risk can be much lower if you avoid the common behavioural errors and do it for the long term. The stock market has reliably produced solid gains over 25+ periods of time.

    In other words, if you borrow to invest for 25 years, it can be a solid wealth-building strategy.

    Borrowing on margin changes it to a short-term strategy. A normal short-term fluctuation can cause a margin call. It makes a risky strategy compound into a super-risky strategy.

    There is also a higher interest rate for margin accounts vs. secured credit lines or No Margin Call investment loans.

    It is also a poor use of capital. For margin, you need to have a 100% chance of being able to cover a margin call. That means you need to have capital or equity availabe unused just in case.

    Why not just invest the capital and forget the margin investing?

    I also find margin call investing usualy involves tiny amounts, especially given the level of risk.

    For example, you want to invest $100,000, so you put down $50,000 and use $50,000 of your margin account. Then you need to keep $50,000 available capital or credit in case of a margin call.

    Risk on high risk with moderate amounts invested.

    As a comparison, what if you took your $50,000 cash plus your $50,000 capital or equity to get $100,000 to invest. Then you pledge that for a 3:1 No Margin Call loan of $300,000 and invest $400,000.

    With this 2nd option, you have have a solid, long-term strategy with $400,000 investments, instead of a risky short-term strategy with $100,000 investments.

    My suggestion – leverage should only be done as a solid, long-term strategy. If you want to make it high risk, do it by making the leverage far larger, not by making it a short-term strategy.

    Ed

  3. Jay on April 27, 2017 at 3:14 pm

    Is BMO and RBC still the top choices for a Re-advanceable mortgage? I’m currently with a credit union for banking but would be willing to switch everything to the bank my mortgage is with. I’m currently buying a new home and want to setup the SM. Side note: I’m only putting 30% down, but I would prefer to be all setup forwhen I can start borrowing against my mortgage.

    • Ed Rempel on May 6, 2017 at 5:42 pm

      Hi Jay,

      The best choice depends on several factors. I have a free referral service on my blog, if you want to know the best one for your situation.

      You only need 20% down normally, so your 30% down is fine.

      Ed

      • Jay on May 9, 2017 at 12:37 pm

        Thanks for replying Ed. I have one more question. You have said before you do not recommend collecting dividends and paying down the mortgage(Frugal Trader’s Method) with them due to tax bleed. Is this still the case with FT’s method? I’ve been looking to see where FT addresses the tax bleed issue but could not find anything.



  4. Scott on May 22, 2018 at 3:12 pm

    I’ve been implementing a variant of SM for several years now. When my mortgage was up for renewal I had my deductible HELOC balance rolled into a separate mortgage, and the interest charged on it I treat as tax deductible. I did this in order to get a lower interest rate, and the downside being less flexible repayment options. I also capitalize the interest on this mortgage once per year by withdrawing the annual interest amount from the HELOC. I opt for the longest possible amortization on the deductible mortgage to keep the payments low and mostly interest however a portion of each payment is still to the principle, which really is not required for SM. Now my question: At the time of capitalizing my interest, can I also capitalize the principle paid throughout the year by charging it back to the HELOC along with the interest charges? Effectively this would make the mortgage an interest-only mortgage. Of course I could still only deduct the portion that was paid for interest.

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