Is Your Home Really a Good Investment?

Most Canadians think so. My experience tells a different story.

For decades, Canadians have been told that their home is their best investment. After preparing thousands of financial plans, I’ve found that this belief often leads people to rely too heavily on home equity for their retirement.

The long-term data is clear:

• Toronto real estate has grown about 6.3% per year for the last 50 years.
• The Toronto stock market has grown nearly seven times more.
• The U.S. market has grown 17 times more.
• Most retirees need $2–5 million invested to support the lifestyle they want. This is much more than the average home is worth.

A home with a large mortgage can produce strong returns because of leverage.

A paid-off home, however, usually provides only moderate growth, and no retirement cash flow unless the equity is accessed.

In this article, I outline why homeowners often appear wealthier than renters, the role of forced savings and leverage, and how strategies like longer amortizations or the Smith Manoeuvre can help keep your home working for you.

If you want a clearer understanding of where your home actually fits in your long-term financial plan, this is a good place to start.

CLICK THE LINK BELOW TO READ THE ARTICLE:

Money Pip article: How to Make Your Home a Good Investment: Financial Wisdom from Toronto-based Financial Planner Ed Rempel

For decades, Canadians have heard the familiar saying: “Your home is your best investment.” In a country where homeownership is often treated as the ultimate financial milestone, this belief feels almost like a cultural truth. But according to Toronto-based financial advisor Ed Rempel, relying too heavily on home equity can be a risky approach to building wealth and preparing for retirement.

Rempel, who has written extensively on personal finance and retirement planning, argues that while real estate has its place, it is far from the best-performing asset over the long run. “For many people, their home may be their only major investment. For them, that old conventional wisdom might be true. But that is unfortunate. It is easy to find better investments with dramatically higher long-term returns.”

The data bears this out. Over the last fifty years, the average home in Toronto has grown in value by about 6.3% annually. That is a respectable return compared to GICs, but far below the performance of equities. Rempel points out that the Toronto stock market has delivered nearly seven times the growth of Toronto real estate the last 50 years. Even more, the U.S. stock market has delivered nearly 17 times the growth and global markets nearly 13 times the growth of Toronto real estate the last 50 years. This gap matters most when people are planning for retirement.

Many Canadians assume their home will serve as their retirement nest egg, either by downsizing or selling altogether. Yet the numbers suggest this is rarely sufficient. “We have written financial plans for thousands of Canadians. Everyone is unique. The total investments most need to retire with the lifestyle they want are between $2 million to $5 million,” Rempel explains. Considering that the average Toronto home is just over $1 million, the gap becomes clear. Even if homeowners sell and invest their proceeds, the total is often not enough to sustain the kind of lifestyle most retirees hope for. 

Still, statistics consistently show that homeowners tend to be wealthier than renters. Rempel explains this apparent contradiction through two behavioural forces that tilt the scales in homeowners’ favour. The first is forced savings. Mortgage payments are not optional, and over time, they steadily build equity in the property. Renters often enjoy significantly lower monthly costs, but unless they have the discipline to invest the difference, they are less likely to accumulate wealth in the same way. 

The second factor is leverage. With a 20% down payment, homeowners are able to control an asset worth five times their initial investment. This magnifies returns in the early years of ownership. If a $1 million home rises in value by just six percent, the $60,000 gain represents a 30% return on the $200,000 invested. That level of return is remarkable, but it only lasts while there is still a significant mortgage in place. As the mortgage is gradually paid down, the effect of leverage fades. Once a home is fully paid off, the return is limited to the modest annual appreciation of the property itself. 

This creates a paradox that surprises many people. A heavily mortgaged home can be an excellent investment because of the leverage effect, but as the mortgage disappears, the investment appeal of the property declines. Homeowners then find themselves sitting on what Rempel calls “dead equity”. Unlike a diversified portfolio, home equity does not usually generate cash flow, nor does it grow as quickly as equities. This becomes especially problematic in retirement, when steady income and reliable growth are both essential. Your home equity does not support your financial freedom and retirement goal nearly as much as it could if you invested it more effectively,” Rempel says.

Should your home even be considered for providing for your retirement? 93% of Canadian homeowners aged 65 and older intend to stay in their current home throughout retirement, according to a HomeEquity Bank survey of over 1,000 Canadians conducted with Ipsos. This strong preference is driven by emotional attachments, proximity to family and community, and the desire for stability. Unless you access your home equity in some way, your home provides no cash flow at all for your retirement.

That does not mean a home has no place in a financial plan. The secret is to treat it realistically and to understand how to keep it working for you. One option is to pay down the mortgage slowly, using a longer amortization period to keep payments manageable and investing the difference in higher-growth assets. Another is to use more advanced strategies such as the Smith Manoeuvre, which allows homeowners to borrow the principal portion of each mortgage payment and invest it, gradually turning the mortgage into a tax-deductible investment loan while maintaining leverage on the property. 

Both approaches require discipline. Lowering monthly mortgage payments only helps if the savings are invested consistently. Otherwise, the benefit of leverage is lost without any compensating growth from other assets. For those serious about financial independence, the lesson is clear: your home can be part of the plan, but it should not be the plan itself.

Home ownership offers undeniable emotional rewards. Stability, pride of ownership, and the comfort of a familiar place to live are all valuable. But when judged strictly on financial performance, a home is not the powerhouse investment many Canadians believe it to be. As Rempel puts it, “A home with a large mortgage is usually a great investment. A paid-off home is usually only a moderate return.”

For anyone hoping to retire comfortably, the path lies in building a diversified portfolio that delivers growth and freedom over the long run. 

Ed

The post MONEY PIP article – How to Make Your Home a Good Investment: Financial Wisdom from Toronto-based Financial Planner Ed Rempel appeared first on Ed Rempel.

Wait. Don’t people say, “Your home is your best investment?

For many people, their home may be their only major investment. For them, that old conventional wisdom might be true. But that is unfortunate.

It is easy to find better investments with dramatically higher long-term returns.

Despite the lower returns, homeowners on average are wealthier for 2 non-investment reasons.

In my latest video, podcast episode, and blog post you’ll learn:

• How do homes compare to other growth investments for rate of return?
• Why is it unfortunate if your home is your largest investment?
• What are the 2 non-investment reasons homeowners tend to be wealthier?
• Why does your home start being a great investment but then stop?
• Can your home be your retirement plan?
• Is home equity the key to wealth or is it “dead equity”?
• How can you make your home a good investment?
• What are the 2 best strategies to make your home a great investment?

How do homes compare to other growth investments for rate of return?

For many people, their home may be their only major investment. For them, that old conventional wisdom might be true. But that is unfortunate.

The average home in Toronto has grown in value by 6.3%/year the last 50 years. This is more than most other cities in Canada.

The central growth investment for long-term investing and retirement investing is the stock market, where returns have been dramatically higher. In fact, Toronto homes have grown in value only slightly more than GICs.

The average home in Toronto on January 1, 1975 was worth $52,806. Investing that amount until the end of 2024 in different investments, here is how much you would have:

We value our homes for many emotional and non-investment reasons. A home provides stability, personal satisfaction, and pride of ownership. However, as a pure growth investment, our homes are not high growth.

Remember this stat. The Toronto stock market has had nearly 7 times the growth of Toronto real estate. Global and US stock market returns are much higher.

Why is it unfortunate if your home is your largest investment?

If your home is your largest investment, you probably can’t retire comfortably.

Retirement planning has good and bad news. The bad news is that you probably need much more than you think to retire comfortably. The good news is that it can be much easier to get there than you think.

We have written Financial Plans for thousands of Canadians. Everyone is unique. The total investments most need to retire with the lifestyle they want is between $2 million to 5 million. Some with very frugal retirements are less. Some with very comfortable retirements are far more.

You can use the “4% Rule” as a general estimate. A portfolio of $2 million sounds like a lot, but it supports a retirement of $80,000/year before tax. Think of a couple with each earning $40,000/year. That’s decent, but not comfortable. I know – it’s odd thinking that $2 million is not a lot!

If you are planning to retire in 20 or 30 years, the cost of living doubles about every 25 years. To retire on $80,000/year in 25 years, you will need twice as much, or about $4 million at that time.

Other than some in the FIRE community, financial independence means you become a multi-millionaire.

A multi-millionaire is not rich today!

In short, the average home in Toronto is a bit over $1 million, while most people need $2-5 million in investments to retire comfortably with the lifestyle they want.

What are the 2 non-investment reasons homeowners tend to be wealthier?

Despite the lower returns than other investments, homeowners tend to be wealthier. There are 2 main non-investment reasons for this:

1.   Forced savings: Homeowners are forced to make their mortgage payments, which means they slowly pay down their mortgage. They are forced to grow their equity. Tenants typically have significantly lower monthly payments, but they are not forced to save.

2.   Leverage: Homeowners typically start with a down payment of 20% and borrow the other 80%. This means that for a $1 million home, they invested $200,000 but have an asset worth $1 million. They are leveraging 4:1! Their home is worth 5 times the money they invested so their returns start 5 times higher.

Leverage with a 20% down payment means that if your $1 million home grows in value by a moderate 6% or $60,000, you made a return of 30% on the $200,000 you invested.

A 30%/year return is awesome!

Why does your home start being a great investment but then stop?

Here is the ironic (and funny part). Most homeowners spend their working lives focused on paying off their mortgage. They start with a 20% down payment and are making a return of about 30%/year. As they pay down their mortgage, their rate of return on the money they have invested goes down dramatically. Once they pay off their mortgage, their home value is growing only 6%/year.

Mortgage Size             Your Rate of Return

80% of home value                  30%

60% of home value                  15%

50% of home value                  12%

25% of home value                    8%

Mortgage paid off                      6%

In short, your home starts as a great investment when you have a large mortgage. Then the return drops dramatically as you pay down your mortgage. Once it is paid off, your return is just moderate.

Can your home be your retirement plan?

I often hear people say that when they retire, they will downsize their home and use the savings for their retirement.

There are 2 problems with this thinking.

First, if you downsize in Toronto from a 2,500 sq. ft. 4-bedroom home to a 1,250 sq. ft. bungalow or a condo (half the size), the prices may hardly be any lower. You likely won’t clear very much. Remember that most people we see need $2-5 million to retire with the lifestyle they want.

Second, the people that talk about downsizing are usually young. When you reach retirement, will you still want to downsize? The vast majority of people we meet want to stay in their home when they retire. They are comfortable there. They have so much history. It is full of all their stuff. What do they do with all their stuff if they downsize? And downsizing usually would not get them much money.

There is logic in selling your home to buy or rent, especially a condo. Freedom. If you want to travel a lot, having a house is a problem. Who will maintain it, mow the lawn & shovel the snow? With a condo, you just lock the door and then travel as long as you want.

The investment logic of selling is that if your mortgage is paid off, your home is not making a great return – plus it is giving you no monthly cash flow. If you have significant home equity, how can you use that to support your retirement cash flow?

The easiest way is to sell your home and rent. You clear $1 million or more, invest it for more growth and then withdraw a bit each month for cash flow. Selling a bit of your investments each month is called “self-made dividends”.

This can help your retirement, but your home is likely not your retirement. Even if you sell it, rent, and invest all the proceeds, it is likely not enough. The amount you invest is probably less than $2-5 million most people want to retire with the lifestyle they want.

Is home equity the key to wealth or is it “dead equity”?

I hear both sides. For many people, the equity in their home is the bulk of their net worth. (Unfortunately.) But many people call it “dead equity”.

What do they mean by “dead equity”? It can mean 2 things:

1.   That part of their net worth is not getting stock market returns.

2.   When they retire, your home equity generally does not give you any monthly cash flow.

The term “dead equity” is certainly exaggerated. It’s not dead. It is still making a modest return, even if you have no mortgage.

However, the main point is generally true. Your home equity:

1.   Does not support your financial freedom and retirement goal nearly as much as it could if you invested it more effectively.

2.   Does not normally give you a regular monthly cash flow once you retire.

How can you make your home a good investment?

To keep your home as a good investment, you should keep a large mortgage on it as long as you can. There are other considerations such as payments, but remember how your rate of return drops dramatically as you pay down your mortgage?

There are 2 main ways to do this:

1.   Pay off your mortgage as slowly as possible. Start with a 30-year amortization. If you refinance, try to revert back to a 30-year amortization. Keep your payment as low as possible – and then invest the difference.

With a minimum payment, your mortgage is likely to remain above 60% of your home value for many years. This means you can keep getting a return of 15% of more on the amount you have invested.

Most people that don’t have a Financial Plan save far too little to become financially independent with the lifestyle they want. It is important to stay disciplined and invest all the savings from your lower payment.

Remember, it is the discipline of a forced mortgage payment that helps homeowners be wealthier. A lower mortgage payment only helps you if you invest all the savings.

 2.   Smith Manoeuvre: This is an elegant strategy to keep reborrowing the principal portion of your mortgage payment from a linked credit line to invest. It converts your mortgage over time into a tax-deductible credit line. It can allow you to keep your total amount borrowed at 80% of the value of your home (or whatever level you are comfortable with).

Keeping your total amount borrowed near 80% of your home value means you can keep getting the 30%/year return on the amount you have invested in your home.

In short, a home with a large mortgage is usually a great investment. A paid-off home is usually only a moderate return.

Ed

The post How to Make Your Home a Good Investment appeared first on Ed Rempel.

How can your life really be different if you focus on maximum wealth-building principles?

It’s not about the money. It’s about your life.

This story is an extreme version of the life of an ordinary person managing his money exceptionally.

The concepts are in my last post, “Rempel Maximum – 5 Steps to Becoming a Multi-Millionaire”.

We often hear that building wealth is just about numbers. But here’s the truth: the numbers are just the tools. What really matters is what those numbers do for your life.

In this article, you’ll see the stark contrast between two ordinary guys—Joe and Rich—who made radically different financial choices. 

One followed conventional advice. The other followed a plan most Canadians don’t even know exists.

In my latest video, podcast episode, and blog post you’ll learn:

• Why conservative investing may quietly sabotage your retirement, and what you can do instead.
• How aggressive (but smart) leverage can massively increase your net worth.
• The truth about long-term stock returns compared to balanced portfolios.
• How the Smith Manoeuvre can create wealth without using your cash flow.
• What “last decade risk” is, and how to avoid it derailing your retirement.
• The power of tax-efficient investing and how to compound your tax refunds.
• How building wealth gives you more than luxury — it gives you freedom, confidence, and impact.
• Why hardly anyone should actually follow these principles to the maximum.
• What living an “exceptional life” actually looks like when you manage your money exceptionally.

The Story of Joe & Rich

Joe and Rich were childhood buddies, graduated from university at 22, worked together at the same salary and both saved $10,000 per year until they retired at 65. They both saved 20% down to buy a $400,000 home.

But they were not the same. Joe is a conventional guy. Rich read all about the Rempel Maximum wealth-building process and committed to doing it to the maximum. He wanted to try living an exceptional life.

Joe valued safety and just wanted everything low risk. Rich valued freedom – the freedom to live the exceptional life he wants.

Joe used conventional methods. He invested in a conservative, balanced portfolio making a 5% return, bought his home at 29, and retired at 65 with $963,000 in investments. He retired reasonably comfortably on $55,000 per year with a middle-class lifestyle. Joe loved travelling, but was satisfied taking a couple trips every year.

The Road to Freedom

Rich wanted an exceptional life. He wanted financial freedom, but also self-confidence from having a huge net worth. He decided to build the largest investment portfolio he could.

He started by investing more aggressively with 100% in equities, making an 8% return over time. He saw the evidence that stocks provided more consistent long term growth than bonds or cash.

He was determined to avoid “last decade risk”. Traditional slow & steady wealth-building means that the vast majority of the investments most people own during their working years are in the last few years before retirement. With traditional methods, one bad decade just before you retire can ruin your retirement.

Rich wanted a large portfolio while he is young, not just the last few years before retiring. Every year, he borrowed to invest as much as he could qualify for. Initially, his only option was a 3:1 loan on the amount he had invested. He invested his $10,000 savings plus $30,000 from a loan every year. The loan was a “no margin call” loan, so he would not be forced to sell if his investments declined.

When he bought his home, he did the Smith Manoeuvre strategy to invest more without using his cash flow. As his mortgage was paid down, he borrowed the same amount to invest, which slowly converted his mortgage into a tax-deductible credit line.

The Smith Manoeuvre helped Rich with his broader strategy of maximum wealth building. He found he could use the investments from the Smith Manoeuvre to qualify for a larger investment loan. Every year or two, he increased his investment loan to the maximum he qualified for. His higher net worth gave him more loan options.

Every year, he saved $10,000, borrowed $14,500 from his secured credit line and increased his investment loan by $74,000. His investment loan was getting large, but his focus was on his net worth, which was rising faster.

Rich invested very tax-efficiently, trying to defer all the tax on the growth of his investments. He invested for long-term growth – not income. Meanwhile, he claimed large interest deductions every year on his investment loans and the investment credit line on his home, reinvesting all his tax refunds.

Rich retired at 65 with a portfolio of $12,940,000. He owed $2,540,000 on his investment loans, which gave him a net worth of $10,400,000, not including his home. His large portfolio gave him a retirement income of $535,000 per year.

He felt very confident with his high net worth. He owed a lot of money, but was comfortable with it. He did not want to sell any investments to pay off the loan, so he kept it right through his retirement. He paid $101,000 per year of tax-deductible interest every year, but could easily make those payments from his high income.  He was glad to still have a large tax deduction after he retired, which most seniors don’t. He still had $435,000 to spend every year.

He considered slowly paying off his investment loan during his retirement, so that he would die debt-free. In the end, he decided to let his estate pay off the loan. He did not want to leave a large inheritance, preferring to enjoy his retirement and do something meaningful with his life.

Throughout his life, he always had faith that his investments would grow long term, patience to wait, and discipline to stick with his plan.

The Life of Freedom

Rich lived exceptionally well, travelling extensively, taking long trips to several new places every year. He always invited friends or family to join him on his vacations. He was a long-suffering Toronto sports fan, with seasons tickets to the Leafs, Raptors, Jays and Argos, as well as the theatre.

He bought a nice cottage on a lake, mostly for his extended family to hang out together. He sold some investments and paid cash, but then immediately borrowed 75% back to invest, to minimize the effect on his portfolio.

Rich knew many people that had suffered from cancer, so he made very large donations every year for cancer and several other charities that were meaningful for him. He felt proud to have several charities mention his name on commemorative plaques.

From Bill Gates, he got the idea to setup “Rich’s Charitable Foundation”, which would outlive him, continuing to support the charities important to him.

Rich’s huge portfolio gave him such a great feeling of self-confidence and security. His life was full of great options and he loved the freedom.

More valuable to him, though, was that he felt he was an inspiration to his family and friends as to what one ordinary man can do just by managing his money exceptionally.

The Point of the Story

This story is an illustration only of the principles in my next article: Rempel Maximum – 5 Steps to Becoming a Multi-Millionaire.

The “Rempel Maximum” is a process to build as much wealth as you can in a solid, reliable way. It is best to think of the Rempel Maximum as a concept – a set of tools, not a recipe. Do none of it, a bit, or the amount you are comfortable with that will give you the life you want.

It can include a variety of tax and investment strategies (tools). You can choose which of these tools make sense for you and how big or small to go.

A quick caveat. Doing these ideas to the maximum is probably not for you. It is only for the perhaps 3-5% of people that are aggressive wealth-builders, have a high risk tolerance and are highly motivated to become wealthy. Even these wealth-builders should probably not push it to the maximum.

Why build wealth? It’s not about the money. It’s about your life.

The benefits of being wealthy are hard to put into words until you get there. There is the obvious great lifestyle, but the emotional benefits are most important.

Security. Freedom. Self-confidence. These are priceless.

Ed

The post Rempel Maximum – The Story of Joe & Rich appeared first on Ed Rempel.

Remember the show “Who wants to be a millionaire?” Are you the kind of person that wants to build some serious wealth? Live an exceptional life? Be financially free?

I don’t mean just a comfortable amount. I mean a lot – like being a multi-millionaire.

The truth is, average people can become very wealthy just by managing their money for maximum growth.

The chart is based on “The Story of Joe & Rich”. This story is an extreme version of the life of an ordinary person managing his money exceptionally.

I’m not talking about a “get rich quick scheme”. I’m talking about a solid, reliable way to become wealthy over time.

In my latest video, podcast episode, and blog post you’ll learn:

• What is the Rempel Maximum?
• What is your motivation?
• Where does this idea come from?
• What are the 5 steps to building maximum wealth?
• What are the 5 power principles it is based on?
• What are the risks?
• What tax & investment strategies can be part of the Rempel Maximum?
• Some examples of the Rempel Maximum concept vs. conventional wisdom.

What is the Rempel Maximum?

The Rempel Maximum started out as a specific strategy, but it has become more of a concept or way of thinking.

As a strategy, the Rempel Maximum is a method of doing the Smith Manoeuvre more aggressively by starting with the maximum lump sum you can borrow without using more of your cash flow.

For example, if your mortgage payment is $2,000/month and pays $1,000/month of principal on your mortgage, you gain $1,000/month of credit in the linked credit line. With the Plain Jane Smith Manoeuvre, you borrow that $1,000/month to invest. 

With the Rempel Maximum, you invest a lump sum from your Smith Manoeuvre credit line and/or an investment loan so that your interest payment is $1,000/month. 

If the interest rate is 5%, then you can borrow $240,000 to invest as a lump sum and use the $1,000/month credit you gain to pay the interest on it. Investing $240,000 once builds your wealth faster than starting with zero and investing $1,000/month.

That is the Rempel Maximum strategy.

However, creative thinking led to many options and methods of doing it larger or smaller, which led to the Rempel Maximum becoming more of a concept or way of thinking.

For example, you could contribute less to your RRSP and increase your mortgage payment, so that you pay more principal and can support a larger investment loan. 

Both the RRSP contribution and the investment credit line or loan payment are tax-deductible, so you get the same tax savings. However, you have invested about 20 times more as a lump sum.

Or you could invest a bit smaller lump sum so that you are confident you can always make the payments even if interest rates rise. Your Plan needs to include what you would do if interest rates rise.

There are 2 Definitions for Rempel Maximum:

Strategy: A version of the Smith Manoeuvre to invest the maximum lump sum without increasing your cash flow.

Concept: A process to build as much wealth as you can in a solid, reliable way.

The “Rempel Maximum” is a process to build as much wealth as you can in a solid, reliable way. There is a list of strategies that could potentially be part of it. You can choose which of these tools make sense for you and how big or small to go.

The Rempel Maximum is the quest to find the methods most likely to build wealth reliably. It is best to think of it as a concept – a set of tools, not a recipe. Do none of it, a bit, or the amount you are comfortable with and that will give you the life you want.

Important things to know first:

1. Doing these ideas to the maximum is probably not for you. It is only for the perhaps 3-5% of people that are aggressive wealth-builders, have a high risk tolerance and are highly motivated to become wealthy. Even these wealth-builders should probably not push it to the maximum.

2. Why become wealthy? You may think that is a strange question, but motivation is important.

It’s not about the money. It’s about your life.

We have been working with a select group of wealth-builders for quite a few years. They each have their own personal motivation, but mainly:

• Wanting more out of life. They are not satisfied with a typical, middle class life. They want to do something exceptional or live life to the fullest.
• Freedom. Knowing they will be able to do whatever they want. This could include retiring early, extensive travel or “fun money”, supporting their family, or becoming a philanthropist. They want to know they could afford to do anything.
• Security (with a huge buffer). A large nest egg means they do not have to worry about money.
• Confidence. Being financially independent creates a great feeling of self-confidence. You are in control of your life.

What is your motivation?

Where does this idea come from?

I decided 25 years ago that I wanted to live an exceptional life. I want to build a large portfolio to be financially free.

For me, it’s not having just enough that, if I am super-frugal, I can live without a job. It’s not just a round number like $1 million. For me, it’s about feeling self-confident and being able to make the biggest difference in the world.

I started my quest 25 years ago to figure out the best way to achieve this.

Being a Certified Financial Planner (CFP), an accountant (CPA) and reading hundreds of financial books gave me the background knowledge. I learned an “unconventional wisdom” from experience writing many financial plans. Much of what most people believe about finance is wrong or not optimal. I found that with conventional methods, hardly anyone could retire with the lifestyle they want.

Being a motivated & creative math guy, I love developing strategies.

This strategy is based on my experience from trying to do this myself for 25 years and from writing over 1,000 professional financial plans, including quite a few for wealth-builders.

Here are the Rempel Maximum 5 steps to building maximum wealth:

1. Financial plan – Without a plan, a goal is just a dream. Specific written goals and the strategies to get there. These are big, risky strategies and you need to think them through. There is a reason that people with a financial plan on average have 4.2 times more wealth (CIRANO study).
2. “Stocks for the long run” – The investing “bible” by Prof. Jeremy Seigel showed that stocks are the highest return asset class. They are risky short and medium term, but what most people don’t realize is that growth is reliable over the long term (20+ years). The stock market has been more predictable than bonds after inflation for 20-year periods. The process can be done with real estate, but stocks have much higher long-term growth.
3. Leverage – All wealthy people borrowed to invest. The bigger the leverage, the more wealth you can build – assuming you can stick with it long term. The main mistake is not thinking big enough.

Leverage is risky, but the risks are reasonable if you invest reliably for the long term and take steps to make sure you never sell after a decline – for financial or emotional reasons.

You have to qualify for any investment loan or credit line. When you are young and have a low income and net worth, your loans may be small. With a good credit rating, as your wealth builds, you should be able to qualify for much larger loans or credit lines.

4. Tax-efficiency – Minimize and defer tax. Invest tax-efficiently. The tax rules provide many creative opportunities that make a huge difference.
5. Faith, Patience & Discipline – The mindset necessary to build wealth. The biggest risk in the Rempel Maximum is your behaviour. Major declines are buying opportunities. Your mind must be in the right place – always focused on long term growth.

Why does this work? The Rempel Maximum is based on 5 power principles:

1. The power of the plan – Your Financial Plan is the GPS for your life. It’s hard to overstate the importance of a plan. It’s the difference between driving with or without a GPS in an unfamiliar city. Decide what you want to accomplish, how big or small to go, and what tools make sense for you. Don’t get side-tracked. Know your next step. Visualize your ultimate goal. Your Plan is the big steps you want to take to have the life you want.
2. The power of compounding – The “snowball effect”. “Compound interest is the eighth wonder of the world.” (Albert Einstein). Building wealth means having the largest amount invested for the longest time.
3. The power of leverage – Borrowing to invest magnifies your gains and your losses. Investing effectively for the long term means you are highly likely to get magnified gains. Borrowing to invest should be for a minimum of 25 years to be most confident of success.
4. The power of free enterprise – Be an owner, not a loaner. Invest in great businesses. The stock market is the highest growth asset and has reliably provided solid growth over long periods of time – 25 years or longer. The worst 25-year period in the stock market (S&P500) has been:
   1. Last 150 years – 5%/year.
   2. Last 80 years – 8%/year.
5. The power of the mind – “What you focus on grows, what you think about expands, and what you dwell upon determines your destiny.” (Robin Sharma) Powerful growth strategies such as borrowing to invest should only be done by the right people in the right way over the long term.

When you combine these, you can get a powerful wealth-building process. For example, your Plan could be for compounding growth of leveraged equity investments over the long term. Your cash flow only pays interest. Your Plan works out how to do it so you can maintain it long-term, including knowing how you will always make the payments and having investments you are confident should provide strong long-term growth.

What are the risks:

1/Your behaviour – Avoid the 2 big mistakes:

a) Big mistake #1 – Selling after a market decline. This is the main risk of borrowing to invest. If you might sell even once in the next 30 years after a big market crash, don’t borrow to invest.

b) Big mistake #2 – Chasing performance. The Dalbar study has shown over the years that the average investor loses 3-6%/year because they buy popular investments that have performed well recently and then sell when they become unpopular. Think of your portfolio as a bar of soap – the more you touch it, the smaller it gets. Invest with a solid, proven strategy/style and stick with it.

2/ Too far/too fast or over-confidence – Your growth needs to be sustainable. Make sure you can always make your payments. Investment loans should never be subject to a margin call. Have a buffer for emergencies.

3/ Short-term thinking – Some people think the way to grow the maximum wealth is to have the riskiest investments possible with the highest growth potential. But it is not growth potential we need. It is reliable long-term very high returns. It’s better to have an investment that averages 10-12%/year with a reliable history of growing more than 8%/year over 25-year periods than an investment with a 10% likely potential to grow 1,000%. Get your growth over the long term, not in the short term.

The Rempel Maximum is a process, not a recipe. You can go big or small. It can include any of these tax and investment strategies (tools):

1. Automatic investing – Pay yourself first. Be frugal, so you can invest 20-50% of your income.
2. 100% equity investing – “Stocks for the Long Run”. Invest for long term growth, not income.
3. Smith Manoeuvre – Use your home equity to build wealth without using your cash flow. Convert your mortgage to tax deductible interest over time.
4. Lifecycle Investing – The ultimate strategy for Millennials and renters. Save for your retirement the same as you buy your home – with big loans that you pay over time. Avoid “last decade” risk. Slowly building wealth the traditional way leaves you at risk of one bad decade just before you retire. Reduce risk by diversifying across time.
5. Leveraged investing – Borrow to invest with an investment loan, such as a 3:1 loan. Can be an enhancement of the Smith Manoeuvre or Lifecycle Investing. It is an effective strategy when done by the right people in the right way over the long term.

Here are some possible examples to illustrate the concept of Rempel Maximum vs. conventional wisdom:

1. Conventional methods – Save 10% of your income and keep a large amount for emergencies.

Rempel Maximum – Be frugal. Save 20-50% of your income. Invest mainly for long-term growth.

2. Conventional methods – Save down payment for home. Pay off mortgage. Then save for retirement.

Rempel Maximum – Save 20% down, possibly using an RRSP loan. Do Smith Manoeuvre to convert your mortgage to tax-deductible over time instead of paying it off, possibly with an additional investment loan. Focus cash flow on maximizing RRSP & TFSA.

3. Conventional methods – Invest to “sleep at night” in a diversified portfolio of stocks, bonds & cash.

Rempel Maximum – Invest 100% in “stocks for the long run”.

4. Conventional methods – Save & invest $10,000 per year.

Rempel Maximum 1 – Save $10,000 per year. Take 3:1 loan every year. Invest $40,000 per year.

Rempel Maximum 2 – Take a $250,000 investment loan with interest payments of $10,000/year.

5. Conventional methods – Retire debt-free and invest conservatively to protect capital. Become a senior on a “fixed income”.

Rempel Maximum – Retire with a rising income, not a fixed income. Invest focused on equities to make more than inflation and have the maximum sustainable income. Keep your investment credit line right through retirement until you sell your home.

Summary

The “Rempel Maximum” is a process to build as much wealth as you can in a solid, reliable way. It is best to think of the Rempel Maximum as a concept – a set of tools, not a recipe. Do none of it, a bit, or the amount you are comfortable with that will give you the life you want.

It is also a specific strategy that is a more aggressive Smith Manoeuvre, but it can be used more effectively if you think of it as a concept and think creatively of how best to use it in your Plan.

It can include a variety of tax and investment strategies (tools). You can choose which of these tools make sense for you and how big or small to go.

There are 5 steps. Always start with a written Plan to decide exactly what you want to accomplish and why, what tools make sense for you, and how big or small to go. Don’t start on the road until you know where it leads for you.

Be frugal. Save and invest 20-50% of your income. Invest the highest portion of equities that you are comfortable with. Borrow to invest as high as you can tolerate. This could be part of the Lifecycle Investing strategy or the Smith Manoeuvre strategy. Make sure you can stick with it during market crashes.

Then have faith in equities, discipline to stick with it, and patience to be a good investor.

It works because of the 5 power principles.

Doing these ideas to the maximum is probably not for you. There is nothing wrong with a conventional life.

It’s not about the money. It’s about your life. Know what you value and what is important to you, so you are clear on your inner motivation.

The benefits of being wealthy are hard to put into words until you get there. There is the obvious great lifestyle, but the emotional benefits are most important.

Security. Freedom. Self-confidence. These are priceless.

Ed

Read “The Story of Joe & Rich”. This story in one example of these principles. It is an extreme version of the life of an ordinary person managing his money exceptionally.

The post Rempel Maximum – 5 Steps to Becoming a Multi-Millionaire appeared first on Ed Rempel.

The Smith Manoeuvre is an efficient strategy to use equity in your home to invest for your future without using your cash flow. It converts your mortgage over time into a tax deductible investment credit line.

Most Canadians are searching for a feeling of financial security, but all the bills & life expenses mean they never build up enough of a nest egg to be secure. The Smith Manoeuvre is a strategy that can help you build your nest egg and help you achieve the retirement you want without using your cash flow.

We have become known as experts in the Smith Manoeuvre, having helped hundreds of Canadian families implement it. It is one of the most effective wealth-building strategies when done by the right people in the right way over the long term.

In my latest video, podcast episode, and blog post you’ll learn:

• What is the Smith Manoeuvre?
• What are the benefits?
• What are the risks?
• How do you manage the risks?
• How do you implement it?
• How do you avoid having to use your cash flow?
• How long should you ideally do the Smith Manoeuvre?
• Are there really 8 Smith Manoeuvre strategies?
• Is it legal?
• What is the best way to invest with the Smith Manoeuvre?
• How can I learn more and find out whether the Smith Manoeuvre is right for me?

It is best to consider it as part of your retirement plan. I have helped thousands of Canadians plan for their retirement and found that many people are unable to invest enough to be able to have the retirement they want without a significant effect on their lifestyle. In many cases, the Smith Manoeuvre can fill the gap by providing enough additional investments for them to achieve their desired retirement.

In short, the Smith Manoeuvre involves borrowing the available equity in your home to invest bit by bit as you gain equity with each mortgage payment. As your mortgage declines, it is replaced by a tax deductible credit line from money borrowed to invest. You can borrow from the credit line to pay its own interest (capitalize the interest), so it does not require your cash flow. The interest tax deductions can give you tax refunds, which you can use to pay down your mortgage more quickly. Over time, your investments can build up a large nest egg that can help fund the retirement you want.

I meet with people all the time whose main financial goal (if they have one at all) is a general desire to somehow pay off their mortgage as soon as possible, and then they can finally start saving for retirement. But it is increasingly clear that much of Canada’s hard working middle class continues to face under-funded “golden years’ simply because they run out of time. One of the main benefits of the Smith Manoeuvre is that it can help you start saving for your retirement now – not 20 years from now.

Long term returns on the stock market have been far higher than typical borrowing rates, so you could earn a significant investment gain over time, especially when you include the tax benefits. For example, if your secured credit line interest rate is 3.2% and you are in a 40% tax bracket, you only need to invest to earn more than 1.9% per year after tax long term to benefit. That is quite a low hurdle.

Borrowing to invest is inherently risky. It should never be done only for the tax deductions. The risks decline considerably with time, however. The stock market fluctuates widely in one-year periods, but the worst 25-year calendar return of the S&P500 in the last 80 years has been a gain of 7.9% per year¹. This is why the Smith Manoeuvre is generally only suitable for high risk tolerance investors with longer time horizons.

When it comes to the Smith Manoeuvre, I am the:

• leading expert in Canada.
• only accountant working with it.
• only planner combining it with comprehensive financial planning.
• only source for all 7 Smith Manoeuvre strategies.

Ed is recognized by Fraser Smith in his book “The Smith Manoeuvre” on page 82 (4th printing – July, 2005).

This page is intended to discuss all the main issues regarding the Smith Manoeuvre. It answers the following questions:

1. What are the benefits?
2. What are the risks?
3. How do you manage the risks?
4. How do you implement it?
5. How do you avoid having to use your cash flow?
6. Are there really 7 Smith Manoeuvre strategies?
7. Is it legal?
8. What is the best way to invest with the Smith Manoeuvre?
9. How can I learn more and find out whether the Smith Manoeuvre is right for me?

If you would like to learn more about the Smith Manoeuvre and whether it is suitable for you, the best way is to read this site in detail. It is the best source for accurate information about the strategy. Please ask any questions in the comments below.

If you think the strategy might be suitable for you, then you should discuss with your financial planner whether or not to include it in your retirement plan. If you “Work with Me” to create your Unified Financial Plan, I can help you determine whether or not to include the Smith Manoeuvre in your retirement plan.

What is the Smith Manoeuvre?

In short, the Smith Manoeuvre involves borrowing the available equity in your home to invest bit by bit as you gain equity with each mortgage payment. As your mortgage declines, it is replaced by a tax-deductible credit line from money borrowed to invest. You can borrow from the credit line to pay its own interest (capitalize the interest), so it does not normally require any of your cash flow. The interest tax deductions can give you tax refunds, which you can use to pay down your mortgage more quickly. Over time, your investments can build up a large nest egg that can help fund the retirement you want.

It is best to consider it as part of your retirement plan. We have helped thousands of Canadians plan for their retirement and found that many people are unable to invest enough to be able to have the retirement they want without a significant effect on their lifestyle. In many cases, the Smith Manoeuvre can fill the gap by providing enough additional investments for them to achieve their desired retirement.

This means they can continue to live their lifestyle now and still be on track for the retirement they want.

I talk with people all the time whose main financial goal (if they have one at all) is a general desire to somehow pay off their mortgage as soon as possible, and then they can finally start saving for retirement. But it is increasingly clear that much of Canada’s hard working middle class continues to face under-funded “golden years’ simply because they run out of time. One of the main benefits of the Smith Manoeuvre is that it can help you start saving for your retirement now – not 20 years from now.

Long term returns on the stock market have been far higher than typical borrowing rates, so you could earn a surprisingly large benefit over time, especially when you include the tax benefits.

For you to have a very high chance of success long-term with the Smith Manoeuvre, it is important to be the right type of person, have the right outlook, and set it up properly.

Borrowing to invest is inherently risky. It should never be done only for the tax deductions. The risks decline considerably with time, however. The stock market fluctuates widely in one-year periods, but the worst 25-year calendar return of the S&P 500 in the last 90 has been a gain of 7.9% per year. This is why the Smith Manoeuvre is generally only suitable for people with a high risk tolerance and a longer time horizon. I suggest committing to a minimum of 20 years.

The general rule of thumb is that your investments need a long-term return of only 2/3 of the average interest rate on your secured credit line for you to break even over time after tax. For example, if interest rate is 6% and you are in a 40% tax bracket, you only need to invest to earn more than 4% per year long term after tax to benefit from the Smith Manoeuvre after 25 years. That is quite a low hurdle.

If you would like to learn more about the Smith Manoeuvre and whether it is suitable for you, the best way is to watch this video in detail. It is the best source for accurate information about the strategy.

When it comes to the Smith Manoeuvre, to my knowledge, we are the:

• leading experts.
• only accountant working with it.
• only financial planner combining it with comprehensive financial planning.
• only source for all 8 Smith Manoeuvre strategies.

I am recognized by Fraser Smith in his book “The Smith Manoeuvre” on page 82 (4th printing – July, 2005).

What are the benefits?

Most discussions about the Smith Manoeuvre recommend it as a way to make your mortgage tax deductible like our American friends have, but it does not actually do that. It converts your mortgage over time into a credit line used to borrow to invest for your future. The interest on the credit line is normally tax deductible.

The 3 main benefits of the Smith Manoeuvre are:

1. Invest for your future without using your cash flow.
2. Tax deductions.
3. Pay your mortgage off faster.

The main benefit comes from the long-term compound growth of your investments, which is normally far more than your extra tax refunds. For this reason, you should think of the Smith Manoeuvre primarily as a strategy of borrowing to invest for your future. The tax deduction should not be your main reason for implementing it.

When we model the Smith Manoeuvre over 25-year periods, typically only 20% of the benefit is from tax savings and 80% is from the difference between the long-term compound investment growth and the interest cost.

Interest on money borrowed to invest is, however, one of the only tax deductions that is available to all taxpayers. People that earn salaries usually have few options, other than RRSPs, to reduce their taxes. People who are retired often have no deductions at all, but can still claim their interest tax deductions if they maintain the Smith Manoeuvre during retirement.

The long-term benefits can be significant, though. 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 without using your cash flow.² Starting with a lump sum or doing a more aggressive version can yield higher benefits.

What are the risks?

The long term growth and tax refunds are nice, but borrowing to invest is not for everyone. The Smith Manoeuvre is a risky strategy because you are borrowing to invest. It magnifies your gains and your losses a lot and can easily double or triple your profit or your loss. You owe the balance of the loan and the interest regardless of how your investments perform.

The biggest risk to the Smith Manoeuvre is you. If you are the type of person that might panic and sell during a large market crash, then the Smith Manoeuvre is not right for you. If you do it for 30 years, there will likely be a few market crashes during that time and you need to be able to stay invested through them.

To consider this type of strategy, you need to be able to tolerate the ups and downs of your investments and stay invested for the long term, especially after any market crash or if the value of your investments falls below the amount you owe on the credit line.

The biggest problem with borrowing to invest is that investors often do it at the worst possible time and not for the long term. Investors are often drawn to it after the stock markets have been rising strongly for several years. Stocks can feel safer in strong bull markets, but this is the riskiest time to invest.

How do you manage the risks?

The best way to deal with the risks is to invest for the long term and have a sound investment strategy. It is most effective for the Smith Manoeuvre to be part of your Financial Plan, to give you the long-term outlook, and to work with a financial planning & tax professional to make sure it is setup properly and follows all the tax rules.

In general, you should only consider the Smith Manoeuvre if you are planning to stick with it for a minimum of 20 years, and preferably much longer. You need to have the emotional and financial strength necessary to maintain this as a long-term strategy.

I talked with one guy who said, “Let me try it for a year or 2 and see how it goes.” I told him to not even start if that is his thought. I have no idea where the stock market will be in 1 or 2 years. I have a very good idea where it will be in 25 years. Based on history, the market has been between 7 and 17 times higher after 25 years. It is important with the Smith Manoeuvre to implement it in a way that you have a very high chance of major success long term.

The Smith Manoeuvre is an efficient way of borrowing to invest, so it is only suitable for people that have a high risk tolerance. From my experience, it works best with people that are optimistic about the future, have a reasonable understanding of long-term stock market history, a long-term outlook, and that consider it to be a key part of their retirement plan.

While the stock market is volatile, the long term risk is far lower than most people believe. If you invest for 20 years or more, the range of historical returns after inflation (standard deviation) of stocks is actually lower than bonds.³ The companies on the stock market tend to do anything they can to keep growing their profits after a downturn, which is the main reason the stock market has historically reliably recovered from all declines.

How do you implement it?

To implement it, you need a “readvanceable mortgage”, which is a mortgage linked with a credit line. Readvanceable mortgages are available from most banks. I have a post rating readvanceable mortgages to help you get the best one. The credit limit for your mortgage plus the credit line is normally 80% of the appraised value of your home. (Note that new OSFI mortgage rules reduce the credit line to 65% over time, but still allow you to start with a combined limit of 80% of the value of your home.)

In the “Plain Jane” Smith Manoeuvre, with each mortgage payment, you pay down some principal which immediately becomes available credit in the credit line. You can borrow this amount to invest directly from the credit line. For example, if your mortgage payment is $1,000 bi-weekly and the principal portion is $500 bi-weekly, as soon as you make your mortgage payment, you gain $500 of credit in the credit line linked to your mortgage. You can then borrow $500 bi-weekly from the credit line to invest.

If you invest bi-weekly or monthly in this way, you get the “dollar cost averaging” benefit of a lower average cost, which makes this a safer way to invest than investing one lump sum.

Your investment credit line interest is normally tax deductible, so you should start receiving tax refunds. They may be very small in the early years. In the classic Smith Manoeuvre scenario, you would use your tax refunds to pay down your mortgage and then immediately reborrow the same amount from your credit line to invest. In practice, you should look at your entire financial situation and use the tax refund in the most effective way.

If you use only tax refunds from the basic Smith Manoeuvre to pay your mortgage more quickly, you generally pay off your 25-year mortgage about three years sooner.²If you need help in getting the best readvanceable mortgage for your situation, check out my free “Ed’s Mortgage Referral Service”. I know the advantages and disadvantages of all the readvanceable mortgages available in Canada and have contacts and experience with most of them.

How do you avoid having to use your cash flow?

The Smith Manoeuvre can normally be done without using your cash flow if you “capitalize the interest”. This means you borrow from your credit line to pay the interest on the credit line.

There is a tax advantage for doing this. The tax rule is that if the interest on your credit line is tax deductible, then the interest on the interest is also tax deductible. There are usually more effective uses for your cash flow than paying low rate, tax deductible interest, such as paying off non-deductible debt or investing in your RRSP. It is very useful that you don’t need to use any cash flow for the Smith Manoeuvre.

The key issue with capitalizing interest is tracking. You need to be able to track that the money you borrowed was used to pay the interest.

Banks generally will not allow you to automatically use the credit line to pay its own interest, so you need to “guerilla capitalize” the interest, which means you do it as a manual transaction. Have the interest paid from your chequing, but then withdraw the exact same amount (to the penny) from your credit line to replenish your chequing account. A better way is to have a dedicated Smith Manoeuvre chequing account that is used only for these transactions, so that all the money going in or out is only for the Smith Manoeuvre.

How long should you ideally do the Smith Manoeuvre?

If the Smith Manoeuvre is a suitable strategy for you, then you can get the maximum benefit by maintaining it as long as you own a home. This can include maintaining it right through your retirement. You can keep the tax-deductible credit line or mortgage during retirement, when you may not have any other tax deductions. You can eventually pay it off when you sell your home, not by selling investments.

This is a different way of thinking. Instead of trying to pay off non-deductible debt, you plan to keep tax-deductible debt as long as possible, so that you can keep the investments as long as possible. It is the investments that provide your retirement cash flow.

Maintaining your Smith Manoeuvre for life, or as long as you own a home, offers you the maximum long-term benefits.

Are there really 8 Smith Manoeuvre strategies?

The Smith Manoeuvre is not just one strategy. There are actually 8 categories of Smith Manoeuvre strategies, each of which can be done large or small. The variations are limited only by your imagination, but here are the main categories of strategies:

1.  “Plain Jane” Smith Manoeuvre:

This is the basic original Smith Manoeuvre starting with zero and investing bi-weekly or monthly the principal portion of each mortgage payment. The standard way is to invest up to 80% of your home value. You can, of course, borrow to invest significantly less (if 80% is uncomfortable for you) or more (if your goal is to build a larger nest egg over time).

2. “Singleton Shuffle” or “Flintstone Flip”:
You can convert part of your mortgage to a tax-deductible credit line instantly if you have non-registered investments. To do this, sell the investments to pay down your mortgage and then immediately reborrow the same amount from the credit line to reinvest. This gives you the same amount of investments and the same amount of debt, but now part of your debt is tax-deductible.

When we met Frank and Isabel, they had a $100,000 mortgage and $100,000 investments at the same bank branch. We recommend they sell the investments to pay off the mortgage, then immediately borrowed $100,000 to invest again. They still had $100,000 in investments and a $100,000 debt, but the new mortgage interest is now tax deductible because it was used to buy the investments.

It is usually a good idea to use any non-registered investments to convert part of your mortgage to tax deductible as you start the Smith Manoeuvre.

3. Top-up:
You can kick-start the Smith Manoeuvre if you have additional equity in your home. You can borrow the available credit in your credit line to invest, so that you can start with a lump sum. This still normally requires no cash flow, since you can capitalize the interest.

4. “Debt Miracle”:
If you have other non-deductible debts and some home equity available, you can merge all the debts and the payments into your new mortgage. You refinance all your debt at lower rates, plus you are effectively converting all the debts to tax deductible interest over time. This can make your monthly Smith Manoeuvre investment very large.

When we met Stefan and Maureen, they were struggling with debt payments and not able to invest much. They had a $1,000 per month mortgage payment, $500 per month for a car loan, $250 per month for a credit line and $250 per month for a credit card. We merged all their debts into their mortgage and kept the payment at $2,000 per month. This is the same payment, but now $1,500 per month is the principal portion, which allowed Stefan and Maureen to invest $1,500 per month with the Smith Manoeuvre.

This strategy can be a miracle sometimes. For Stefan & Maureen, they were struggling with a bunch of debt payments and unable to invest for their future. With the Debt Miracle, they had one low-interest debt and were investing $1,500/month for their retirement.

5. Smith Manoeuvre with Dividends:
If your objective is more about paying down your mortgage and not about maximizing your benefit, you can invest entirely in dividend-paying investments. You can use the dividends to pay down your mortgage more quickly and then immediately reborrow the same amounts to invest.

Your overall benefit from this strategy is reduced by the “tax drag” from the tax on the dividends every year, which reduces your tax refunds. Dividends are generally taxed at lower rates, but at much higher rates than deferred capital gains, which are the norm with the Smith Manoeuvre. The lowest taxed type of investment income is deferred capital gains, both because of the lower tax on capital gains and that you can pay it many years from now.

Some people implement the Smith Manoeuvre using dividend-paying stocks, ETFs or mutual funds. Dividend investing has historically been a relatively effective way to invest, since it generally means you are invested in larger, more stable and slower growing companies.

However, dividends are fully taxable every year, unless they are from Canadian companies. Most people that invest for dividends end up non-diversified because they end up invested entirely in Canada. Canadian stocks have generally had significantly lower returns than global or US stocks.

The expected benefit from the Smith Manoeuvre with Dividends is generally lower than the other strategies here because of the “tax drag” (sometimes called “tax bleed”).

I modeled it and found that your dividend investments would have to earn about 1%/year more than more tax-efficient growth investments over time to get the same benefit. This is true even though your mortgage is converted to tax-deductible more quickly, because of both lower expected returns and the “tax bleed”.

6. Smith/Snyder:
After you retire, you can take income from your leveraged investments either by selling a bit every month (self-made dividends) or buying investments that payout a significant monthly amount. One example is “T8” mutual funds that pay out up to 8% of the balance each year. There are a variety of ETFs with large monthly payouts. Most of these payments are “return of capital” (“ROC”), which creates a tax issue. ROC is tax-deferred (for about 12 ½ years with an 8% payout), but reduces the amount of your credit line that is deductible – and it is up to you to track it.

If you maintain the Smith Manoeuvre investments into retirement, then this is one of the options for receiving retirement income. We use this for retired clients who maintain the Smith Manoeuvre, but track the tax-deductibility of their credit line in a huge spreadsheet.

This strategy was heavily marketed in the past as a way to pay off a mortgage very quickly, but actually has no benefits – unless you need the income. The “return of capital” (“ROC”) means the original loan or credit line becomes non-deductible over time. For tax purposes, paying a return of capital payment onto your mortgage is the same as cashing in your investment and spending it.

When you receive payments that include ROC, the book value of your investment is reduced by the amount of ROC. This means your capital gain when you eventually sell the investment is higher.

For example, Rocco borrowed $100,000 to invest in a T8 mutual fund. He received $8,000 per year in monthly payments and paid no tax on them, because they are ROC. This has 2 tax issues:

• The ROC reduces the deductibility of the investment loan. After one year, the interest on only $92,000 of the loan is tax deductible. After 2 years, only $84,000. Rocco must track this on a spreadsheet to accurately record the interest tax deduction on his tax return each year.

If part of the ROC payment is used to pay the interest on the credit line or paid onto the tax deductible credit line, then it does not reduce the deductibility. This can become complex to track.

• ROC means a larger capital gain in the future. Rocco’s $8,000 per year payments were tax-free for the first 12 ½ years. At that point, the book value of his investment will be reduced to zero, so all ROC payments become taxed annually as capital gains.

Rocco sold his investment 20 years later. He was fortunate that it was still worth $100,000, after having paid out $8,000 per year every year. He thought there would be no capital gain, since the investment had the same value as when he invested. However, since the book value was zero, he had a $100,000 capital gain on sale.

The Smith/Snyder should generally only be considered if you need the cash flow and understand the tax consequences. You should be careful with any investment that pays “return of capital” (“ROC”).

7. Rempel Maximum:
I created this strategy for the very small number of clients that want the maximum possible wealth building they can do with their given cash flow. It is only suitable for people with very high risk tolerance focused on building up the largest nest egg they can.

Instead of investing the principal portion of each mortgage payment, you can borrow a large lump sum to invest so that the interest-only payments are equal to the principal portion. You could use either a credit line or an investment loan.

For example, Mark wanted to aggressively grow his wealth. His mortgage payment paid $500 per month principal. Instead of investing the $500 per month from his credit line, he took out an investment loan of $150,000 at 4%. He used his credit line to pay the interest payments of $500 per month, so it did not come from his cash flow. He only had to make his regular mortgage payment.

With the “Plain Jane” Smith Manoeuvre, Mark would have started from zero and invested $500 per month. With the Rempel Maximum, he invested $150,000 once. His cash flow is the same with either strategy.

Mark wanted to grow his wealth and was sophisticated enough to tolerate the much higher risk. He was confident that with effective investments, the $150,000 investment would grow much faster than starting with zero and investing $500 per month.

People that try to maximize their long-term growth by trying to do Lifecycle Investing often do the Rempel or the Triple Top-up.

8. Triple Top-up:

This strategy is the same as the Top-up, except that you can also get a 3:1 investment loan. If you have $100,000 credit available, some companies will lend you another $300,000 if you pledge $100,000 in qualifying investments.

This strategy is also for the very small number of clients that want the maximum possible wealth building. It is only suitable for people with very high risk tolerance focused on building up the largest nest egg they can. The total amount borrowed may be more or less than the Rempel Maximum, depending on your situation, and it might require more cash flow to make it work.

Is it legal?

Yes. There is generally no issue with the tax deduction, as long as you follow the tax rules. You are only deducting interest borrowed to invest, which is the same tax rule most businesses use. The main tax issues to maintain tax deductibility are:

1. Tracking:
It is critical to always be able to trace that any amount borrowed was invested.

2. Keep tax deductible credit line separate:
Do not co-mingle deductible and non-deductible debts. Do not co-mingle leveraged investments with non-leveraged investments.

3. Current use:
CRA is concerned with the “current use” of money borrowed, not the original use. If you borrow to invest and then cash in the investment to spend, your credit line is no longer deductible because the “current use” of the money is your spending.

4. Non-registered or corporate investments:
The investments cannot be in registered accounts, such as RRSP, TFSA or FHSA. Only taxable accounts, such as non-leveraged investments or investments held inside a corporation are eligible.

5. “Expectation of income”:
Your investments should be reasonably expected to be capable of paying income either now or in the future. This is often misinterpreted as the investments must pay dividends or interest. In general, almost any stock or mutual fund is fine, even if it does not pay a dividend, as long as its prospectus does not prohibit ever paying a dividend. All that is necessary is a reasonable expectation that the investment could pay a dividend or interest at some point. Tax-efficient corporate class mutual funds or stocks like Warren Buffett’s Berkshire Hathaway that have never paid any taxable distributions are normally fine. However, swap-based ETFs , options or crypto that cannot possibly pay income are normally not eligible.

6. Selling investments:
If you sell any investments, the lower of the amount invested (actually the book value) or the proceeds of selling must be paid down on the credit line, or the interest on that amount of the credit line becomes non-deductible.

7. Taxable investment income:
The general rule is that if you receive taxable income from your investments, such as dividends or a capital gains distribution, you can use that cash for any purpose without affecting the deductibility of the credit line. You must clearly be able to trace the cash you withdraw to the taxable income.

For example, Nancy borrowed $100,000 to invest. Her investment rose in value to $110,000. Then she lost her job. When her Employment Insurance ran out, she decided to cash in $10,000 to make her mortgage payments. She was glad to have these investments to support her in her emergency.

Nancy thought she was only withdrawing her gain. However, the book value of the $10,000 she sold was $9,091. The result was that she had a capital gain of only $909. However, $9,091 of her investment credit line was no longer deductible.

If she had wanted to withdraw only her $10,000 gain, she would need to sell the entire $110,000 in order to trigger the $10,000 capital gain. She could then withdraw the $10,000 and then reinvest the remaining $100,000.

8. Return of capital:
If you receive any payments from the investments that are tax-free because they are “return of capital” (“ROC”), such as from a T8 fund or an ETF, that amount must be paid onto the credit line, or the interest on that amount of the credit line is no longer deductible. Most investments with a fixed payout include some ROC, even if it is only a modest amount that you can only find out on their T5 slip after year-end. If you receive any ROC, you need to track how much of your investment credit line is still deductible to do your tax return each year.

What is the best way to invest with the Smith Manoeuvre?

Investments for the Smith Manoeuvre should be ones that you expect to provide significant & reliable growth over the long-term, be tax-efficient, possibly more conservative than your other investments such as those in your RRSP, and should be quality investments that you will be confident with during a large market crash.

Investing tax-efficiently can significantly increase the benefit. Capital gains and dividends are taxed at preferred rates, but the lowest tax by far is on deferred capital gains. The most tax-efficient investments pay little or no taxable income and defer most or all of your gains far into the future when you start withdrawing in retirement. Meanwhile, you can still claim your interest deduction each year.

Key to effectively implementing the Smith Manoeuvre is to have investments that you will still be confident with after they fall significantly in value. The Smith Manoeuvre is borrowing to invest, which is a risky strategy. It should only be done with a long time horizon, preferably 20-30 years or more. In that time, the stock market is very likely to have some major crashes or bear markets. It is critical that you can maintain your investments through these bear markets. If you sell even once in the next 30 years after a 30% decline, you have severely reduced the effectiveness of the Smith Manoeuvre.

In short, any investment that you would sell if it declined by 30-40% is not a good choice. If you would sell your investments after a decline, then the Smith Manoeuvre is probably too risky for you. You need to be able to remain invested through the inevitable bear markets.

The Smith Manoeuvre is mostly commonly done with equity (stock market) investments, such as mutual funds, segregated funds, ETFs or individual stocks. In general, it is best to avoid individual stocks and funds restricted to specific sectors, since they are usually riskier than broad-based funds.

Focusing on global equity mutual funds or ETFs with a buy-and-hold philosophy is generally the most effective. This gives you broad diversification and reduces the temptation to market time. Studies, such as the Dalbar study, show that investors lose an average of 6% per year by regularly moving investments to whatever has been performing well recently. Most investors “buy high and sell low” over and over again by buying investing in currently popular investments. Buy-and-hold investors tend to have higher returns and pay less tax.

Our process is that we work with a portfolio manager who finds the world’s best investors. He calls them “All Star Managers”. All his fund managers have long term track records outperform their index after all fees. I believe their outperformance results from skill. I invest 100% of my personal investments with this portfolio manager.

Investing with All Star Managers gives us confidence to stay invested and even buy more at market lows. For example, after the market crash in 2008, I remained completely confident our fund managers would eventually recover the loss, and even published an article just a few weeks from the bottom in March 2009 called: “How to take advantage of the market crash of 2008”.

How can I learn more and find out whether the Smith Manoeuvre is right for me?

If you think the Smith Manoeuvre might be suitable for you, then you should discuss with your financial planner whether or not to include it in your retirement plan. We offer a free 30-minute consultation to see whether we are a fit to work together.

For help in getting the best readvanceable mortgage for your situation, check out our free “Ed’s Mortgage Referral Service”. We know the advantages and disadvantages of all the readvanceable mortgages available in Canada and have contacts and experience with most of them.

If your mortgage is not due yet and you want to start sooner, fill out both “Ed’s Mortgage Breaking Calculation” and “Ed’s Mortgage Referral Service” to find out whether or not paying the penalty so you can start now is worth it in your situation.

¹ Standard & Poors.

² Smith Manoeuvre Calculator. Assumes starting mortgage at 80% of home value, 25-year amortization, 3% mortgage, 4% credit line, 8% long term investment return (less than long term returns of stock markets), and 46% marginal tax bracket.

³ “Stocks for the Long Run”, 2008, Prof. Jeremy Siegel.

Ed

The post Smith Manoeuvre appeared first on Ed Rempel.

With its quirky name, the Smith Manoeuvre might sound unconventional, but it’s a strategy that truly works—when done by the right people, in the right way, over the long term.

From crafting over 1,000 professional Financial Plans, I’ve seen firsthand how the Smith Manoeuvre can transform your finances, helping Canadians use their home equity to invest for their future without impacting their cash flow. 

When included as part of a comprehensive financial plan, this strategy can empower you to achieve the life you’ve always envisioned.

But optimizing the Smith Manoeuvre requires more than just the basics—it’s about mastering the practical details and understanding how to maximize its benefits.

In my latest YouTube video, podcast episode and blog post you’ll learn:

• What is the right reason to do the Smith Manoeuvre?
• How do you know if you are the right person for the Smith Manoeuvre?
• What is the right mortgage?
• How can you keep it 100% tax deductible?
• Which of the 8 Smith Manoeuvre strategies is right for you?
• Why is it critical that the Smith Manoeuvre is a long-term strategy?
• What is the right mindset to minimize the risk & maximize the benefits?

1. What Is the Right Reason to Do the Smith Manoeuvre?

Many misconceptions surround the Smith Manoeuvre’s primary benefits. Here’s what you need to know:

• It’s not about tax deductions. While tax savings are a part of the benefit, they only account for 15-20% of the overall value.
• The real advantage lies in long-term growth. The primary benefit is the compounded, after-tax growth of investments minus the after-tax cost of borrowing. For most people, the expected net benefit after 25 years is equivalent to the current value of their home.
• It’s not about eliminating debt. Some people mistakenly think the Smith Manoeuvre is a strategy to pay off their mortgage faster. That’s not the case. The focus is on investing for retirement without dipping into your cash flow.
• It’s a bridge to retirement security. Retiring comfortably is challenging for many, and the Smith Manoeuvre often fills the gap by enabling additional investments alongside RRSPs and TFSAs.
• Make efficient use of your home equity. Don’t let your home equity sit idle. One client, a widower, referred to unutilized equity as “fun I didn’t have.”
• Integrate it into your financial plan. The Smith Manoeuvre works best as part of a comprehensive financial plan designed to balance living for today with investing for your future.

2. How Do You Know If You Are the Right Person for the Smith Manoeuvre?

The Smith Manoeuvre isn’t for everyone. It requires specific traits and commitments:

• Risk tolerance. You must be able to stick with your investments even during downturns. Successful investors have the discipline to do nothing when markets decline.
• Long-term commitment. The strategy only works if you’re in it for the long haul—ideally 20 years or more. If you’re looking for a short-term fix, this isn’t the right approach. Better is for life – or as long as you own your home.
• Story of caution. A client once wanted to try the Smith Manoeuvre for just one year. If that’s your mindset, don’t even start.

3. What Is the Right Mortgage?

The foundation of the Smith Manoeuvre is a readvanceable mortgage (mortgage linked with a credit line), but not all are created equal:

• Features to look for:
  • Overall limit of 80% of the appraised value at the start. (declines with new OSFI rules)
  • Automatic and immediate readvancing.
  • Invest from credit line – Or need a separate Smith Manoeuvre chequing
  • Multiple credit lines available.
  • Multiple mortgages available – Readvance into one credit line or multiple.
  • Invest from $1 (No minimum)
  • No minimum investment amount.
  • No monthly fees.
  • Competitive interest rates.
• 10 readvanceable mortgages. See my post with pros & cons of each, and ratings.
• Avoid suboptimal options. For example, Manulife’s readvanceable product only starts at 65% of the appraised value, has higher interest rates, and may charge monthly fees.
• Expert implementation matters. Many mortgage brokers and bank representatives don’t fully understand the Smith Manoeuvre’s intricacies or tax rules. Work with financial planners experienced in implementing this strategy.

4. How Can You Keep It 100% Tax-Deductible?

Tax-deductibility is a key element of the Smith Manoeuvre. Smith Manoeuvre is not complex, but is easy to mess up. Here’s how to ensure you stay on track: 

• Choose the right investments. Invest in assets with income potential (e.g., equities) that don’t restrict dividends or interest payments. CRA’s folio S3-F6-C1 outlines interest deductibility rules.
• Keep accounts separate. Deductible and non-deductible credit lines, mortgages, and investments should never be commingled. Mixing them up can cost you tax deductions.
• Interest capitalization done right. Borrow only what you need for investments or to pay interest on investment loans. Missteps, like spending the full available credit, can lead to trouble.
• Be audit-ready. Keep detailed records. In the event of a CRA audit, you must prove your figures. We handle dozens of CRA pre-assessments annually, often with 60-page submissions.
• Collaborate with a CPA. Work with an accountant who understands the Smith Manoeuvre and will represent you with the CRA if necessary.

5. Which of the 8 Smith Manoeuvre Strategies Is Right for You?

The Smith Manoeuvre offers several variations to suit different needs. Here are the main options (details can be found on my blog):

• Plain Jane
• Debt Swap (Singleton Shuffle / Flintstone Flip) Make some of your mortgage tax-deductible in one day.
• Top-Up. Plane Jane plus lump sum.
• Triple Top-Up Plane Jane plus lump sum plus 3:1 investment loan.
• Debt Miracle. One couple used this strategy to combine many debts and start to invest $2,500/month with no change in cash flow.
• Smith Manoeuvre with Dividends. Less tax-efficient; need to earn 1%/year higher return.
• Smith/Snyder. Effective for retirement cash flow but has tax challenges. Story of mortgage broker firm heavily marketing Smith Manoeuvre with T-8 funds.
• Rempel Maximum. The ultimate growth-focused strategy.

6. Why Is It Critical That the Smith Manoeuvre Is a Long-Term Strategy?

Long-term thinking is essential to success:

• Market reliability over time. While the stock market / equities are unpredictable in the short term, they become surprisingly dependable over 20+ years. Historical data shows the stock market has delivered returns 7-17 times higher after 25 years.
• Stock market is more predictable after inflation than bonds after 20 years or more.
• The power of compounding. Stocks rise in the long term because corporate profits grow. This makes equities the most effective retirement investment for most people.

7. What Is the Right Mindset to Minimize Risk and Maximize Benefits?

Your mindset determines your success:

• Think long-term. Commit to the strategy for at least 20 years. Not a 1-year trial.
• Stay the course. Be prepared to hold your investments through market downturns. Confidence in your investments is key. 
• Tax efficiency matters. Choose buy-and-hold investments that minimize tax impacts.
• Learn to tolerate risk. Risk tolerance is a skill that improves over time, much like adjusting to turbulence during air travel. You get used to it. Biggest mistake would be getting off. Air travel is still the most effective way to get to your destination.
• Always have a plan. Your financial plan acts as the GPS for your financial life, helping you stay focused on long-term goals.
• Work with experts. Collaborate with experienced financial planners and tax accountants to minimize risks and maximize benefits.
• Your Financial Plan is the GPS for your life. As the leading expert on the Smith Manoeuvre in Canada (and tax accountant), I’m the only source for all 8 Smith Manoeuvre strategies. 

The Smith Manoeuvre is a powerful tool when implemented thoughtfully and as part of a comprehensive financial plan. With the right guidance, it can transform your home equity into a reliable vehicle for retirement security and long-term wealth growth.

Ed

The post 7 Best Ideas to Optimize the Smith Manoeuvre (Canadian Financial Summit 2024) appeared first on Ed Rempel.

As a financial planner, I’ve had a unique view into the full financial picture of thousands of Canadians and have read countless studies. 

My experience spans clients of varying financial backgrounds, as well as countless conversations with readers of my blog, friends, and acquaintances. 

Although our clients may not represent the entire population—they tend to have higher incomes, are growth-focused, and always work with a clear plan—my broad exposure has helped me form a solid understanding of what wealth really is and the common ways people achieve it.

In my latest blog post, YouTube video and podcast episode, I’ll cover some key questions that get to the heart of wealth.

You’ll learn:

• How much do you need to be “wealthy”?
• What do media stories get wrong about the wealthy and the poor?
• Why are people with high incomes different from people with high net worth?
• Is a high income important to become wealthy?
• Do most wealthy people inherit their wealth, or do they grow it themselves?
• What types of people have high net worth?
• What does the Lifecycle Investing study tell us about growing wealth?
• How can you become wealthy?

Let’s explore these points to help you understand how wealth is built and why the reality may differ from what’s often portrayed.

How Much Do You Need to Be “Wealthy”?

“Being wealthy” isn’t about a specific income level. 

To me, it’s about having enough investments to sustain your desired lifestyle without needing to work if you choose not to. 

For financial independence, I suggest aiming to have investments that provide 20% more than what you need for your ideal lifestyle, just as a buffer. 

Once you reach about 50% more than your goal, that’s when you can feel truly “wealthy.” 

This amount allows you to live without financial worries and gives you the freedom to pursue what you want.

However, it’s essential that these investments are productive assets—assets that grow reliably over time. 

Many Canadians count their home as part of their wealth, but unless you plan to use it as retirement income (by downsizing, renting, or leveraging through strategies like the Smith Manoeuvre), your home may not be a productive financial asset for the future.

What Do Media Stories Get Wrong About the Wealthy and the Poor?

There’s often confusion about the difference between income and wealth in media portrayals. 

Many media stories talk about the top or bottom 20%, 10% or 1% yet these stories highlight income differences rather than net worth. 

True wealth is about net worth. Being wealthy means high net worth, not high income.

Income statistics are also often questionable. 

They are often salary and wages only, often excluding government programs received by low income people, investment income received by high income people, and income tax paid mostly by high income people.

Income stats are usually for households, where the lowest 20% are often a single person while the highest 20% is usually a couple. Income stats often compare single people with couples.

Net worth official statistics are questionable. Many assets that are hard to value, such as a business, property overseas, investments inside a corporation or a trust.

Media stories use statistics that use averages, which often don’t reflect actual people.

For example, 2 large low income groups – students with a net worth of zero and seniors with a net worth of $1 million have an average net worth of $500,000, which does not represent either group.

Why Are People With High Incomes Different From People With High Net Worth?

It’s common to assume that a high income equates to wealth, but the truth is more nuanced. 

Take two groups:

Who is wealthy?

A couple earning $200,000/year, but with no savings (net worth of zero). E.g. Recent university grads with student loans. 

A couple earning $30,000/year, with a net worth of $1.6 million. E.g. Seniors with a paid off home. “Millionaires in poverty.” 75% of seniors own a home and most are paid off.

The high-net seniors are technically wealthier, yet income-focused studies might miss this group’s financial security. It’s a reminder that a high income can certainly help, but it doesn’t guarantee wealth.

Is a High Income Important to Become Wealthy?

While having a good income can ease the path to saving and investing, it’s ultimately how much you save that matters. 

It’s definitely important to have a good income, since you need a productive profession or skills, and it’s easier to save if your income is higher. 

However, income for the top 20% is not much in Toronto. 

There are many exceptions. For example, doctors are widely known to have the lowest net worth based on their income. They tend to think they should live a doctor’s high lifestyle and spend most of their income.

Chart: Higher net worth people tend to have higher incomes.

What Kinds of Households Have Different Income Levels?

Household income varies across different life stages. 

People with low incomes, not working or only part-time are often in a high-income household.

General rule of thumb: Top, middle, and bottom 20% are mostly the same people at different times in their life.

Only a small percent of people stay in their income group most of their life.

Bottom 20%: Income below $30K/year. The ones I see are mostly students & seniors. Stats Canada says students & seniors are the most likely groups to be in the bottom 20%. Quite often single people and not working full time. A single person at minimum wage working full time is $34,000/year, which is already above the lowest 20%.

2nd lowest 20%: Income $30K-$55K. 20s & 30s early in career, or the same people but now with a partner.

Middle 20%: Income $55K-$90K. 30s & 40s early or mid-careers. Could be a minimum wage couple with both working full time.

2nd highest 20%: $90K-$150K. Often the same people in their 50s & 60s late in their career. Have received raises for years or promotions, or changed jobs to higher income.

Top 20%: Income $150K+. Valuable skills & professions. Professionals (especially doctors & engineers), IT specialists, salespeople, or business owners of most ages 30-65. Productive degrees in STEM fields. Or tradespeople with a small business.

Also, many people with one year of high income. A significant percent of people are in the top 20% for only 1 or 2 years. For example, they sell a rental property or a business, or receive a severance.

Seniors: Back down to lowest or 2nd lowest 20% again in most cases. Most Canadians don’t save nearly enough to retire comfortably.

Interestingly, people don’t stay in one income group for life; they often shift depending on life events like career changes, marriage, or retirement. 

This dynamic nature of household income is why lifetime financial planning is essential.

Do Most Wealthy People Inherit Their Wealth, or Do They Earn It?

Contrary to popular belief, few wealthy Canadians inherited their wealth.  

The majority are self-made millionaires and billionaires built their wealth through hard work, saving, and investing. 

E.g., Warren Buffett, Elon Musk, Bill Gates, Mark Zuckerberg, Larry Page & Sergey Bryn from Google, Jeff Bezos from Amazon.

If you look at the Forbes 400 – only 13% inherited it, and 87% made it themselves.

Classic stories: 1st generation makes wealth. 2nd generation maintains it. 3rd generation loses it. E.g., Eaton family.

I know a story of meeting the grandson of the owner of a huge business with a household name. 

He is moving in with a roommate out west because he cannot afford his rent in Toronto. His grandfather had a partner and a bunch of kids, so he only received a small portion. Now the cost of living is high and he spent most of it. This story is the norm.

In fact, even those who inherit typically don’t see that money until later in life, when they are already in their 60s or 70s, as 50% of the couple, often one reaches age 94. Most inheritances don’t happen until the second parent dies.

Most people want to enjoy their wealth and leave a bit for their kids. Few plan for intergenerational wealth.

Warren Buffett’s advice: “I will leave my kids enough so they can do anything, but not enough so they can do nothing.”

What Types of People Have High Net Worth?

Wealth typically builds with age. 

High-net-worth individuals are usually older people (50+), having saved and invested steadily over the years. 

Income also tends to rise with age, but retirees are mostly low income, but still high net worth.

Investors, especially growth investors: Stock market (equity) investors, business owners and investors in leveraged real estate (with large mortgages).

Equities (stock market or businesses) are the highest growth asset class. Equity investors & business owners both invest in businesses.

Example of wealth over 40 years in stocks vs fixed income (bonds) vs real estate. Growth of $52,800 (average house in Toronto) in 1974 is just over $1 million now in real estate, $825,000 in fixed income, but almost $10 million in global stocks:

The highest net worth individuals also often use leverage effectively, borrowing to invest in growth assets. Nearly all very wealthy people borrowed to invest in investments or their business.

Those who can handle investment risk may benefit from strategies like the Smith Manoeuvre or other forms of investment loans, which, over decades, can significantly amplify wealth.

For example, the Smith Manoeuvre or investment loans (e.g., 3:1 investment loans) for investors, a business with large loan, or real estate with huge mortgage.

Example of wealth for people that leveraged vs. no leverage.

Invest $4,167/month for 30 years: Investments $5,869,000.

Borrow $1 million to invest and pay $4,167/month interest for 30 years (30% tax bracket): Investments $20,825,000 (net of loan).

Investments 4 times higher with the same cash flow.

What Does the Lifecycle Investing Study Tell Us About Growing Wealth?

A study by Yale professors shows that starting with a large investment portfolio early in life can yield more wealth than incremental savings. 

It works much like borrowing as much as possible to buy a home when you are young and then pay it off by your mid-50s and move to your target asset allocation by retirement. 

This study showed that 100% of the time this has created more wealth than the normal bit-by-bit savings most people do.

It works because you start with a large investment portfolio when you are young.

This method minimizes the “last decade risk,” where low returns late in your investing years can reduce your lifetime gains. 

For instance, If you invest for 40 years from age 25-65 and your investment returns are low in the last decade from age 55-65, then your 40-year return is low, because nearly all your investments are held in the last decade. 

Your rate of return the first decade from 25-35 is almost irrelevant, because you have hardly any investments then.

Conclusion: When you are young, having large investments is what matters much more than your rate of return. To build wealth, try to get as much money invested as possible when you are young and it can grow for 40 years – even if you have to borrow it.

 Note this is not for everyone. Only for growth-focused people that want to focus on being wealthy and who will stay invested for the long term.

The key takeaway? 

Investing as much as possible when young allows wealth to compound over 40+ years.

How Can You Become Wealthy?

1/ Wealth Builds with Age: Invest as much as possible when you are young.

2/ Save and Invest Early: You’ll benefit from 40 years of compounding.

3/ Invest in Equities (stock market investments): Make regular contributions to growth investments like equities, a business, or real estate with a large mortgage are critical.

4/ Borrow To Invest (leverage) into equities: This is the most effective growth strategy if done by the right people in the right way over the long term. Lifecycle Investing study is an example of how this can work over decades.

Wealth doesn’t happen overnight. 

It’s a gradual process of smart investments, consistent savings, and strategic planning. 

With these insights, you’ll have a better sense of what it takes to build wealth and the types of choices that support financial success over the long haul.

Ed

The post Who Are the Wealthy and How Did They Get Rich? appeared first on Ed Rempel.

The Smith Manoeuvre is an efficient strategy to use your home equity to invest for your future without using your cash flow, while converting your mortgage into a tax-deductible debt. 

This method is known for its effectiveness in enhancing financial plans and can bridge the gap to achieving your retirement goals.

New OSFI Mortgage Rules

If you do the Smith Manoeuvre, understanding the new OSFI mortgage rules is crucial.

Recent changes to mortgage regulations by the Office of the Superintendent of Financial Institutions (OSFI) have introduced new constraints on readvanceable mortgages (CLPs). Here’s what you need to know:

• Reduction in Readvanceable Limits: If your total mortgage limit exceeds 65% of your home’s value, the new rules will prevent readvancing your credit on a $1 for $1 basis. For instance, if your mortgage payment reduces your principal by $1,000, you might not be able to reborrow the full $1,000 in your credit line.
• Change in Borrowing Limits: The borrowing limit will gradually decrease from 80% to 65% of your home’s value over time.
• Effective Date: These changes will apply to mortgages coming due after October 31. Since most major banks align their fiscal years with this date, expect these rules to impact your mortgage renewal if it occurs after this cutoff.

As OSFI notes, while many borrowers will see no immediate effect, those with a loan-to-value (LTV) ratio exceeding 65% will experience a gradual shift where a portion of their mortgage principal payments will go toward reducing their overall mortgage balance until it falls below the 65% LTV threshold.

Impact on the Smith Manoeuvre

The new rules will have a moderate effect on the Smith Manoeuvre, which is integral to many financial plans. Here’s how these changes could impact your strategy:

• Overall Effect: The changes are moderate for most users. You might experience a modest change in your monthly cash flow. If you’re maximizing the Smith Manoeuvre, the new credit available after each mortgage payment will be about 20% less. For smaller mortgages, the reduction could be up to 80%. However, if your total credit limit is already at 65% or less, there will be no impact.

Effect is not large.

Effect of much higher interest rates this year is far greater.

Formula for the New Rules

To calculate the reduced credit available due to the new rules, use the following formula:

Total credit limit 80%.*

Variable credit limit 65%.*

Total credit limit reduced from 80% to 65% over time.

o   Based on mortgage amortization years. E.g., 25 years.

Loan-to-value (LTV) = Amount owing / value of your home (appraisal).

Credit readvance in your credit line:

Reduced credit = Principal payment x (80%-65%) / LTV of mortgage(s)%

Credit readvance = Principal payment – Reduced credit

* Total credit limit is normally 80% and variable credit limit 65%, but that is not always the case. If they are different, use the actual percentage limits in the formula, instead of 80% and 65%.

• Old Limit is typically 80%
• New Limit is 65%
• LTV is the loan-to-value ratio of your mortgage

Examples of the Effect

Let’s explore a few scenarios:

Example 1: New Smith Manoeuvre

• Home Value: $1 million – Last appraisal
• Mortgage: $800,000 at 6.5%
• Credit Line Balance: $0
• Total Owing: $800,000
• Loan-to-value (LTV) of mortgage(s): 80%
• Payment: $5,334/month; Interest: $4,334/month
• Principal: $1,000/month

Using the formula:

Reduced credit = Principal payment x (80%-65%) / LTV of mortgage(s)%

Reduced credit = $1,000/month x 15% / 80% = $188/month.

Credit readvance = Principal payment – Reduced credit

Credit readvance = $1,000/month – $188/month = $812/month.

Old Rules: New credit available = $1,000 

New Rules: New credit available = $812

Example 2: After a Few Years

• Home Value: $1 million – Last appraisal
• Mortgage: $700,000 at 6.5%
• Credit Line Balance: $80,000
• Total Owing (Reduced total limit 78%): $780,000
• Loant-to-value (LTV) of mortgage(s): 70%
• Payment: $5,334/month; Interest: $3,792/month
• Principal: $1,542/month

Reduced credit = Principal payment x (78%-65%) / LTV of mortgage(s)%

Reduced credit = $1,542/month x 13% / 70% = $286/month.

Credit readvance = Principal payment – Reduced credit

Credit readvance = $1,542/month – $286/month = $1,256/month.

Old Rules: New credit available = $1,542 

New Rules: New credit available = $1,256

Example 3: Mostly Paid Off

• Home Value: $1 million – Last appraisal
• Mortgage: $150,000 at 6.5%
• Credit Line Balance: $530,000
• Total Owing (Reduced total limit 68%): $680,000
• Loan-to-value (LTV) of mortgage: 15%
• Payment: $5,334/month; Interest: $812/month
• Principal: $4,522/month

Reduced credit = Principal payment x (68%-65%) / LTV of mortgage(s)%

Reduced credit = $4,522/month x 3% / 15% = $904/month.

Credit readvance = Principal payment – Reduced credit

Credit readvance = $4,522/month – $904/month = $3,618/month.

Old Rules: New credit available = $4,522 

New Rules: New credit available = $3,618

Effect on Monthly Investment

• New Smith Manoeuvre: New credit of $812, resulting in the same amount available for investment.
• After a Few Years: New credit of $1,256, with $776 available for investment after adjustments.
• Mostly Paid Off: New credit of $3,618, with $438 available for investment.

Under the old rules, monthly investments would remain flat for 25 years. However, under the new rules, investments will decline over time, with a more pronounced decrease in later years.

Best & Worst-Case Examples

Best case:

o   Mortgage 80% LTV.

o   Credit available to invest 20% less.

Worst case:

o   Mortgage 15% (minimum allowed).

o   Credit available to invest 45% less.

Managing the Process

To manage the impact of these changes:

• Credit readvance has 2 uses: Pay tax-deductible interest on your credit line(s) (“capitalize”) &  Invest.
• Adjust Investments: Consider investing 20% less each month or increasing your mortgage payment by approximately 4%.
• Credit Management: Keep some extra credit available to accommodate declining new credit.

Minimizing or Eliminating the Effect

1. Renew Early: Renew your mortgage before October 31 to avoid the new rules.

o   Today’s invest rates – 3-year probably better than 5-year term.

o   Rules don’t apply till mortgage due date after October 31, 2023.

2. Reappraise Home: Reappraise your home regularly to keep the LTV ratio below 65%.

o   Don’t increase total limit.

o   With 23% increase in home value, effect is eliminated.

o   Need 23% increase in home value to bring total limit to 65% LTV.

o   23% increase typically happens in 5 years. Recently less than 5.

o   Better to invest the increase for growth-focused investors.

O If you invest the increase, the effect is slower, not eliminated.

3. Split Mortgages: Consider creating split mortgages to maintain a high percentage of tax-deductible debt.

o   Convert tax-deductible credit line to split mortgage.

o   Try to keep 2 mortgage portions close to 80% of home value.

o   Main non-deductible mortgage + tax-deductible split mortgage.

Effect on Smith Manoeuvre vs. TFSA

When deciding between the Smith Manoeuvre and contributing to a Tax-Free Savings Account (TFSA):

Smith Manoeuvre means pay down mortgage & reborrow from tax-deductible credit line to invest.

All 3 options, you invest the same amount & can invest the same.

Differences are tax differences.

• The Smith Manoeuvre generally offers better tax efficiency compared to TFSA contributions. Tax-efficient investors get refunds in most years vs. TFSA no tax.

• The TFSA might become more attractive since you can invest 100% of your extra cash, whereas the Smith Manoeuvre may only allow for a reduced amount due to the new constraints.

Income in 20% bracket             Income in 30+% bracket

Less than $53,000 (2023)        Over $53,000 (2023)

Priority 1        Smith Manoeuvre                     RRSP

Priority 2        TFSA                                           Smith Manoeuvre

Priority 3        Non-registered (not RRSP)       TFSA

General rule of thumb with new rules:

TFSA generally beats Smith Manoeuvre.

You invest 100% of extra cash, instead of 80% or less.

Income in 20% bracket             Income in 30+% bracket

Less than $53,000 (2023)        Over $53,000 (2023)

Priority 1        TFSA                                           RRSP

Priority 2        Smith Manoeuvre                     TFSA

Priority 3        Non-registered (not RRSP)       Smith Manoeuvre

Old Rules: No TFSA contributions unless mortgage will be paid off before retirement.

New Rules: No mortgage prepayments until TFSAs are maximized.

Conclusion

The new OSFI mortgage rules introduce a moderate impact on the Smith Manoeuvre, affecting how much you can invest each month. While the changes are notable, particularly for larger mortgages or those nearing the 65% LTV threshold, there are strategies to manage and mitigate these effects. Understanding the formula and adjusting your approach can help you continue to leverage home equity effectively for investment.

The post Smith Manoeuvre In A Financial Plan & The New OSFI Rules (Canadian Financial Summit 2023) appeared first on Ed Rempel.

The Smith Manoeuvre has long been a popular strategy for Canadian homeowners seeking to convert their mortgage debt into tax-deductible investment debt. 

However, recent tax and regulatory changes have impacted the efficacy of the Smith Manoeuvre, and further changes from the Liberal government could pose additional challenges.

In my latest blog post, YouTube video and podcast episode I give an analysis of the current landscape and potential future threats to this investment strategy.

You’ll learn about:

• What tax & regulatory changes have happened that affect Smith Manoeuvre?
• What changes might the Liberals do that would attack the Smith Manoeuvre?
• Why is an attack on the Smith Manoeuvre possible?
• What are the 19 tax increases that affect investors?
• What additional tax increases might the Liberals be thinking of?
• Why are the Liberals continually increasing taxes?
• Is it likely that they would attack the Smith Manoeuvre?
• What happens if the Liberals Attack the Smith Manoeuvre?

Recent Changes Affecting the Smith Manoeuvre

Negative Impacts:

1. OSFI Rules: The Office of the Superintendent of Financial Institutions (OSFI) has introduced rules that reduce ongoing investments through the Smith Manoeuvre by about 20%. This reduction stems from tighter regulations on mortgage lending and interest deductibility.
2. Higher Capital Gains Inclusion: The increase in the capital gains inclusion rate reduces the benefit of the Smith Manoeuvre by decreasing the after-tax returns on investments.

Positive Impacts:

1. Higher Income Tax Rates: Paradoxically, higher income tax rates can increase the benefits of the Smith Manoeuvre. As tax rates rise, so do the tax refunds from interest deductions, enhancing the overall tax efficiency of the strategy.

Potential Liberal Policy Changes

If the Liberal government targets the Smith Manoeuvre, several policy changes could undermine its benefits:

1. Limiting Interest Rate Deductions: A significant threat is the potential limitation of interest rate deductions to match investment income, similar to the rules in Quebec. This would severely restrict the ability to deduct interest expenses.
2. Increased Investment Taxes:
   • 100% Capital Gains Inclusion: Increasing the capital gains inclusion rate to 100% would eliminate the preferential tax treatment of capital gains, making investment returns less attractive.
   • Higher Tax on Dividends: Increased taxes on dividends would reduce the after-tax returns on dividend-paying investments, further diminishing the benefits of the Smith Manoeuvre.

Historical Context of Liberal Tax Increases

The Liberal government has a history of implementing tax increases, particularly targeting investors and higher-income Canadians. This trend raises concerns about future policy changes:

• 2016: Increased tax rates for incomes over $200,000 to more than 50%, elimination of the Family Tax Credit, and new reporting requirements for the sale of principal residences.
• 2019: Introduction of the passive investments tax and the Tax on Split Income (TOSI) rules, and the implementation of the carbon tax.
• 2023: OSFI rules reducing interest deductibility, property flipping tax, and a ban on foreign ownership of property.
• 2024: Increase in the capital gains inclusion rate from 50% to 67%, new Alternative Minimum Tax (AMT) rules, stricter General Anti-Avoidance Rule (GAAR), and a 2% share buyback tax.

Additional Tax Increases on the Horizon

Speculation about further tax increases includes:

• GAAR Usage Expansion: The application of the General Anti-Avoidance Rule in more scenarios, potentially disallowing any transaction partly motivated by tax savings.
• Home Equity Tax: Discussions around implementing a tax on home equity.
• Wealth and Gift Taxes: Consideration of wealth and gift taxes, influenced by left-wing think tanks.

Motivation Behind Liberal Tax Increases

The Liberal government’s consistent tax increases can be attributed to several factors:

1. Political Strategy: Using tax policy to create divisions between different economic groups to garner political support.
2. Economic Philosophy: A left-wing approach aiming to redistribute income rather than focusing on economic growth.
3. Fiscal Needs: The need to address the government’s substantial debt and annual deficits.

Likelihood of an Attack on the Smith Manoeuvre

Despite these concerns, a direct attack on the Smith Manoeuvre appears unlikely:

1. Legal Protections: Interest deductions are specifically allowed in the Income Tax Folio S3-F6-C1, and new GAAR rules stipulate that they don’t apply to actions explicitly permitted.
2. Widespread Use: Interest rate deductions are a common business expense, making limitations impractical.
3. Limited Awareness: The Smith Manoeuvre is not widely known enough to serve as an effective political wedge issue.

Conclusion

The Smith Manoeuvre remains a valuable strategy for building a retirement nest egg over time without significant cash flow impacts. 

While regulatory and tax changes have reduced some of its benefits, the strategy still offers substantial advantages through investment returns. 

Even in the absence of tax benefits, the Smith Manoeuvre can be highly beneficial when implemented correctly over the long term.

For homeowners utilizing or considering the Smith Manoeuvre, staying informed about policy changes and adapting strategies as needed will be crucial to maintaining its benefits.

Ed

The post What Happens if the Liberals Attack the Smith Manoeuvre? appeared first on Ed Rempel.

You know the basics about the Smith Manoeuvre. It’s a big decision. Here is a discussion of the big issues.

Listen to my new podcast with Sean Cooper from BurnYourMortgage.ca .

Here is the link:

How to Successfully Implement the Smith Manoeuvre with Ed Rempel

We discuss:

• Why should you consider the Smith Manoeuvre?
• How to know if the Smith Manoeuvre is right for you.
• Managing the risks. Avoiding the common errors.
• Tax tracking & Capitalizing.
• Dealing with CRA.
• How the Smith Manoeuvre can fit into your retirement plan.
• What happens if you move?
• What happens once your mortgage is paid off?
• What happens after you retire?
• Options – The 7 Smith Manoeuvre strategies.
• Effective investing with the Smith Manoeuvre.
• Implementing the Smith Manoeuvre.
• How I can help.

Do you have more questions? I have what I believe is the most in-depth discussion of the Smith Manoeuvre anywhere on my blog. Read it and ask your questions here: The Smith Manoeuvre – Is your mortgage tax deductible?

You can listen to my new podcast with Sean Cooper here:

How to Successfully Implement the Smith Manoeuvre with Ed Rempel

Ed

The post How to Successfully Implement the Smith Manoeuvre (Podcast with Ed Rempel) appeared first on Ed Rempel.