Ed Rempel Unpacks the Smith Manoeuvre – How It May Help Risk-Tolerant Investors

According to recent census data, almost two-thirds of Canadians are saving for retirement and are busy contributing to registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). 65.2 percent of households are engaged in saving for retirement, which is a robust figure when compared with the national household savings rate that recently fell to 4.6 percent.

However, while that mark is encouraging, that still means that more than a third of Canadians are not saving for retirement. Many believe that, while those in the prime of their earning years (ages 35 to 54) and members of the middle class are more easily able to devote resources to retirement planning, the younger members of the workforce do not have the same financial wherewithal–for reasons that range from indebtedness to lower salaries. A rise in housing prices relative to wage growth in large metropolitan areas in Canada has also presented a significant obstacle to young and middle-aged savers.

“Many people who would like to save now have to dedicate money to a large down payment on a house,” explains Ed Rempel, a certified financial planner and chartered professional accountant. “And it’s taking them longer to pay down their mortgages, so they have less time to save for their retirement.  That’s part of the problem.”

Ed Rempel, who runs a financial blog called Unconventional Wisdom, is a leading expert on the Smith Manoeuvre, a process that simultaneously allows homeowners to pay down their mortgages more quickly, while investing for retirement. “The Smith Manoeuvre provides an efficient strategy for homeowners to use the equity in their homes to invest without using their cash flow,” Rempel adds. “It allows people to convert their mortgages into tax-deductible credit lines that they can then use to make investments for their retirement.”

The Smith Manoeuvre may be an efficient investment strategy for those who, as mentioned above, want to start planning for retirement, but who are faced with the prospect of paying down a long-term mortgage before they can devote their resources to retirement investing. The strategy works well for those who have a long-term outlook and a risk-tolerant attitude with respect to their investments.

“The main benefit of the Smith Manoeuvre comes from the long-term compound growth of investments,” Rempel further explains. “You can invest for your future without using your cash flow, you receive tax deductions, and you can pay off your mortgage faster. It’s a great option for investors who are willing to stick with the strategy.”

To implement the Smith Manoeuvre in more general terms, a homeowner must have a readvanceable mortgage, which is a mortgage that’s also linked with a credit line. Rempel has a free Ed’s Mortgage Referral Service on his blog to help homeowners get the best readvanceable mortgage for the Smith Manoeuvre. As a homeowner makes mortgage payments and pays down a portion of the principal, that portion is available as credit in a credit line — he or she then borrows from the credit line to make conservative and tax-efficient investments.

The investment credit line is tax-deductible, so, using the Smith Manoeuvre, the homeowner can receive tax refunds, which can then be used to pay down the mortgage more quickly. The homeowner also borrows from the credit line to pay the interest on the credit line; capitalizing the interest is a key part of the strategy and allows a homeowner to invest without having to resort to using his or her cash flow.

Ed Rempel is the only accountant in Canada working with the Smith Manoeuvre and the only financial planner combining the strategy with comprehensive financial planning. He explained that the Smith Manoeuvre can be a helpful choice for investors who have a time horizon of 20 to 30 years when it comes to their investment portfolio

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