Interview #8 – Robinson Smith and the Smith Manoeuvre

Today on the FI Garage The Mechanic and The Accountant have a Red Truck IPA and get to speak with Robinson Smith, author of Master Your Mortgage for Financial Freedom. Robinson’s father Fraser created the Smith Manoeuvre in order to help Canadian’s make their debt tax-deductible and help more Canadians achieve financial freedom. Robinson has now picked up the torch and released a new book to help you master your mortgage and build wealth.

Beer – Red Truck Hard Day Northwest IPA [0:42]
  • Basic’s of the Smith Manoeuvre (3:01)
  • Maintaining your total debt (8:00)
  • Deductible Debt vs Non-deductible debt (8:58)
  • Tax-free day (14:05)
  • Reducing your taxes (15:05)
  • The after-tax cost of borrowing (22:20)
  • Capitalization of interest (23:15)
  • Cash Flow Dam (35:12)
  • Test run of Smith Manoeuvre calculator (40:40)

Don’t forget to leave your comments on the episode page by the end of February 29th, 2019 in order for a chance to win a copy of the book and exclusive access to the calculator.

Links

60 Comments

  1. Great episode! I have to listen to this a few times . So much information to digest.
    You guys really make learning about money a fun experience.
    Thanks a bunch

    1. Thanks Gary! There is a ton to learn from Robinson, some pretty powerful stuff.

      The book does a great job of laying it out in straightforward terms.

  2. I was wondering about capital gains or dividends made on investments bought using funds borrowed via the Smith Maneuver. Is it basically beside the point of the maneuver, and/or is there a way around it?

    1. So the capital gains and dividends will be taxed the same way be without the manoeuvre the only difference being that when your use the Smith Manoeuvre you create tax deductible interest that you can use to offset some of that income on your tax return.

    2. This is an interesting question. Personally I have worked hard on trying to max registered accounts. However, there comes a time on the path to FI that one is probably going to need to start using non-registered accounts and be taxed on capital gains or dividends. The advantage of the SM, in it’s basic form, is that you start those non-reg accounts while you are paying down your mortgage with no other money out of your pocket. The advantage of the SM is the length of time your investments have to compound and the ongoing tax deduction you receive.

    3. L.J. – the investing component must be done in an open/on-registered account, so I’m afraid if you improve your wealth, the government is going to want a piece. That being said, the deductions help and so will contributing to registered investments outside of your Smith Manoeuvre. In the end, any taxation is well worth the benefit.

  3. You guys certainly stepped up your marketing on this one…a giveaway is a next-level strategy!
    This episode gave a good answer to the question “is it better to do Smith Manoeuvre or invest in TFSA/RRSP?”…which is something I had been asked before but stumbled on because I neglected the fact that the plain jane SM can run itself on the mortgage payments you are making anyway!
    By the way, I bought the book on preorder but lent it out to a friend (who was about to set up a new mortgage) before digging in myself. Would be great to be able to pair it with a calculator and maybe a second book so that i can share one and read one!

    1. Marketing isn’t our strong point but people always love free stuff right?

      I think a lot of people don’t realize that if they are already making mortgage payments they can do the Smith Manoeuvre without having any impact on their current cash flows. You just get to pay off your mortgage a lot faster and add to you retirement nest egg!

  4. Loved this episode! I have this book on order at my library, and definitely want to learn more. My one misgiving is that my mortgage is already paid off. Thus it would feel more like “betting the farm” to me, rather than trading one kind of debt for another (tax deductible) kind. I’m thinking I would only invest 20-40% to allow me to sleep at night.

    Thanks for the great content, as always!

    1. Hey Kayla, Thanks for listening!

      First off that’s amazing that you have your house paid off, nice work!

      Since it is already paid off any investing you do using a HELOC would be more like leveraged investing. The interest will all be tax-deductible as long as you invest it into taxable accounts but you would be taking on debt you wouldn’t otherwise have, unlike the Smith Manoeuvre. That being said leveraged investing can produce some amazing results! I think it is a smart move to only do what you are comfortable with. People often forget to factor their own comfort level into the equation.

      It seems like you are well on your way to FI, keep up the good work!

    2. Kayla – The Accountant is right – if you’re not converting your debt but taking on new debt, you are truly leveraging. This would warrant a discussion with an investment advisor, methinks, but in the end you will need to do only what you are comfortable with – being able to sleep at night is an important one!

  5. Another great episode gents. I have to say I wasn’t excited for it, but after I listened I’m sold and want to learn so much more. Already IM’d my tax accountant friend. I recall the mechanic saying (long ago) that he struggled through switching to a HELOCable mortgage. More on that if you could. Any banks better than the others? Worth breaking an existing mortgage to make it happen (Just remortgaged last year)?

    1. Hey Todd, We were due for renewal on our mortgage and I was pretty sure it was going to be our last 5 year term. I wanted to get a re-advanceable HELOC regardless of whether we used the equity to invest or start the SM. I am paying a higher rate than before, so that was a consideration. I figured I could accept the higher rate in order to have access to the equity. We changed lenders so we had to basically re-qualify for the mortgage which could pose some problems for some. There were also legal costs etc. which came in around $800. I probably should have tried harder to get these covered by the lender.
      There’s so many options out there for mortgages now, I wouldn’t know where to start recommending. You could talk to a mortgage broker. Breaking your existing mortgage could come with some steep penalties, make sure you understand the costs. Any option to have the existing borrower add a re-advanceable HELOC on?

  6. This episode was fantastic! It cleared up a lot of things about the SM that I wasn’t too clear on. And it was pretty relaxed, easy going conversation, not a boring, tune out in 5 minutes lecture. I will be listening to this a few more times definitely. Kudos and Thanks.

    1. Thanks, Monique!

      It’s definitely one to listen to a few times. Robinson has a ton of great information to digest!

  7. Great interview! I am going to listen to it again and will definitely read the book to learn more. I like how RS explained how you can take a 25 year mortgage and using the SM could drastically reduce the mortgage life. I am thinking of applying the principles on my next mortgage. Thanks for the excellent content.
    5 stars!!!

    1. Thanks Shaidah, I’m so glad we could finally sit down with RS and get the straight goods. There is a lot of minor misinterpretation and misunderstanding of the SM. I think this is such a powerful strategy for those of us on the path to FI that are already investing in the markets and can adopt that knowledge and start building a non-reg portfolio. It’s all about building assets and having tax deductible liabilities.

      1. Money Mechanic- I agree about the misinterpretation/misunderstanding. I wish I new about it sooner! I had no idea how powerful of a strategy it can be to compound the gains and pay down the mortgage faster and faster. I am telling all my young coworkers who are starting to get into the housing market to look into this strategy- but staying in debt forever is a tough pill to swallow.

        1. I think the main hurdle with the strategy is getting over the mindset of being in debt. As RS mentions, and illustrates well in the book, you are using tax deductible ‘good debt’ to invest in an asset. You always have that asset to offset or pay off that debt at some point in the future if you choose.

        2. Hi Shaidah – yep, wrapping one’s head around maintaining debt is a tough one for some. That being said, many younger people are already so in debt they’ve almost resigned themselves they’ll be in debt forever. But if that was to be the case, would you rather it non-deductible or deductible…? Keep spreading the word!

  8. Great episode. I had not heard of the SM previous, and I have just refi ed my home to purchase a rental property. Seeing the statements, it looks like I may have accidentally stumbled on to a readvanceable mortgage. I am definately picking up the book and talking about this in our choose fi local group. Looks like a great opportunity that I would never heard about on “those us shows” !

    1. Awesome! Finally the FI Garage has some useful content!! LOL Sounds like the cash-flow dam would be an excellent strategy for your rental income. It’s really surprising how powerful this accelerator can be when you math it out.

  9. Interesting episode, I’m tempted to pick up the book if I can convince my library to pick it up (or I get a copy 😉 ).

    I’m already borrowing from a HELOC portion of an All-In-One mortgage product to fund a non-registered account. Each year I get more room in the HELOC portion but so far I have not borrowed this extra cash for investing, mostly because it keeps things slightly simpler. Time to break out a spreadsheet to see what the future benefit is vs my anticipated effort.

    1. Right on, I know how much you love spreadsheets. Are you investing in dividend stocks, or index ETFs in your non-reg? I currently am just holding Div stocks, but I have looked at the Horizons total return ETFs a few times.

      1. ETF’s all the way, I considered the Horizon funds but with the changes announced in 2019 I’m glad I went for the simpler route.

        I currently only hold a single Canadian ETF, the only slightly tricky tracking is documenting dividends vs return of capital in the distributions but adjustedcostbase.ca takes care of that for me.

  10. Thanks so much for doing this episode, FI garage! I have a way better understanding now and am almost fully convinced on SM. One thing I’m wondering is if I need to have 20% equity in my property to do it. I’m pretty sure I do from what I’ve read. I wonder if it’s worth me picking up the mortgage-paying pace to get to 20% quicker so I can start SM ASAP. Thanks again for the food for thought!

    1. Hi Kathleen, thanks for the comment. You would have to talk to your mortgage lender to find out what they require for the re-advanceable HELOC. As I mentioned in another comment, be aware of any fees or penalties if you choose to change your current mortgage, and the potential costs for writing a new mortgage. My HELOC also came with a higher cost of borrowing, so that may be a consideration. Best to sit down and figure out the math for your situation, this is where one of the RS accredited professionals could be of assistance.

  11. I have been on the FI journey for a few years and I have a Financial Freedom date indelibly etched on my brain. I repeat it daily to keep the obsession front of mind. Being mortgage free is an absolute requirement and this podcast is a game changer. I’ve heard of the Smith Manoeuvre before but regrettably never explored it. I wasn’t in that FI mind set, and you don’t know what you don’t know. But now I know and need to know more. This is a podcast that I will need to listen to a few more times to really comprehend the power of this strategy. This is a book that I will be buying and adding to my FI library. Thanks for bringing him on your show and keep up the good work. Hopefully one day you will put in a plug for some good craft beer from Saskatchewan.

    1. Thanks for the comment Randall. ‘Indelibly etched on my brain’ This is awesome, I think there’s lots of us in the community who relate to this. I agree that being mortgage free is a requirement for FI too. However, that doesn’t mean you couldn’t be using dead equity to invest in an asset and continue to build your networth. It’s all a lot to wrap your head around, I’m working on exploring these strategies and expanding my mindset. I love the moments when I think to myself, ‘huh, interesting I didn’t know that, must learn more.’

      We will pursue getting some Sask beers delivered to us! We have a few friends here that are from Sask. Cheers.

  12. Great Episode! Looking forward to reading this book and getting all educated before my family moves in the next couple of years. It will be the perfect opportunity to get into a HELOC and leverage my equity into accelerated pay down! I’ve been intrigued by the SM since I heard of it on exploreficanada a couple months back and this conversation was very helpful. Keep up the great work guys!

    1. Thanks Greg, You’ll be in a perfect position to implement the strategy when you move and re-fi. The book is a great resource, and now that I have had a chance to run my numbers through the online calculator, I highly recommend that too. Cheers. Smithman calc

  13. Great episode! The smith maneuver is my favourite financial strategy. I’ve got the book already, but would love a chance to test out that calculator and have a beer with the FIgarage guys!

    1. Yeah, that’s really the bonus win of the contest anyway!!! It might just be you and I at our meetup next week, so we’ll just have a beer and record in the FI Garage instead. The calculator is awesome, I had a chance to run some numbers through it and I love the way it responds real time to each input or attribute you manipulate.

  14. Thank you for the fantastic episode guys. This strategy is really fascinating and why not have your HELOC finally make you some money instead of cost you money!

    I really appreciate everything I learn from this podcast, keep up the great work!

  15. This was my favorite episode so far. I will be listening to it again. I have a little while before my mortgage comes up for renewal but I already got the spouse on board with a SM. This is defiantly a book I will be getting my hands on.

  16. Well done guys! Like many of the other commenters this is by far my favourite episode so far – all the usual entertaining banter and a mega-dose of information. Plus RS gets pretty savage for a minute or two there haha. Anyhow can the SM be utilized on a cottage or second home? The mortgage on my primary residence is paid off and has a HELOC with zero balance, my second home (I derive no income from this property) has a conventional mortgage. Assuming that I obtain a re-advanceable mortgage/HELOC on that property (unfortunately I just renewed 5 months ago!) would I be able to employ the SM? It would be great to capitalize on the benefits the SM offers! Keep up the good work gents!

    1. That’s a good question, you could be deducting the interest on the money you borrowed to purchase the second house if it was an income property. That said, because it’s not, I wonder if you could do the SM with that mortgage? I don’t see why not, you’re still converting non-deductible debt by borrowing to buy other income paying assets. But I definitely will have to defer to an expert in this case. We’ll see what RS has to say when he’s back from vacation. Cheers,

    2. I’m back from vacay. Sunburn and all…Your second home, as long as you’re not renting it out and the mortgage is therefore deductible, can be used for the SM just as a principal residence. The test for deductibility is, did you borrow with the reasonable expectation of generating income. The mortgage loan on your second home is not tax deductible…but it could be. If you break the mortgage on this home you will see a penalty, but The Smithman Calculator can show you that 99.9% of the time, the upfront cost of the break (which can be rolled into the new readvanceable so not out of pocket for you) will be worth it. Let me know if you would like to speak to a mortgage broker who specializes in the SM. info@smithman.net

  17. Awesome episode. I will need to listen to it more than once and/or get the book. I just stumbled on your podcast this week and was super happy that there are other FIRE people in Victoria. We just moved from Alberta. 🙂 I will put the book on hold at the library since there so much good stuff in the episode. I think I need a pen and paper for this one. Since it is tax time soon any suggestions for a good accountant in the region that understands the FIRE ways? Cheers. Keep up the great work.

    1. Yeah, there is so much to wrap your head around to get this manoeuvre done correctly. I highly recommend the book, it’ll give you a good starting point and then you can engage the necessary resources to fill in the blanks. As for FIRE in Victoria, if you’re on Facebook, I have a group called Van Isle Mustachians and we try and have a few meetups throughout the year. It’s great to sit down with some other FIRE enthusiasts and chat about investing and life optimization. I shall pass on your question to ‘The Accountant’ about a FIRE savvy accountant in the area. Unfortunately he is experiencing technical difficulties at the moment! Probably something to do with using his laptop as an electronic napkin during a couple episodes… Thanks for listening, and for the feedback. Cheers.

    2. Hi FRC – I can hook you up with my family’s personal accountant and to whom I have referred many, many clients when I was an advisor putting people into the SM all day every day (or mortgage broker, investment advisor, etc). send me an email at info@smithman.net.

  18. Another solid podcast, from a great group of guys. Really glad you passed the hurdle of the 20th episode and are now at expert level.

    We are apporaching 2 years into a 5 year mortgage, would it ever make sense to refinance the mortgage early? Or just do the leg work now and start the Smith Maneuver when we refinance in 3 years?

    Also, some beer suggestions:
    -Bridge Brewing’s Bourbon Blood Orange Wheat Ale
    -Steel & Oak’s Beechwood Smoked Honey Doppelbock

    Hillside Liquor Plus should have both.

    1. Thanks for the comment. The biggest issue with refinancing early would be the penalties to do so, which would depend on your mortgage terms. Since you probably aren’t refinancing into a lower rate mortgage with HELOC you’re not going to get any rate arbitrage to justify the cost. We waited out our first 5 year term and then started our re-advanceable HELOC. Depending on how much equity you already have, the math might work out in your favour to ‘prime the pump’ and get the SM started now. Thanks for the beer suggestions, they’re outside our usual choice of flavour with is great! We need those ideas. Cheers

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