Getting serious about building wealth is simple - The Smith Manoeuvre, Pt 2
One of the most common sentiments we hear in this industry is that “my home is not an investment, it’s my place to put down roots.” And this is fair - our homes are so much more than an investment. But why can’t they be both?
During these strange financial times, when most of us are scraping by month-to-month, it’s hard to even consider our financial picture next year, let alone years into the future. But if you are a homeowner then you have the power to start building an incredible foundation for yourself and your family sooner than you think, thanks to The Smith Manoeuvre.
The Smith Manoeuvre again?
A few weeks ago I wrote a piece introducing The Smith Manoeuvre in its simplest form (you can check that post out here) and got a ton of great feedback and homeowners reaching out with questions right away. It was pretty clear within hours of sending out that breakdown of the strategy that there is considerable interest among homeowners this year in finding ways to maximize their financial potential, especially when those methods don’t require any extra income.
So today, I thought it would be a great idea to dig a bit deeper into what this strategy can look like for you, debunk some of the misconceptions around what it is, and pull back the curtain of mystery that has, in my experience, held a lot of homeowners back from diving in.
I speak with Canadians every day who are worried about what their financial futures might look like, so I am passionate about sharing this strategy that can help to dispose of your mortgage faster and build a strong financial foundation in tandem.
Is it right for me?
Of course, as with any big financial decision, there are a ton of factors to consider when deciding whether a given path is right for you and your family. And, as with any of these decisions, it may not always be the right time to start. So what are some things to consider before starting your Smith Manoeuvre journey?
Do you have a solid understanding of how it works? This should go without saying, but it’s imperative that you have your head fully wrapped around this or any financial strategy before diving in. Of course, there will be a learning curve and knowledge you gain along the way, but knowing the basics of the process well will ensure that you don’t come up against any unwelcome surprises along the way.
Do you have the equity you need? While you do not need any extra cash to get started, you do need to have at least 20% equity in your home to access the necessary readvanceable mortgage. This means that the principal mortgage amount you have outstanding is 80% or less of the current market value of your home. Not sure how much equity you have? We can run some simple numbers and, if necessary, schedule an appraisal to find out exactly how wealthy you already are!
What is your timeline? Since the first step in The Smith Manoeuvre is to get you into a readvancable mortgage, this could mean breaking your current fixed-term mortgage to do so. Since breaking your fixed mortgage can come with a penalty of thousands of dollars, there is no more perfect time to start than when your current mortgage is up for renewal. With that same penalty in mind, also consider how long you plan on staying in your current home. That’s not to say that starting sooner won’t be worth incurring the penalty - we will always run the math and see if your gains will outweigh the fee!
What is your marginal tax rate? In Canada, we are taxed on a sliding scale based on our taxable income less any expenses or deductions. Our marginal tax rate (or the rate at which we are taxed on the next dollar earned) is calculated both federally and provincially, and our income is divided into the taxation bracket in which that amount falls. For example, the 2022 federal marginal tax rates are 5% on $0 to $50,197, 20.5% on $50,197 to $100,392, 26% on $100,392 to $155,625 and so on. To find out what your combined federal and provincial marginal tax rate is, check out this great post.
Why does it matter? Because the higher your rate of taxation, the greater your tax deductions will be. And as we know, tax deductions are the superpower of this strategy.
Don’t let a lower income and lower marginal tax rate deter you, though. Even small deductions and smaller mortgage prepayments are better than none!
How do you feel about debt? This is perhaps the biggest factor when deciding whether The Smith Manoeuvre is right for you. Everyone has debt - you, me, and even the wealthiest Canadians. But there is a huge difference in debt mindset between the wealthy and everyday Canadians that has a big impact on our ability to grow and that is the difference between good debt and bad debt.
Bad debt is debt that sits there, costing us money and little else - say, for example, our non-tax deductible mortgage interest.
Good debt, on the other hand, is generative for our bottom lines in that we can invest it, deduct the interest and generate tax savings.
Wealthy people have learned to embrace the power of good debt and use it to generate more wealth for themselves whereas most of us tend to let our debt loom over us like a fog. To best embrace this strategy, you’ll have to shift your mind to think like the rich and consider debt one of your best financial friends.
Learn from the master
I am lucky to not only be a Smith Manoeuvre Certified mortgage professional, but also to be able to call Robinson Smith - The SmithMan himself - my friend. Rob was gracious to join Lacey Morrison (The Broker Social) and I for a quick chat recently where we broke down some of the biggest misconceptions that we know can hold people back from leveraging this incredible tool. So grab a cup of coffee and hang out to learn from the best in the business. Then, when you’re ready to learn about how this strategy can help you change your present and your future, let’s connect.
