Using The Smithman Calculator, let’s look at a few examples of how The Smith Manoeuvre can help Canadians with various starting financial positions.
Pete and Pat
Pete and Pat own an $850,000 house with a 25-year, $600,000 mortgage at 5.2% and a borrowing rate of 7.2%. They make around $150,000 and are forecasting an 8% investment portfolio growth rate*. By implementing The Smith Manoeuvre, what improvements can they expect over the original 25-year amortization period? They can expect that instead of having expensive, non-deductible mortgage debt for 25 years, they will be rid of it in around 21 years. As for the tax relief that makes this reduction in amortization possible, they can expect tax deductions of approximately $475,000. And finally, at the end of 25 years they will be able to generate income off a projected investment portfolio of about $930,000. And they were not required to either sacrifice their lifestyle during the conversion process or come out of pocket by any additional monthly amount in order to create these improvements.
Mike and Mary
These folks own a $500,000 home with a 30-year mortgage of $250,000 at a rate of 4% and a borrowing rate of 5%. Their household income is $90,000 and they are using a forecasted portfolio growth rate of 6%. In addition, they have been investing $200 per month and have an existing investment portfolio of $20,000. For these folks, instead of having their mortgage for 30 years, it will be fully converted in less than 18 years. That’s an improvement of over 12 years. The tax deductions they will enjoy over the original amortization period amount to over $250,000 and they will have an investment portfolio of over $720,000 from which they can enjoy retirement income. Again, no additional monthly cashflow was required from these folks – they were able to debt swap their existing investment portfolio and simply redirect the $200 they were already investing each month toward mortgage prepayments.
Jeff and Jerry
Jeff and Jerry have done pretty well for themselves. They make $200,000 and live in a $1.2 million dollar house with a $700,000, 5% mortgage for another 19 years. Their borrowing rate is 6.5% and believe they can earn 8% on their investments and a 4% dividend yield. They have $50,000 in existing investments and also own a rental property which generates $36,000 in annual rental revenues and annual expenses of $34,000. By implementing The Smith Manoeuvre along with a few of the accelerators they have available to them, the tax deductions they can look forward to over the original amortization period of 19 years amount to approximately $690,000, instead of having their expensive, non-deductible mortgage for 19 years, they will be rid of it in well under eight years. And they can expect to have an investment portfolio of over $1.5 million.
But as these folks make such a good living, what happens if they do decide to contribute an additional $300 per month out-of-pocket towards their Smith Manoeuvre? Deductions then increase by almost $10,000, their non-deductible mortgage is gone in around seven years, and their investment portfolio climbs an extra $200,000.
In sum, almost every Canadian homeowner with the ability to acquire the appropriate and required type of specific mortgage financing can expect some sort of improvement in their financial circumstance – many times a great deal of improvement – by converting their mortgage with The Smith Manoeuvre. Yet every Canadian is living a different situation, so it is impossible to show you what your personal situation looks like without a consult. However, a Smith Manoeuvre Certified Professional near you can run your family’s numbers to see what you can look forward to.
* portfolio values exclude taxation
