According to Robinson Smith, son of the Smith Manoeuvre’s creator, mortgage brokers can increase revenue without having to take on more clients.
The Smith Manoeuvre is a strategy that converts non-deductible mortgage interest into the deductible interest of an investment loan. Named after the late Fraser Smith of Victoria, B.C., and also the eponymous title of his book, the strategy caught fire in Canada upon its introduction a few decades ago. However, according to his son, it’s been forgotten as a new generation of brokers took the reins.
“What the strategy entails is financing into a readvanceable mortgage for the Canadian homeowner,” said Smith. “The readvanceable mortgage will allow you to reaccess any equity that’s created by your regular mortgage payments, whatever principal reduces that mortgage each month. Let’s say on a $2,500 mortgage payment, $1,000 goes to interest to the bank non-deductible, $1,500 reduces the principal balance on that—let’s say $400,000—mortgage. When that balance is reduced, the secured line of credit component increases its limit by whatever is paid down—if you put down $1,500, you can reaccess $1,500.
“By pulling out that investment, you are doing a few things simultaneously: You’re generating tax deductions by borrowing to invest its deductible debt and these tax deductions generate tax refunds at the end of the year, and you’re able to take these tax refunds and overpay your mortgage.”
Smith says that borrowers can pay off their mortgages well ahead of their amortization period, depending on how many Smith Manoeuvre principles they adhere to. If they do the bare minimum on a 25-year amortization, they can expect to pay their mortgages off three or four years ahead of schedule.
A nagging problem faced by a great many Canadian borrowers is that they’re left with little to nothing after their monthly expenses, including mortgage payments.
“But because you’re borrowing to invest that principal component each and every month, you’re putting away $1,500 a month, whereas otherwise there’s no cash to do so” said Smith. “So you’re building up an investment portfolio, you’re generating tax deductions, which lead to a refund, which allows you to overpay that mortgage at minimum once a year.”
The Smith Manoeuvre presents an interesting strategy for mortgage brokers to augment their revenues without having to prospect new clients.
"If a homeowner with a mortgage is interested in implementing the Smith Manoeuvre, they may be in a typical mortgage with no line of credit or readvanceable component to it,” he continued. “They need that, so they’ll need to be refinanced, which gives a mortgage broker the ability to go through their rolodex. A quick glance tells them at least half, or more, have at least 20% equity in their home and they qualify for a readvanceable, regardless of how long they’ve been in that current mortgage. I’ve never seen a mortgage penalty or IRD dissuade someone from breaking their mortgage to get into a readvanceable, so it’s potentially a great revenue generator for mortgage brokers without having to go out and get new clients. They already have the clients.”