Clawing our way to financial independence

A couple of weeks ago the library sent me a notice that the Smith Manoeuvre book by Fraser Smtih was in for me. Many months ago I had put my name down to request the book and it finally came my way. Here is a mini-review of the book, and an explanation of why we are going to pass on using this technique for now.

Book Review
The premise
In Canada, the government does not allow us to deduct mortgage interest from income taxes like Americans can. We can, however, deduct the interest paid on any money borrowed to make investments. The basic premise of the Smith Manoeuvre is that you borrow against the equity in your home using a home equity line of credit (HELOC) and use this money to invest, thus making your mortgage interest tax deductible. Every year, you can deduct the interest on what you have borrowed from your income taxes, and pay less taxes.
The money you save on taxes you reinvest and thus build your investment. Eventually your mortgage will be paid off and you will have a substantial investment, which has hopefully grown and exceeds what you owe on your mortgage. At this point you could sell off some of the investments and pay off the HELOC completely, making yourself debt free.

The idea is to turn bad debt which is not tax deductible, into good debt which is.

The book
The book was straightforward, easy to read. But in the end, so much has been talked about this topic on the internet, I can't say it is an essential resource for someone who wanted to consider applying this technique. The book held no great insights for me, and in fact annoyed me because it kept referring to this Smithman Calculator which I should purchase from their website. This calculator would "show me" how much money I could save by using this technique myself. I think it's probably time to make this calculator free to all before someone like me plugs in some formulas into an online Google Spreadsheet and creates one herself she shares with all.

The most useful thing I learned is that it is possible to do this technique without remortgaging. Fraser Smith suggests applying for a second "wrap around" mortgage/line of credit which gives you access to the equity to borrow, and, over time, pays out the original mortgage. This is good because I have no interest in paying penalties for remortgaging.

Overall if you like to have books for reference then sure, consider buying it. Otherwise read the blogs and perhaps put your name down for a copy at your local library.

Would I implement the Smith Manoeuvre?
No, I wouldn't right now.

I spent a good morning trying to figure out if this would work for us. We have equity in our house now, and could conceivably apply for a wrap around mortgage from a bank which would allow us to borrow this equity for investing purposes. I was shocked to see we had paid $12k in interest on our mortgage last year.

So why not?
1. We have debt debt debt. It would make more sense in my mind to use the HELOC to pay less interest on the money we already owe. When we are paying 10% on loans, a HELOC would almost halve our interest rate, saving us somewhere in the ball park of $3k a year.
2. We don't have that much equity we could borrow from. Banks allow you to borrow up to 80% of your house value, leaving us with only $12k in equity in the house. Again, probably better off to use that to lower our interest payments.
3. Our mortgage is currently partially deductible through our home based business. We deducted 14% of the interest this year from our business income (over $1600).
4. Complexity. I have noticed that if I ignore the finances even the smallest amount things can very easily begin to slide. For example, I have been using a low interest credit card balance offer to reduce some of our loan interest, but I almost missed a deadline to transfer off one card onto another, which would have meant 19% interest again for March. Adding further complexity to our already complex finances of multiple banks, credit cards and loans is just too much right now. I might truly miss something that will cost us!
5. Increasing aversion to more debt. In order to use the Smith Manoeuvre you must be comfortable with carrying debt (good, bad or ugly), although it is supposed to be all good debt. Yes, your investments are supposed to increase (although many bloggers have pointed out to me that there are never any guarantees) but you maintain your mortgage debt at the same level in order to make these investments. I find this scary, probably because I feel we have only stepped back a few feet from the precipice. Its nice being away from the edge, but I can still see how close we were :)

For further reading on how the Smith Manoeuvre works (or doesn't work) I suggest these excellent sites:
Smith Manoeuvre Website
Million Dollar Journey - great review of this strategy
Canadian Capitalist - who suggest mortgage prepayments will leave you better off than the Smith Man!
The Financial Blogger - who is implementing this technique, read to find out how it is working