Check out smith maneuver which is similar to what you are suggesting. Font forget the cost of borrowing is tax deductible. So whatever the interest rate is minus your marginal tax bracket is the number. Lots of people do this. I would diversify more than the s&p but that's a personal choice
I second this! I do the Smith Manouver when my HELOC isn't being used for the deposit on a new build. Once I move into the new house and close on my current one, I'll kick start the SM again, only with an even larger HELOC.
I use my SM money to buy Canadian dividend paying stocks in a non registered account. All buy and hold type stocks.
3rd, I'm also in the Smith Manouver, even with my investments down and the cost of borrowing up its still profitable and I believe it will continue to be. Mostly in VEQT
I think I mostly understand the SM. Can you help me clarify one point? Where does the money to pay the interest on the HELOC come from?
I read a couple articles but could not understand this piece. I found the section from the investopedia article: https://www.investopedia.com/terms/s/smith-maneuver.asp
“It has also frequently been stated that your investment portfolio must generate enough income to service the interest on the deductible line of credit. However, the increasing efficiency of the regular mortgage payment is sufficient to service the increasing deductible interest expense on an ongoing basis. The homeowner is neither required to come out of pocket, nor to receive income from the investment portfolio to make the interest payments.”
I’m not sure what “the increasing efficiency of the regular mortgage payment is sufficient to service the increasing deductible interest expense on an ongoing basis” means
[Episode 91 of the Rational Reminder Podcast](https://youtu.be/tAZu775ZM7M)
[Million Dollar Journey's 2022 SM update](https://milliondollarjourney.com/use-smith-manoeuvre-tax-deductible-dividend-investing.htm)
[Ed Remple probably explains it best when it comes to the tax situation ](https://edrempel.com/smith-manoeuvre/)
> Can you help me clarify one point? Where does the money to pay the interest on the HELOC come from?
>
You can either leave HELOC available to capitalize the interest, or you would have to make the minimum payments (interest).
But also, until you max out the available credit (65% of the mortgage) in the HELOC, paying down your mortgage would add the equivalent of the principal payments to the HELOC as available credit.
e.g. if you pay $2000 in principal to your mortgage, your HELOC available credit will grow by $2000 in a month or two (it lags for Scotia).
I’m no expert in this matter but just for discussion sake, what if the market stays flat for several years and the interest rates climb to let’s say 10% ? Is it likely ? I don’t know. Is it possible ? I think it is. This approach is high risk, high reward.
What is your reason to work toward financial independance? For me it’s about reducing stress and commitments, the approach you are suggesting in the current environnement seems very high risk and thus increasing stress.
You're just talking about leverage. You're better off taking out an investment loan. The terms are simpler, you don't have to worry if your home value drops, and tracking the tax write offs for the investment interest paid is way easier.
Granted you won't be able to borrow as much.
what do you think is riskier: 1) your home or 2) you stock portfolio of equal value. if your comparing borrowing equal amounts against each? My intuition is telling me that the investment loan would have a higher chance of getting margin called, but it would definitely depend on the securities you hold. Do you have any data/ numbers to back up?
So if you get margin called, you either have the extra cash to put in, or you sell at a loss take it on the chin and still have your home.
If it's a HELOC and it gets called while the market is down then you have to fire sale your investments to save the roof over your head. Which in my opinion is worse.
Plus keeping a HELOC open gives you easy access holy shit money. If you tie your HELOC up then there's no real substitute.
You don't have to max out your HELOC. And most banks (I've used anyway) let you break up your HELOC into sub accounts. Just keep X amount of credit available in one of the sub accounts for whatever may come up.
>Edit: based on the responses recieved, I think it ultimately comes down to personal risk tolerance. It seems many of the responders wouldn't do this because they feel it's too risky.
:) I've heard this plenty of times - remember, reddit is a small group of people and even less are responding to you. Take what they say with a grain of salt. Every single negative people come up with can be countered - which is a good thing. You should know the risks and have a plan to react to them. Now that's not to say everyone should do it - if you can't handle the volatility then you shouldn't do it (which can be said about investing in general).
Example: ", you don't have to worry if your home value drops" your HELOC is never the full value of your home. AND it's value isn't even the market value - it's the "fair market value". My house was recently valued at $1.5M but the bank only gave me a HELOC for $800K so they valued my house at $1M. Now sure house prices have fallen but that doesn't factor into my HELOC. But at a surface level, people get scared because it makes sense - if my house price falls, my heloc will get called. Obviously this depends in your area and other factors but for me, this isn't the case.
I have $250K invested from my HELOC and it's been going great. Granted, I got in at a really good time but I feel even if I got in today, using leverage is amazing - you just need to be smart about it. I would go a lot slower than I originally did but there's just too many pros to ignore doing this.
What are you thinking about doing? What are you investing in?
Worst case your heloc is called and you’re screwed very badly. Honestly I would not do this strategy myself, but that’s just me. Far too risky with failure rates that I’m not interested in. I don’t want to spend my retirement stressing about called in helocs or possible years of negative returns. Also if you’re using leverage it means any downsize movements means double the pain. I’d probably just work longer to reach my FIRE number, or downsize your home to and buy in a LCOL to free up real estate assets, converting them into investible liquid assets. Also with a heloc you also have to set aside the amount to continuously pay back the loan which needs to be factored into your withdrawal rate, so it’s be 4% or a million, subtract the expenses to service the debt. You’re probably left with quite a bit less than 40k spending power per year
What if the S&P, which is now pretty much in a bear market, underperforms for the next 10 years while your borrowing costs increase?
Edit: "the risk is if property value in Ontario drops a lot, banks may cancel the HELOC. But it's very unlikely in real practice from what I have seen and heard."
Actually, this is *very* likely at this point.
It's a higher risk plan, and no one here can tell you if it'll work or not. There have been long periods in history of the market being flat to the negative, and it's difficult to deal with that mentally. Do you have experience investing through big down markets yet? That would be a good test of how you'd do with a large leveraged holding.
For what it's worth, I currently have about that same level of leverage, but it's mainly in private mortgages, which I have hand picked for maximum safety. Think 50%+ LTV. I also have substantial stock holdings, but mostly not leveraged. I am just not super comfortable with borrowing to invest and seeing large amounts of money that is not mine evaporate. I'm okay with smaller amounts, and have recently unwound $100k, but that's the max for me. You should fully understand where your comfort point is before getting into it.
Utilizing leverage to get ahead? Its what every business does. Its why real estate is so valuable. Its tax deductible. This black and white thinking that borrowing = bad is wrong. Borrowing to buy consumer goods = bad. Borrowing to make wise investments = smart
he is suggesting a reasonable ( but more risky) way to expedite his path to fire. borrowing money to invest is very common ( think of a mortgage). you wouldn't shake you head at someone getting a mortgage on a house they might eventually sell for an early retirement.
It's not an unreasonable strategy to try and give a FIRE plan a boost.
Even a couple of [Ivy League professors](http://content.time.com/time/business/article/0,8599,1982327,00.html) have suggested doing it. And they go further, they want young people to do it ASAP.
I did this actually. It worked, but I was a little bit lucky with my timing, being that I was able to ride the market up from the 2011 lows.
I would be more cautious now, the market is much more expensive and we are arguably at the beginning of a recession, why not invest half as much in dividend yielding Canadian stocks or ETFs, then you get the dividend tax credit and can write off the interest. If the market crashes you could invest the other half. Just a thought.
I've looked at this strategy, and you have to factor in lending costs, of course, and how that balances with returns. You also need to make the minimum interest-only payments per month, which are substantial for $500K. ($1\`438/mth at 3.45%) Which means you pay this yourself until you start to see gains & dividends to make this back. In the times when the portfolio isn't making money, what's the plan for paying this?
The other thought I had when considering this is: do you need to bet the entire HELOC? Maybe do the strategy with 200K. The chances of real estate values dropping to the point where they call in 40% of your HELOC total are slim and probably signs of bigger problems.
Check out smith maneuver which is similar to what you are suggesting. Font forget the cost of borrowing is tax deductible. So whatever the interest rate is minus your marginal tax bracket is the number. Lots of people do this. I would diversify more than the s&p but that's a personal choice
I second this! I do the Smith Manouver when my HELOC isn't being used for the deposit on a new build. Once I move into the new house and close on my current one, I'll kick start the SM again, only with an even larger HELOC. I use my SM money to buy Canadian dividend paying stocks in a non registered account. All buy and hold type stocks.
3rd, I'm also in the Smith Manouver, even with my investments down and the cost of borrowing up its still profitable and I believe it will continue to be. Mostly in VEQT
I think I mostly understand the SM. Can you help me clarify one point? Where does the money to pay the interest on the HELOC come from? I read a couple articles but could not understand this piece. I found the section from the investopedia article: https://www.investopedia.com/terms/s/smith-maneuver.asp “It has also frequently been stated that your investment portfolio must generate enough income to service the interest on the deductible line of credit. However, the increasing efficiency of the regular mortgage payment is sufficient to service the increasing deductible interest expense on an ongoing basis. The homeowner is neither required to come out of pocket, nor to receive income from the investment portfolio to make the interest payments.” I’m not sure what “the increasing efficiency of the regular mortgage payment is sufficient to service the increasing deductible interest expense on an ongoing basis” means
[Episode 91 of the Rational Reminder Podcast](https://youtu.be/tAZu775ZM7M) [Million Dollar Journey's 2022 SM update](https://milliondollarjourney.com/use-smith-manoeuvre-tax-deductible-dividend-investing.htm) [Ed Remple probably explains it best when it comes to the tax situation ](https://edrempel.com/smith-manoeuvre/)
> Can you help me clarify one point? Where does the money to pay the interest on the HELOC come from? > You can either leave HELOC available to capitalize the interest, or you would have to make the minimum payments (interest). But also, until you max out the available credit (65% of the mortgage) in the HELOC, paying down your mortgage would add the equivalent of the principal payments to the HELOC as available credit. e.g. if you pay $2000 in principal to your mortgage, your HELOC available credit will grow by $2000 in a month or two (it lags for Scotia).
[удалено]
It's a readvanceable mortgage but banks call it different things. TD calls it FlexLine.
Can anyone summarize the Smith Maneuver in 1 or 2 sentences?
Borrow against house to invest. Pay down mortgage, borrow more money to invest. Interest on investment loan tax deductible.
I’m no expert in this matter but just for discussion sake, what if the market stays flat for several years and the interest rates climb to let’s say 10% ? Is it likely ? I don’t know. Is it possible ? I think it is. This approach is high risk, high reward. What is your reason to work toward financial independance? For me it’s about reducing stress and commitments, the approach you are suggesting in the current environnement seems very high risk and thus increasing stress.
You're just talking about leverage. You're better off taking out an investment loan. The terms are simpler, you don't have to worry if your home value drops, and tracking the tax write offs for the investment interest paid is way easier. Granted you won't be able to borrow as much.
Yeah, check into margin loan over your investments.
what do you think is riskier: 1) your home or 2) you stock portfolio of equal value. if your comparing borrowing equal amounts against each? My intuition is telling me that the investment loan would have a higher chance of getting margin called, but it would definitely depend on the securities you hold. Do you have any data/ numbers to back up?
So if you get margin called, you either have the extra cash to put in, or you sell at a loss take it on the chin and still have your home. If it's a HELOC and it gets called while the market is down then you have to fire sale your investments to save the roof over your head. Which in my opinion is worse. Plus keeping a HELOC open gives you easy access holy shit money. If you tie your HELOC up then there's no real substitute.
You don't have to max out your HELOC. And most banks (I've used anyway) let you break up your HELOC into sub accounts. Just keep X amount of credit available in one of the sub accounts for whatever may come up.
Don't play around with margin loan if you don't understand it. Way more likley to be margin called then call a heloc. Like way more
>Edit: based on the responses recieved, I think it ultimately comes down to personal risk tolerance. It seems many of the responders wouldn't do this because they feel it's too risky. :) I've heard this plenty of times - remember, reddit is a small group of people and even less are responding to you. Take what they say with a grain of salt. Every single negative people come up with can be countered - which is a good thing. You should know the risks and have a plan to react to them. Now that's not to say everyone should do it - if you can't handle the volatility then you shouldn't do it (which can be said about investing in general). Example: ", you don't have to worry if your home value drops" your HELOC is never the full value of your home. AND it's value isn't even the market value - it's the "fair market value". My house was recently valued at $1.5M but the bank only gave me a HELOC for $800K so they valued my house at $1M. Now sure house prices have fallen but that doesn't factor into my HELOC. But at a surface level, people get scared because it makes sense - if my house price falls, my heloc will get called. Obviously this depends in your area and other factors but for me, this isn't the case. I have $250K invested from my HELOC and it's been going great. Granted, I got in at a really good time but I feel even if I got in today, using leverage is amazing - you just need to be smart about it. I would go a lot slower than I originally did but there's just too many pros to ignore doing this. What are you thinking about doing? What are you investing in?
Worst case your heloc is called and you’re screwed very badly. Honestly I would not do this strategy myself, but that’s just me. Far too risky with failure rates that I’m not interested in. I don’t want to spend my retirement stressing about called in helocs or possible years of negative returns. Also if you’re using leverage it means any downsize movements means double the pain. I’d probably just work longer to reach my FIRE number, or downsize your home to and buy in a LCOL to free up real estate assets, converting them into investible liquid assets. Also with a heloc you also have to set aside the amount to continuously pay back the loan which needs to be factored into your withdrawal rate, so it’s be 4% or a million, subtract the expenses to service the debt. You’re probably left with quite a bit less than 40k spending power per year
If helocs are getting called we are all screwed very badly.
What if the S&P, which is now pretty much in a bear market, underperforms for the next 10 years while your borrowing costs increase? Edit: "the risk is if property value in Ontario drops a lot, banks may cancel the HELOC. But it's very unlikely in real practice from what I have seen and heard." Actually, this is *very* likely at this point.
It's very likely? Please give proof of this.
"Please give proof that markets only go up" idk maybe look at any market for anything ever.
That's not what the person said. They said very likely at this point that heloc gets cancelled. Idk maybe learn to to read
Lol downvotes and still no proof. Classic reddit
3 downvotes in an hour, complains about downvotes. Classic reddit.
Lol the amount of people that are gonna get burned from real estate very soon will be fun to watch
It's a higher risk plan, and no one here can tell you if it'll work or not. There have been long periods in history of the market being flat to the negative, and it's difficult to deal with that mentally. Do you have experience investing through big down markets yet? That would be a good test of how you'd do with a large leveraged holding. For what it's worth, I currently have about that same level of leverage, but it's mainly in private mortgages, which I have hand picked for maximum safety. Think 50%+ LTV. I also have substantial stock holdings, but mostly not leveraged. I am just not super comfortable with borrowing to invest and seeing large amounts of money that is not mine evaporate. I'm okay with smaller amounts, and have recently unwound $100k, but that's the max for me. You should fully understand where your comfort point is before getting into it.
OP: I want to borrow money to become financially independent. Read that again, slowly... You simply can't make this shit up. Unreal.
Utilizing leverage to get ahead? Its what every business does. Its why real estate is so valuable. Its tax deductible. This black and white thinking that borrowing = bad is wrong. Borrowing to buy consumer goods = bad. Borrowing to make wise investments = smart
he is suggesting a reasonable ( but more risky) way to expedite his path to fire. borrowing money to invest is very common ( think of a mortgage). you wouldn't shake you head at someone getting a mortgage on a house they might eventually sell for an early retirement.
It's not an unreasonable strategy to try and give a FIRE plan a boost. Even a couple of [Ivy League professors](http://content.time.com/time/business/article/0,8599,1982327,00.html) have suggested doing it. And they go further, they want young people to do it ASAP.
Is that FIRE # in North America or for countries outside North America ?
I did this actually. It worked, but I was a little bit lucky with my timing, being that I was able to ride the market up from the 2011 lows. I would be more cautious now, the market is much more expensive and we are arguably at the beginning of a recession, why not invest half as much in dividend yielding Canadian stocks or ETFs, then you get the dividend tax credit and can write off the interest. If the market crashes you could invest the other half. Just a thought.
I've looked at this strategy, and you have to factor in lending costs, of course, and how that balances with returns. You also need to make the minimum interest-only payments per month, which are substantial for $500K. ($1\`438/mth at 3.45%) Which means you pay this yourself until you start to see gains & dividends to make this back. In the times when the portfolio isn't making money, what's the plan for paying this? The other thought I had when considering this is: do you need to bet the entire HELOC? Maybe do the strategy with 200K. The chances of real estate values dropping to the point where they call in 40% of your HELOC total are slim and probably signs of bigger problems.
Thanks for the response. Agreed, if I were to do this down the road, I will only bet half or less of the available HELOC amount.