Robinson Smith, financial strategist and author, reveals how Canadians can mitigate the challenges that homeowners face in raising their families, raising their net worth and raising their level of financial security in the face of rising costs of life.
Robinson, a consultant with over 15 years in the investment industry, creator of a number of financial educational courses and the author of, “Master Your Mortgage and Retire Ready – The Smith Manoeuvre”, is dedicated to increasing Canadians’ awareness of personal finances.
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In my interview with Robinson, we discuss why the Smith Manoeuvre is more relevant than ever before, why should you work with a Smith Manoeuvre Certified Professional (SMCP) mortgage broker instead of doing it yourself, and why home financing has very little to do with the rate.
I recorded this interview with Robinson Smith a while ago. Most of the information is still relevant, but some things have changed. Mortgage rates are no longer as low as they once were. The question I get most often is, does the Smith Manoeuvre still make sense? The answer is a resounding yes. When rates are low, we have more money to invest, but we receive a lower tax refund. When rates are higher like they are right now, we have less to invest, but we receive a higher tax refund, so things even out. Not to mention, with markets down, it’s a great buying opportunity. You’re able to buy solid long-term investments while they’re on sale. These are just a few of the many reasons why the Smith Manoeuvre still makes sense today.
Listen to the first podcast episode I recorded with Robinson here.
Podcast Update
I realize it’s been quite a while since I released an episode. I decided to take a break from my podcast to better focus on my full-time job as a mortgage broker. However, I missed the podcast a lot, so I’m excited to announce that I’ll be releasing new episodes again. I hired a podcast editor to help me. You can expect all-new episodes of the Burn Your Mortgage Podcast in the coming weeks.
Subscribe now and never miss an episode. Reviews and ratings are appreciated, too.
Full Transcript
Welcome to the Burn Your Mortgage podcast, a Canadian real estate podcast that shows you how to pay off your mortgage sooner and live well while doing it. Now, here's your host Sean Cooper.
Sean Cooper
Welcome to the Burn Your Mortgage Podcast. I'm Sean Cooper and it's great to be back for another episode. On today's show, I'll be talking to Robinson Smith. Robinson Smith, financial strategist, and author reveals how Canadians can mitigate the challenges that homeowners face in raising their families, raising their net worth, and raising their level of financial security in the face of rising costs of life. Robinson, a consultant with over 15 years in the investment industry, creator of a number of financial education courses, and the author of Master Your Mortgage and Retire Ready. The Smith Manoeuvre is dedicated to increasing Canadians' awareness of personal finances.
In my interview with Robinson, we discuss why this Smith Manoeuvre is more relevant than ever before, why you should work with a Smith Manoeuvre Certified Professional SMCP mortgage broker instead of doing it yourself, and why home financing has very little to do with the rate. Before we get started, I just wanted to provide you with a quick update on the podcast. I've realized it's been quite a while since I released an episode. I decided to take a break from my podcast to better focus on my full-time job as a mortgage broker. However, I missed the podcasts a lot, so I'm excited to announce I'll be releasing new episodes again.
I hired a podcast editor to help me. You'd expect all-new episodes of The Burn Your Mortgage Podcast in the coming weeks and months. I recorded this interview with Robinson Smith a while ago. Most of the information is still relevant, but some things have changed. Mortgage rates are no longer as low as they once were. The question I get most often is does the Smith Manoeuvre still make sense? The answer is a resounding yes. When rates are low, we have more money to invest, but we receive a lower tax refund. However, when rates are higher like they are right now we have less to invest but we receive a higher tax refund. So things even out. Not to mention with markets down. It's a great buying opportunity, you're able to buy solid long-term investments while they're on sale. These are just a few of the many reasons why the Smith Manoeuvre still makes sense today. Now that I've gotten our extended intro out of the way back to our regularly scheduled program without further ado, here's my interview with Robinson Smith.
Sean Cooper
Hi, Robinson. How are you doing today?
Robinson Smith
I'm very well Sean, how are you doing?
Sean Cooper
I'm doing great. Thanks. It's wonderful to have you back on the podcast by popular demand. Your episode on the Smith Manoeuvre was one of the most downloaded episodes in the history of my podcast. So it's wonderful to have you back on the podcast again.
Robinson Smith
Well, that's great news. It's great to hear Sean. Thank you. Pleasure to be here.
Sean Cooper
Perfect. Well, let's get started then. So for anyone who hasn't listened to the first episode that we did together on the Smith Manoeuvre, can you briefly tell the listeners about what the Smith Manoeuvre is? And its benefits? Yeah, sure.
Robinson Smith
I think we went over the Smith Manoeuvre in depth in the original interview that we did, Sean so yeah, just a quick one here. Basically, in Canada, when we borrow money from the bank to buy a house, when we get our mortgage, the interest on that loan from the bank is not tax deductible. Unlike our American cousins, they can deduct the interest on their mortgage on their principal residence, but we can't here in Canada. Now. Conversely, when we sell our principal residence, we don't have to pay capital gains on any gain that improvement value that our houses see, but the Americans do. However, the Smith Manoeuvre, what this accomplishes is it converts your nondeductible interest on your principal residence mortgage to tax-deductible interest.
And we still do not lose the capital gains exemption when we sell our home. So now we're getting the best of both worlds. We're getting a tax-deductible interest on our principal residence mortgage, and we're tax-exempt when we sell the property. The way the strategy works is if we have the appropriate financing on our home the appropriate type of mortgage, it's called a re-advanceable mortgage and there's many out there. Manulife, Scotia, AMCAP, there's a lot of different reimbursable mortgages, but it's a specific type of mortgage where the bank is willing to pretty much always have you owe them the amount that you initially borrowed. So the way it works is typically there's a line of credit which is attached to what we think of as a mortgage, this typical amount that we're going to pay back over the course of 25 or 30 years, and pay a specific interest rate on, when that principal balance that we owe our mortgage is reduced by the mortgage payment that we make, you know, some of that payment goes to interest, some goes to principal.
But let's say on a $500,000 mortgage, our first mortgage payment reduces that mortgage balance by $1,000 to 499,000. The line of credit which is attached, if you will, to this loan portion amortizing loan portion, the limit will increase pretty much dollar for dollar. So when we pay it down by $1,000, we can borrow back $1,000. Now, many Canadians already have this type of mortgage, they may not realize it. But in this case, they're already set up to implement the strategy, some will not have this type of mortgage and need to refinance into it. A lot of Canadians that do have this type of mortgage, they'll get their mortgage statement, and they'll see oh, a line of credit, I've got $1,000 available, great, I didn't go buy a fancy car and make a monthly payment, I can borrow this out and spend it on lifestyle or go on a vacation. And so in this instance, we're looking at wealth destruction, because we're paying down one non-deductible loan on a monthly basis. But we're borrowing back non-deductible debt on the other to buy consumption items, depreciating assets, like cars, vacations, and so our total debt is remaining the same, it will always be forevermore 100% non-tax deductible, we're buying assets, which declined in value. So we're not doing anything to improve our financial security. But with the Smith Manoeuvre, when this $1,000 becomes available, you pull it out and you invest it.
The CRA says if you invest with a reasonable expectation of generating income, you can deduct the interest on that borrowing. And so we do this on a monthly basis, the 1000 down 1000 gets pulled out and I invest it month one, month two, month three. So my total debt is maintaining a constant balance, but I'm converting 100% non-tax deductible debt to 100% tax deductible debt. And I'm accruing assets, which in all likelihood are going to increase in value over time, because I'm borrowing to invest in stocks, bonds, mutual funds, ETFs, investment, real estate, my business, your business, a whole bunch of different things where we can borrow to invest in the interest is tax deductible, and these assets are going to increase in value. So this is wealth creation.
So it's very important to understand the two types of debt. But when implemented correctly, the Smith Manoeuvre provides three benefits immediately, and they accelerate over time. And that is, I'm reducing my tax bill because I'm generating tax-deductible debt. So my tax bill is lower, and I get a tax refund, right tax refund at the end of the year, and I take this tax refund, and I prepay my mortgage, and then I borrow that out the amount that amount out again and invest it. So I'm reducing my tax bill because I'm able to pre-pay my mortgage on at least an annual basis with money that otherwise would not exist. I'm getting out of that expensive, non-deductible mortgage faster, I'm pre-paying it.
So I'm reducing my tax bill and getting rid of my mortgage faster. And I'm accruing assets now on a monthly basis investment assets, which otherwise I wouldn't be able to accrue. And it doesn't cost anything from the homeowner's pocket. It's simply restructuring what they've already got going on with the money that they're already outlying its restructuring and putting it to work for them.
Sean Cooper
Well, it sounds pretty amazing. I mean, sign me up, I wish I had done this Smith Manoeuvre with my mortgage originally when I had it there. I mean, I really liked the fact that it's such a struggle for Canadians to be able to pay down their mortgage, especially with how high home prices are these days, and to save toward retirement. And the great thing that I like about the Smith Manoeuvre is that it doesn't require any additional cash flow because it's nice to have a paid-off house at the end of the day. But if your house is rich and cash poor, then as we've mentioned in the past, you have to take a reverse mortgage and you're always indebted to the bank. So I definitely really liked the fact that you can kind of have your financial cake and eat it too by paying down your mortgage sooner, saving on interest, and it doesn't even require any additional cash flow to build up this investment portfolio. Absolutely. Great. Well, you definitely convinced me about all the benefits of the Smith Manoeuvre. Now you may have heard of a little thing called COVID-19. I'm not sure if you've heard of it or not. But certainly, I think it's been on the mind of a lot of Canadians the last year or so. So can you tell us, Robinson? Why is this Smith Manoeuvre more relevant than ever today? In the current COVID-19 times?
Robinson Smith
Well, you know, in the best of times, we Canadians have two very important financial goals. One is to eliminate our mortgage and get rid of it. It's expensive, it's nondeductible. We want to get rid of it as fast as we can, and rightly so. But the other important goal we have is to start saving for retirement. You know, we want to put money aside for our future. We don't want to have to sign up for a reverse mortgage. As you mentioned, we don't want to be financially reliant on our children. We don't want to have to work in retirement. But the decision of which of these goals we attack first is made for us not by us. Many Canadians are making six-figure incomes and still finding it difficult to keep their head above water and if we don't invest for our future, you know, put money aside for our retirement, nobody cares. But if we don't make our mortgage payment, somebody does care, they're gonna come knocking on our door. And soon enough, that door isn't going to be ours anymore.
We Canadians focus on eliminating this mortgage balance at the expense of not getting invested in our future. So the Smith Manoeuvre allows both of these to happen simultaneously, again, with no new cash over the homeowner's pocket on a monthly basis. But when we're faced with difficult times, all of this gets more difficult, right? There's a lot of economic uncertainty out there. You know, we've got pension insecurity, we've got high taxation, and that's not going to go down anytime soon. Right, we pay more in taxes, your typical Canadian than we do on food and clothing and shelter combined the basic necessities of life. Wow. So we need to do something, there's a lot of uncertainty, people are getting concerned, right, the pension insecurity, we got pensions moving from defined benefit to defined contribution.
So instead of now, knowing what we're going to receive, when we receive our pension, if we even have one, all we know now is what we're putting into it, we see news of this happening all the time, this is to the benefit of the employers, not the employees. So when times are difficult, everything is more difficult. And you know, Canadians need to do something, they've always needed to do something, they've always needed to take action to improve their financial security, but now more than ever. So while there may not be, you know, talking about taxation, while there may not be anything that we ask, as you know, what your typical Canadian can do about the tax rates that we're paying, there certainly is something that we can do about how much tax we pay, given those rates.
So with taxes, you know, consistently in the top five or six highest tax-paying countries on the planet, we need to do something. And so reducing our taxes is something that's readily available to the Canadian homeowner. And we see a lot of other benefits, you know, we're putting money aside for our future. And that feels good when we're uncertain about what's going on and what the future holds. We're reducing our tax bill, that's great. We're getting rid of this expensive debt, as I said much quicker and we're putting money aside, no new cash flow from our pockets. You know debt is difficult to get rid of, we have debt for a number of very good reasons. Like I said, these high taxes, these high expenses, we pay or mortgage takes a big chunk of our paycheck. So if we're able to reduce our tax bill, if we're able, we're able to get rid of this expensive mortgage debt faster.
If we're able to put money aside, we feel much better about our financial security, much more relaxed, right? And not just talking about money, if we're more relaxed, because we feel more financially secure, we do better off in our relationships as well. So you went all around, it's important to take action, regardless when times are good or times are tough, but even more so when times are tough as they are now.
Sean Cooper
No, you've summed it up really great Robinson and especially with COVID-19. Like I'm sure a lot of Canadians have taken on additional debt. So that makes the Smith Manoeuvre even more relevant. And certainly, like with our government has definitely been very supportive of Canadians to help get us through the rough times of COVID-19. But you think about all the debt that the government's taken on. And I mean, I'm sure the government would like to kind of give the impression that the Canadian economy is going to grow its way out of all this debt. But I mean, I don't know what the future holds.
It makes me think that taxes are going to be raised substantially in the future, especially with all the baby boomers retiring and fewer Canadians paying into stuff like CPP and all that. So it seems to me that taxes are just going to continue to go up in the future. So I'm not sure why you wouldn't want to do this Smith Manoeuvre. It definitely seems like my tax bill is going to be going up pretty much every year in the future.
Robinson Smith
Yeah, you know, and you mentioned that an increasing number of Canadians are going to be faced with higher debt because of the situation we've seen over the past year and a bit. That being said, we're also seeing Canadians who have increased savings, because they haven't been able to go on vacation or they haven't been traveling or driving or spending. So in both cases, the Smith Manoeuvre can be very effective if we've got consumer debt that we built up because we've been laid off or we haven't had the income that we usually have if you go and get refinanced so that you can implement this method where you can consolidate this expensive debt that you have into your mortgage and convert that consumer debt into an investment portfolio. Right and your results on this myth maneuver improve.
Now if you've got a buildup of savings because you haven't been spending that can also help because now you can implement the debt swap you can take your cash and you can prepay your mortgage re-borrow that and get it invested in by these big prepayments you're out of that mortgage even faster. So you know increased taxation coming this insecurity, we've got more debt or we've got more savings Any way you look at it if I can reduce my tax bill if I can get rid of debt faster if I can start investing now regardless when times are tough or not, I'm going to be better off and better off. Canadians are better off Canada.
Sean Cooper
Very well said I agree completely. So perfect. Well, I understand you've been pretty busy over the last while you're always busy Robinson, but I understand that you've been busy launching something very helpful for Canadians looking to implement the Smith Manoeuvre. So can you tell the listeners what you've been up to in terms of the exciting, like accreditation that you launched?
Robinson Smith
I was an investment advisor from 2006 until the middle of 2018. Implementing the Smith Manoeuvre for my clients, I sold my advisory in 2018. Because it was time to get out to Canadian homeowners coast to coast, let them know about this strategy. Give them an opportunity to learn about it, decide whether it's for them or not. So to that end, I came up with my book Master Your Mortgage for Financial Freedom, that hit number one in 22 categories on Amazon on launch day, and I think that's probably the only time you'll ever hear me brag, Shawn.
But we did very well. I'm doing a lot of speaking engagements for a lot of different groups, personal finance, real estate investment groups across Canada. So awareness amongst Canadian homeowners of the strategy is growing at an exponential rate. And that is fantastic. That was my father's goal to educate Canadians. It is my goal now, but it doesn't do a whole lot of good to get these Canadian homeowners interested about the strategy looking to implement it, but not have anywhere to go.
You know, there's a number of financial professionals out there, regardless of their profession who have been helping their clients implement, quote, unquote, the Smith Manoeuvre, but there's many, many reports of them doing it incorrectly, inefficiently, just plain wrong. And it's not because these professionals, you know, there's any malice involved here. It's just they haven't taken the time or they fully understand it or they think they do but they don't. So it's important for me to have professionals that Canadian homeowners can go to to help them implement this and be comfortable knowing that they've gone through an accreditation program, Smith Manoeuvre Certified Professional accreditation program.
So they've been trained in the strategy. I've been training realtors mortgage brokers, investment advisors, mortgage, conveyancers insurance brokers and accountants, you know, basically all the different types of financial professionals that Canadian should surround themselves with, anyways, whether they're doing the strategy or not, but now when they come into the website, these homeowners saying, hey, you know, I live in Toronto or Calgary or I live in Montreal or wherever they live, I'm looking for a Smith Manoeuvre Certified Professional to help me implement this. And then I can connect them with local professionals who've gone through and pass the course in the Smith Manoeuvre.
Sean Cooper
It sounds great. Being able to provide that support to Canadians definitely is very invaluable. And it's been wonderful to receive the accreditation myself. And it certainly helped Canadians that way. And by reaching out to Robeson directly, you know that you're working with somebody who really knows this maneuver and hasn't just read a few chapters of Robinson's books that are so I definitely think it's very useful to have so you briefly touched on this in your last answer here, but can you briefly talk about the various roles that the abbreviated SMCP so Smith Manoeuvre Certified Professional play in this Smith Manoeuvre? For example, as you mentioned, there's mortgage broker, realtor, accounting and insurance advisors. So can you briefly just touch on what the various roles that they all play in implementing the Smith Manoeuvre?
Robinson Smith
Yeah, the mortgage broker, such as yourself Sean is typically the pointy end of the spear here, if you don't have the appropriate financing on your property, you can't implement the strategy. So we need the right mortgage product. And using an SMCP mortgage broker means that you're going to get the right re advanceable mortgage for yourself. There's lots of them out there. None of them are perfect for this strategy, but some are better than others. And it depends on your particular situation, which one is best for you and that's what your SMCP mortgage broker will determine. So we've got these local teams of SMCP.
So the broker, the SMCP, mortgage broker knows the SMCP realtor, a lot of times when you refinance your home, you're going to have excess equity in your home. And if you want to buy your first piece of investment property, well, the broker can direct you to the SMCP realtor and the realtor understands what you're doing. Right. They're not just going in with the sole objective of finding a house or rental property for you to buy. They know how it integrates into your principal residence with the cash flow data accelerator, for example, investment advisor, if you've got if you've got 900, 1000, $1,200, to invest on a monthly basis via the Smith Manoeuvre process, you're gonna want to have someone in your corner who understands the strategy and understands your goals and your objectives, and is able to help you guide you as to what you want to invest in what you're comfortable, what's suitable and appropriate for you. And insurance, Everybody needs insurance. It's a very, very important piece of financial planning. Now not a lot of Canadians will believe that they don't agree with that maybe or just haven't thought about it but it is very important and having an insurance agent who is trained in the strategy and able to communicate and collaborate with the other professionals that you're dealing with is very valuable.
They can do an insurance needs analysis and make sure you're all taking care of you and your loved ones. And accountant, you know we're dealing with the CRA here. We want to Make sure that we're calculating our tax deductions correctly. If you're trying to do that yourself, there's a danger that you're going to miss something. So you're much better off by enlisting these professionals to assist you in all these various aspects that are very, very important. And it's very, very valuable to have all these professionals who are in your corner, who know each other. And they all speak the same language, they understand where you're going with all this. So they all play a very important piece. Like I said, I'm busy training these types of professionals across the country. I had someone pass the course last night. So now we're up to 53. Smith Manoeuvre Certified Professional in BC, Alberta, Manitoba, Ontario, and Quebec and the other provinces are coming soon. So it's working out very well, an increasing number of Smith Manoeuvre Certified Professional and an increasing number of inquiries from homeowners to connect them with.
Sean Cooper
That's amazing news. Thanks for sharing that there. And just following up on that question, why should somebody work with an SMCP instead of just a regular mortgage broker, accountant, etc, the realtor investment insurance advisor, why should they work with the SMCP that has that understanding. They're like I remember before Robinson, you said, especially on the accountant side, you said you spend so much time just explaining to the client's accountants just how the Smith Manoeuvre works, I would imagine it's a lot easier to work with an SMCP account and who understands exactly how it works because it might be a bit frustrating for clients to have to explain to their own accountant who doesn't really have a clue about that.
Robinson Smith
So I mean, let's face it, Sean, there are various types of professionals out there. And, you know, when I was an advisor, well over 500 families, sure some of my clients wanted to use the accountant they'd always used, they just been using them for 5, 10, 15 years. And that accountant knew their personal situation, whatever the case may be. But now the homeowner is implementing the Smith Manoeuvre and goes back to their accountant and says, Hey, I'm doing the Smith Manoeuvre, just need to let you know, for next tax season. And the accountant says, What's the Smith Manoeuvre? You know, or the investment advisor says, What's the Smith Manoeuvre? And now because you're not using SMCPs, Smith Manoeuvre Certified Professional. Now you're in a position where you as the homeowner have to educate your investment advisor, your accountant, whoever you're dealing with, and a lot of professionals, they're well entrenched in what they do.
And they're making a good living. And they know that their business model works, and they just don't take the time to learn about other financial strategies to improve your wealth or to reduce your taxes. Well, in my opinion, that is their job as a financial professional, their job is to improve the financial lives of their clients. And if they're not taking the time to research various strategies, which can help accomplish that, then they're not doing their job. So it's important to work with people who are trained in the strategy because that tells you that they're able to communicate with the other professionals in your life, who are also trained in the strategy. But it also tells you that they're the type of professional who goes above and beyond, right, they'll spend the resources, the time to educate themselves in different strategies, which they can then educate their clients and help them implement. We've also got the Smith Manoeuvre, the Smithman calculator, which the SMCPs all have access to. And so it's a really quick process to be able to demonstrate to the client, okay, here's your numbers, here's your income, your house value, your current mortgage, here's what the Smith Manoeuvre looks like for you. Here's how fast you're going to be rid of that mortgage, your estimated net worth improvement, and all that good stuff.
Sean Cooper
Now, you've summed it up very well Robinson and I really like the Smith Manoeuvre calculator myself, I mean, I find clients really enjoy seeing their own personal numbers and seeing the results as well, because it's one thing to understand the concept of the Smith Manoeuvre, but actually see it illustrated in front of your eyes and see how much money that you'll potentially save as well as the size of your investment portfolio. I mean, I definitely think the benefit of having somebody run the calculator for their own personal scenario is definitely very invaluable.
Robinson Smith
Yeah, it helps with the understanding of the strategy as well.
Sean Cooper
Great. So on that theme there. Now, I think pretty much all Canadians want competitive mortgage rates. I mean, we've all pretty much been trained for whatever reason to look for the lowest rate. But as I said, many times the lowest rate can help save you hundreds, but the wrong mortgage product can cost you 1000s. That's a bit of a saying I have there with clients. So Robinson, why is the Smith Manoeuvre about more than simply finding the lowest rate? Why is it more important to find the right mortgage product? And again, why should you work with an SMCP mortgage broker instead of just going to the bank and trying to find the lowest rate and doing it yourself?
Robinson Smith
You know, it's natural. You touched on it. We're bombarded with advertisements and commercials and all of this telling us that we have to get the lowest rate. That's what we need to do as homeowners. When we're looking at looking for a mortgage, we need to get the lowest rate. That's the most sensible thing to do. Well, quite frankly, it's not. And you're saying the lowest rate can help save you hundreds, but the wrong mortgage product can cost you thousands is extremely accurate. A lot of people have these blinders on about how I need to get the lowest rate. Well, if you're getting the lowest rate, you're risking having to spend thousands and thousands of dollars down the road. I mean, I don't know the exact percentage of how many people break their mortgage before their term is up, but it's a very high number.
Sean Cooper
I've heard six and 10 with a five-year fixed rate, they break their mortgage before the end of their term.
Robinson Smith
There you go, I knew I was talking to the right guy. So you go into a five-year mortgage thinking I'm gonna have this mortgage for five years, I'm not gonna have to pay any penalties, I'm not gonna break it, well, then you break it, life happens. And, you know, some of the penalties are very, very high, because they come at the expense of getting the wrong mortgage, or trying to get the lowest rate. I mean, a lot of people choose not to read the fine print, you get these flash mortgage deals, cashback and all this stuff, you really need to know what you're getting. Now, with the Smith Manoeuvre. You know, we don't anticipate breaking our mortgage within the five-year term any more than anybody else does. But we may do that life happens. But it's about getting the right mortgage product, not the cheapest one because there are a lot of different scenarios that someone who's implementing the Smith Manoeuvre may face may have the ability to significantly prepay their mortgage on a monthly basis.
You know, the cash flow diversion accelerator, the cash flow dam accelerator, maybe they want to prepay lump sums via the debt swap accelerator. So there's a lot of different things that may come up that the homeowner can take advantage of. And if they've gone and got the lowest rate re advanceable mortgage, they might learn a hard lesson when they want to start implementing some of these accelerators or paying refunds or other cash flow to prepay their mortgage and get it invested. So some banks, they'll only let you double the mortgage payment. And we need to prepay by more than that. Some banks will say you can prepay as much as you want up until 15 or 20% for the year. But after that you cannot prepay even if you want to, even if you're willing to pay a penalty, we're not going to let you prepaid anymore.
And so that severely restricts you. So you really, really do need the right mortgage, no re advanceable mortgage is going to have a rate that is way out of whack compared to reality, is there going to be a little bit higher, a little bit lower. That's not the concern. The concern is being able to take advantage of the Smith Manoeuvre to the extent that your projected net worth improvement is as high as possible. Do I care if I'm paying $50 a month more with this mortgage? If I can have a $200,000 increase in my net worth at the end of the day? No, right? It's a long-term game. And so we need the right product for our particular situation. And that's what the Smith Manoeuvre Certified Professional mortgage broker does. They look at your situation, say, Okay, here's where you're at now, here's where you can go, here's where you want to go. We go with this one, you're gonna run into problems. If we go with that read advanced one mortgage, now we're talking.
Sean Cooper
No, I agree completely. You're preaching to the choir. And certainly, like we understand you've developed a great questionnaire for individuals who are not SMCP, who do not have that certification there. And I've just heard from firsthand experiences, just clients trying to go into the bank and mention what the Smith Manoeuvre is. And the bank representative either has no idea what it is, or they're not allowed to speak about it. So you're really handicapping yourself by going into the bank. And certainly, I guess sometimes people think that they've read a book on the Smith Manoeuvre, and they think I can just go off and do it on my own. Like I'm an expert. I've read a ton of internet forums online. I know all that
Robinson Smith
Don't get you started on the internet forums, rat's nest.
Sean Cooper
I mean, I kind of compare that to like, I could go online and watch videos on YouTube on like repairing my property. But that doesn't mean that I'm Mike Homes. So I definitely think that it's best to leave some of this stuff to the professionals. So definitely, it's better to work within an SMCP rather than trying to DIY yourself because your mortgage is the single biggest stat of your lifetime. So certainly you don't want to make a mistake with that, that's for sure.
Robinson Smith
Well, you know, and a homeowner wanting to implement the Smith Manoeuvre, they've got a few options, they can go to their bank that they've been dealing with for many, many years. They can go to a non-Smith Manoeuvre Certified Professional mortgage broker, or they can go to a Smith Manoeuvre Certified Professional mortgage broker. As far as what it costs the homeowner where they decide to go for their mortgage. It doesn't change. There's no difference between going to the bank's non-SMCP mortgage broker or an SMCP mortgage broker, right? It doesn't cost the homeowner anything. Brokers get paid by the lenders' mortgage specialist at the bank. It's paid by the bank.
So I like to say when you're looking to implement the Smith Manoeuvre, you can go to the bank and get the wrong mortgage for free. You can go to a non-Smith Manoeuvre Certified Professional broker and get the wrong mortgage for free or you can go to a Smith Manoeuvre Certified Professional broker and get the right mortgage for free. The reality is, there are a lot of moving parts that the homeowner doesn't necessarily need to know. Sure, it's great if they educate themselves to the point that they fully understand everything, but they don't need to, these are the things that the professionals working in the background need to understand. And if you're a Smith Manoeuvre Certified Professional, you do.
And when we go to the bank looking for, hey, you know, Bill from whichever big bank I'd been with for a long time, I want to do the Smith Manoeuvre, I need to read the advanceable mortgage Smith Manoeuvre, I think I heard of that. I think I know what that is, anyway, yeah, we got to read advanceable mortgage, here it is, we're going to put you in it, well, they're not going to be able to do the analysis, they're not going to be able to recommend the right read advanceable because they're only selling one, they can only sell one. And that's the one from the bank that they work at. And I'm not saying that people who work at banks selling mortgages are irresponsible or don't care. But the fact is that these people are employees and they do not have a fiduciary responsibility to the client, which means they do not have the responsibility and a requirement to do the best thing on behalf of their client. They're there to sell products, and nine times out of 10 it's not going to be the best one for you. So a mortgage broker does have a fiduciary responsibility, whether their SMCP accredited or not. But go to one who knows what you need for your particular situation.
Sean Cooper
Now very well said, certainly you could try to go to a general contractor to do something specialized for your property, like, I guess you could ask a general contractor to try to put in a furnace or something like that. And maybe they can do it. But it's probably not going to come out as well as like if you just hire an HVAC expert. So definitely a great point.
Robinson Smith
We're dealing with something terribly, terribly important here. And that is your family's financial prosperity. And there are a lot of people out there who feel they can do the investing on their own, who feel that it's good enough to go to their bank and get a mortgage or feel that they can do the accounting. When we're talking about something as important as your family's financial security. When we're talking about mortgage math, when we're talking about investing, when we're talking about dealing with the CRA.
It is well worth it to enlist professionals who are trained not only in that profession but also within the strategy that you're about to implement. If you get these financial professionals who aren't Smith Manoeuvre Certified Professional accredited, you're going to run into issues. I've seen it I've seen it 100 times I had 500 families as clients, you're going to be faced as a homeowner and as a taxpayer and as a citizen, you're going to be faced with illness in the family, you're going to be faced with death, you're going to be faced with the prospect of moving house unexpectedly unexpected expenses. These things happen in life. And SSmith Manoeuvre Certified Professional are trained in okay if this scenario happens, how do we deal with it. And if you've got a non-SMCP mortgage broker, or a bank mortgage specialist who got your financing, they're not going to know what to do in that situation. Same with the investment advisor, and the accountant. So it's well worth it to enlist these professionals to have that peace of mind and know that these professionals are working for you with your strategy in mind.
Sean Cooper
Very well said I agree completely. Now Robinson, you often talk about behaving like the wealthy, like from reading your book, you hammer home that point that Canadians aren't naturally taught to think like the wealthy do we kind of have to learn that ourselves says certainly that's the case myself like I was always taught that debt is bad and to pay it off as quickly as possible. But as you mentioned, there's good debt and bad debt. It really requires a mindset shift for Canadians. To that extent, what are some common objections that you hear to the Smith Manoeuvre? I'll just kind of list them out, and then you can respond to them. So a common objection that I've often heard is that a refinance costs too much money, for example, clients might have a $10,000 mortgage penalty or more. And when they see that mortgage penalty, they don't want to pay that penalty. So what would you say to somebody that says that a refinance costs too much money in terms of the penalty and the legal fees?
Robinson Smith
Yeah, these days, especially sometimes the penalties can be particularly high. And you're gonna ask your lender, what's my penalty? If I break my mortgage, and frequently your jaw is gonna drop when they tell you and it's not fair? I don't think that they're so high, but you can't necessarily look at it as, what is this dollar amount? And do I want to suck it up and pay for it? Firstly, we have to remember that many times the expense of the penalty into the next mortgage, the re-advanceable mortgage, and what that means is if it's a $10,000 penalty, you're going to end up getting that amount invested, that's going to improve your net worth ironically, you know, so firstly, you're not going to have to come out of pocket to pay that penalty. Secondly, any mortgage broker can do the math, okay, you've got a five-year term. You've been in it for three years. If we switch mortgages, here's the new rate.
What's the savings and debt? Does that beat or match the amount that you're going to pay in the penalty? And that's a $1 value that can be determined and calculated? And even if the answer is no, you know, the savings with the refinance are less than the expense of the mortgage, we have to remember that, you know, if you're not doing theSmith Manoeuvre, that's a clear-cut decision. But if you are, you've also got the added benefit that you're going to start to reinvest on a monthly basis significant sums, you're going to start to reduce your tax bill. So there's added value in refinancing and sucking up a penalty if you're implementing the Smith Manoeuvre.
So you have to weigh the expense of the penalty with the benefits of the new rate plus the benefits of the Smith Manoeuvre. Now, if I decide I don't want to suck up a $10,000 penalty? Well, you can also calculate for the next three years, because you're not getting to the right mortgage, how much is that in forgone wealth, because you're not getting invested on a monthly basis until your term finally ends, and you can get into the right mortgage without a penalty. And do I want to forgo potentially $60,000 in future improvement and wealth, because I don't want to pay a $10,000 penalty, which again, doesn't come out of my pocket to pay if it gets rolled in the mortgage? So there's a number of different considerations, your SMCP can have a discussion with you.
Sean Cooper
I agree it is similar to the mortgage rate. Sometimes we're taught to think in a way that's Pennywise pound foolish and exactly to your point there Robinson like every time I've run this scenario for clients, where sometimes the mortgage kind of ages because they can be so costly with some I mean, not to say anything bad about the banks, but just because sometimes they can be costly on the side of the banks there every time I've run the scenario, and then showed like how much investment gains that the client would give up by perhaps waiting that two or three years to wait into their renewal date to switch into the right type of mortgage, like the investment portfolio that they can grow over that time easily, like outweighs the cost of the mortgage penalty, I kind of see the mortgage penalty, rather than a cost, I see it as an investment like an investment in yourself, because by investing in yourself, you can implement the Smith Manoeuvre that much sooner and grow that investment portfolio to, as you mentioned earlier, $60,000 or more rather than losing out on that opportunity cost over those two or three years.
Robinson Smith
Yeah, do the math and recognize that you know, what may seem or look like a lot of pain right now, in terms of the amount of the penalty, try to get your head around the fact that you're going to forget about that and concentrate on the benefit, it's going to provide you in the long term.
Sean Cooper
Great. And the second objection that I sometimes hear this Smith Manoeuvre is, I don't know if I'm comfortable maintaining my debt rather than paying it off. And again, it speaks that old set like that old school mentality for a lot of Canadians, where we've been taught that debt is bad, and to pay it off as quickly as possible, burn your mortgage, similar to the title of my book there. But yes, the Canadians may be taught just to pay off their mortgage as quickly as possible. But then when you look at this Smith Manoeuvre, you're maintaining your debt, rather than paying it off. So what would you say to somebody who is having a bit of difficulty wrapping their mind around that concept?
Robinson Smith
Yeah, when I was an advisor, this was the biggest challenge I faced when speaking with prospective clients . You know, we're not taught anything about money, personal finance in school. So where do we learn it, we learn it from watching our friends, or we learn it from watching our parents. And our parents learned it from their parents, and chances are very good that their parents and their parents, parents, etc, down the line we're not personal finance specialists. And so we don't have this solid foundational understanding of money and how it works to start off with and that's how we begin our young adult life with this mindset that's been ingrained in us.
And so we hear debt, and we cringe because we've been told that debt is bad. This blanket statement that debt is bad, is a dangerous one. Because there's two types of debt. There's bad debt, and there's good debt. And there's a reason they call it good debt. Good debt is money that was borrowed to invest in appreciating assets. And it's very inexpensive because it's tax deductible. There's bad debt because I can borrow it to consume and buy depreciating assets, but it's not tax deductible. So it's relatively expensive. And the wealthy understand the difference between these two types extremely well. It's one of the main reasons that they're wealthy. They use debt to their advantage, right? Wealthy people, businesses and corporations, use debt to their advantage.
You know, you go downtown in Vancouver or Calgary or Toronto and you look up at the big, big, tall tall buildings and you see in lights the name of the corporation, which owns the building. Well, they've got two floors of that 60-storey building dedicated to managing debt, managing debt, meaning they're not trying to eliminate it, they're trying to maximize it, you're trying to minimize non-deductible debt to try to maximize deductible debt, there's a balance, but the balance does not come at zero tax deductible debt.
The balance comes at some tax-deductible debt. And so some days, you know, hey, we don't have enough debt, we gotta go get more debt if we're going to maximize future financial prospects. And the same goes with households, we need to understand the value of debt. But it's tough. I fully understand that I recognize that having grown up all our lives, being told that all debt is bad, pay it off, as soon as you can don't get any more. Well, we all know somebody who lives in an $800,000 house, who's in their senior years living on fixed incomes, CPP and OAS having to watch what they spend. And that's the price you pay when you focus on paying off your mortgage and being clear title and increasing the equity in your home on a monthly basis. Because the amount of debt you owe against it is decreasing, you're increasing your equity. But if you're not putting it to work, what's it earning you certainly 0%. In fact, less than 0% because of this thing called inflation.
So if I've got 4 or 5 8 $1.2 million of equity earning me negative percent, the wealthy look at that, and they cringe and they cry, and they gag and they want to run out of the room. And this is what Canadians need to try to wrap their heads around is, if I'm going to become better off financially, I am not going to take the advice of my parents who ended up in difficult financial positions, I'm going to take the advice of a wealthy person, I'm going to do what they did, you know, learn what they know. And I'm going to do not to the same extent necessarily, but emulate the wealthy, there's a reason they're wealthy.
Sean Cooper
I agree completely. And also to the point of maintaining your debt level, you also have to think in a worst-case scenario, like if you wanted to, you could redeem all the investments that you've purchased with the home equity line of credit under the real advanced will mortgage, and you can pay off the home equity line of credit in its entirety. So like, for whatever reason, if you decided that, of course, you see the biggest benefit if you continue on with the Smith Manoeuvre for many years until your mortgage is fully paid off. But for any reason, you decided that it's not the right fit for you, you could at any time just sell all your investments and pay off the home equity line of credit, and you just have a mortgage just like any other standard mortgage.
Robinson Smith
Yeah, that's right, Sean, I look at the investment portfolio created as your home equity just elsewhere, right? You've got this increasing amount of equity in your home, and it's worth something, but only if you put it to work. So when we pull it out of the house to buy assets, that's where our equity resides. And if at some point in the future, like let's say, you hit your theoretical mortgage freedom day, instead of 25 years paying off your mortgage, conventionally, via the Smith Manoeuvre, let's say your mortgage freedom day is 16 years. Well, at that point, what that means is you could sell your investment portfolio to pay off all the debt secured by the house and be a clear title.
And if that's what makes you comfortable, then go ahead and do it. Would I do that? No, personally, because I don't see the value of redeeming assets growing it 678 percent to pay off money, you know, this investment loan, which only cost me one and a half percent, or three 2%. You know, when we factor in deductibility, I'm foregoing that spread in growth. But if that's what makes you comfortable, then go for it.
You know, we all have to sleep at night. And this isn't going to be for everybody. Some people will just not feel comfortable with the concept of maintaining their debt. And we have to let them go in peace. Because there's a trade-off between how well off in the future do I want to be versus how poorly do I sleep at night now. So you need to understand debt, you need to understand the value of it. And you need to be comfortable with the fact that I'm not going to see my total debt go down. But I am going to see my assets rise.
Sean Cooper
Very well said and on that theme there, another common thing that I hear from clients is boring to invest is too risky. They see it as leverage, and they're just not comfortable doing that. They'd rather just invest their own like money that they've saved rather than investing money from the Home Equity Line of Credit like it's done through the Smith Manoeuvre. So what do you say to that? Robinson?
Robinson Smith
Well, that's very common. And here we're seeing the money mindset, which is completely flipped to that of the wealthy money mindset. The wealthy person says I am going to buy my cars and boats with cash. Therefore I don't have to accrue this non-deductible expensive consumer debt. I am going to invest with borrowed money. It is very inexpensive because it's tax deductible. And when I invest with borrowed money that frees up my cash to buy the car or similar items, but a lot of Canadians, the majority of the population says, I don't want to borrow to invest.
What if my investments go down? Well, you know, firstly, if you're doing it right, you're not taking a flyer on your cousin's internet startup, you're going into something with the guidance of a professional, you're going into something that is relatively stable. Let's go into some blue chip stuff. And let's buy something which has a history of increasing in value. But Canadians will say, it may go down in value, and I borrowed this money to invest. It may go, Well, yeah, it will go down in value, I can guarantee that markets go up and markets go down, the value of assets go up and go down. But over the long term, if you're doing it correctly, they go up. We've seen that time and again since the 1950s. On the other hand, we Canadians have no problem borrowing to buy consumer items. I really want that sports car. Oh, I've got some equity in the house. Yeah, okay. I could borrow it at really cheap rates, right? I mean, face-it, rates are relatively low these days. But they have no problem borrowing to buy cars, which depreciate in value, to go on vacations, which disappear from food and other luxury items or lifestyle items.
So these are things that are guaranteed to depreciate in value. So the wealthy do not borrow to consume, they borrow to invest, the wealthy, consume with cash, right? Typical Canadians will choose to borrow to consume. So we're doing it backwards. And that's part of the process of educating yourself and understanding which way works when we're looking to improve our wealth, looking to create wealth, which way works better, do I borrow it to buy items which are declining in value or disappearing? Or do I borrow it to buy items which are increasing in value? Now, some people may not choose to borrow to invest at all, they may understand the differences, they may understand that's what the wealthy do. But they may feel they just don't want to do it. They're not comfortable doing it.
And for those people, don't do Smith Manoeuvre. You know, you need to be comfortable. When you're coming up with a financial strategy for your family with a plan. It needs to be something you're comfortable with. And so for the people who still aren't comfortable with borrowing to invest, just don't do it.
Sean Cooper
Well, Robinson, it's been wonderful to have you back on the podcast again today. Before I let you go, can you let the listeners know what of interests that you're working on. And I definitely recommend maybe you can just briefly tell them about the book as well, because for anyone looking for that mindset shift, and have a better understanding of the Smith Manoeuvre. I definitely think it's invaluable to read Robinson's book first because it really lays the groundwork to have that conversation with the SMCP.
Robinson Smith
Well, for more information, they can go to Smithman.net, anybody can go to Smithman.net, they can find the book their Master Your Mortgage for Financial Freedom, we've got the Smithman calculator, which is available. There's also a homeowner course if people really want to get more in-depth. The book itself, as you mentioned, it talks about wealth, it talks about the concept of debt, it talks about re-advanceable mortgage, what the strategy is all about the accelerators that are available to people, it doesn't tell you, as a reader of the book, how to do it for yourself, because I don't know who you are, I don't know what type of mortgage you need. And there's different things to consider as regards linking bank accounts and all that stuff. Depending on the mortgage.
I don't know what you're comfortable investing and all that stuff. But once you understand the strategy, once you have a good understanding of debt, why it works, how it works, all that's when you can go to the Smithman.net There's a link to find or become a Smith Manoeuvre Certified Professional and you can write in there to us and we'll connect you with a specimen or certified professional. Now that being said, people looking for a broker can contact you directly, Sean, you're an SMCP mortgage broker.
Sean Cooper
Yes.
Robinson Smith
As far as I'm concerned, the important thing is to is to educate yourself when it comes to personal finances, not only on the Smith Manoeuvre, but anything you can you know, and one thing I always like to say is if you want to read the book, but don't want to buy it, go to the library and check it out for free, but educate yourself and learn the options that are available to you and speak to professionals. If it comes to the Smith Manoeuvre, we got Smith Manoeuvre Certified Professionals that we can connect you with.
Sean Cooper
Okay, perfect. Thanks very much for being on the podcast.
Robinson Smith
My pleasure, Sean anytime.
Sean Cooper
Thanks for listening to another episode of the Burn Your Mortgage podcast. Besides being a podcast host, I'm also an independent mortgage broker. If you or anyone you know, family, friends, co-workers or neighbors could ever use any unbiased mortgage advice or a second opinion, feel free to reach out. Email me at Sean that's sean@burnyourmortgage.ca or call or text me at 647-867-3711, for a free mortgage consultation. Also, be sure to head on over to www.burnyourmortgage.ca and sign up for my free weekly newsletter. As a small token of my appreciation, you'll be able to download my ultimate mortgage checklist on choosing the perfect mortgage. I look forward to hearing from you and helping you with all your mortgage needs. Once again, thanks for listening.
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