There is a fair bit of discussion going on about The Smith Manoeuvre (SM) in Jonathan Chevreau’s columns in The Financial Post and on his Wealthy Boomer Blog. To recap, the SM involves two parts: in the first part the mortgage is paid down as fast as possible and in the second part a loan equal to the principal payment of the monthly mortgage is taken to invest in the stock market. Note that interest on an investment loan is tax deductible whereas mortgage interest is not.
In his column that kicked off the discussion, Mr. Chevreau endorses the first half of the SM but warns against the pitfalls of leverage involved in the second half. Here’s how Mr. Smith responds to Mr. Chevreau’s criticism:
My only regret is that we do not agree on the importance of simultaneous management of assets and debt early in life. That’s what a well-run business does, and it is certainly what wealthy people do, which is why they are wealthy.
An individual or a household is not really comparable to a business as has been pointed out in this blog post. I also disagree that we should do something simply because wealthy people do it. I doubt that there is a causal link between leveraging and wealth and what wealthy people do after they have accumulated assets is immaterial to the argument.
Personally, I want to keep things simple. Sock away the maximum possible in a RRSP and pay down the mortgage with the rest of the savings. The way I see it, I can earn a guaranteed, risk-free, after-tax return of 5.25% (our mortgage interest rate) by paying down the mortgage, which I think is pretty darn good.
