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The Q&A With Ed Rempel, Financial Blogger And Smith Manoeuvre Expert

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Brampton, Ontario accountant and fee-for-service financial planner Ed Rempel is a popular blogger who provides unconventional financial wisdom, which is namely the conventional wisdom most people believe that just is not true or that is less than optimal.

Below is our recent interview with Ed Rempel.

Q: Ed, you are an expert in the Smith Manoeuvre. Can you explain what this theory is and how it works?

Ed Rempel: In short, the Smith Manoeuvre makes your interest on a residential mortgage tax-deductible in Canada. Here, mortgage interest must be paid with after-tax dollars. You can borrow the available equity in your home to invest a little at a time as you gain equity with each mortgage payment. Over time, the amount of your mortgage declines and it’s replaced by a tax-deductible credit line from money borrowed to invest. The Smith Manoeuvre was developed by a former Canadian financial planner named Fraser Smith, and leverages the fact that interest paid on loans for investments is tax-deductible.

You can borrow from the credit line to pay its own interest (capitalize the interest), so it does not require your cash flow. The interest tax deductions can give you tax refunds, which you can use to pay down your mortgage more quickly. Over time, your investments can build up a large nest egg that can help fund the retirement you want.

Q: Why would someone want to do this? It seems that it has a lot of benefits.

Ed Rempel: There are many benefits. The main benefit is that you can invest for your retirement without using your cash flow. Most people do it as part of their retirement plan. The tax deductibility is attractive, but not the main reason for doing it. And, of course, it helps you pay off your mortgage more quickly. As you might imagine, many people are unable to invest enough to be able to have the retirement they want without a significant effect on their lifestyle. So, often times, the Smith Manoeuvre can provide enough additional investments for them to achieve their desired retirement. It sounds like it makes your mortgage tax deductible, but it does not actually do that. Instead, it converts your mortgage over time into a credit line used to borrow to invest for your future. The interest on the credit line is normally tax deductible.

Q: What kinds of risks would potential investors expect to face?

Ed Rempel: There is some degree of risk associated with virtually every investment strategy. The key is working with an experienced, knowledgeable financial planner who can help you mitigate risks to the extent possible. The Smith Manoeuvre works most effectively as a long-term strategy. If you’re going to use it, I’d recommend investing for at least 20 years, and ideally, much longer. Also, it should be incorporated into a smart investment strategy. Anyone who uses it should also have a tolerance for risk and the capability to be patient and optimistic. Although the stock market is unpredictable and often volatile, the long-term risk isn’t that great, relatively speaking.

Q: If someone decides that this strategy is for him or her, how would they go about taking advantage of it? Is it easy to set up?

Ed Rempel: In order to take advantage of the Smith Manoeuvre you need to have what’s called a readvanceable mortgage, which, by the way, is available at most banks. This is a mortgage that’s connected to a line of credit. With each mortgage payment, you’re paying down some principal which immediately becomes available credit in your credit line. You can borrow this amount to invest directly from the credit line. If you invest in this way on an ongoing basis, you get the benefit of a lower average cost, which is actually a safer way to invest than investing in one lump sum.

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