April 4, 2007, 4:58 pm

A full example of the Smith Manoeuvre

by: The Financial Blogger    Category: Smith Manoeuvre
email this postEmail This Post Print This PostPrint This Post Post a CommentPost a Comment

Now that you’ve been reading enough about the Smith Manoeuvre and the leverage strategies and risk, it’s time to put some figures together. By this example, I hope to make this technique more clear.

 

First, let’s keep David and Tracy‘s example. I listed their debts in the Example of debt elimination post. They have a house worth 260K with a 190K mortgage. By changing their regular mortgage into a Home Equity Line of Credit, they will probably pay around 6% (which is Prime rate in Canada). Therefore, their monthly interest payment on 190K, will be $950 (190K*6%/12 months).

 

In order to respect their budget, they will put $1279,50 in payment each month. That will give $329,50 ($1279,5-$950) to invest during the same period. At the end of the first year, our young couple will have a debt of 190K and a total of $3954 that has been invested. The interest paid on this amount will be tax deductible for all Canadian residents, yeah!

 

Year

HELOC #1

Interest Paid

HELOC #2

Interest Paid

Tax Deduction

Investment + Growth

1

 186 046,00 $  11 162,76 $    3 954,00 $      237,24 $          94,90 $                  4 270,32 $

2

 182 092,00 $  10 925,52 $    7 908,00 $      474,48 $        189,79 $                  8 882,27 $

3

 178 138,00 $  10 688,28 $  11 862,00 $      711,72 $        284,69 $                13 863,17 $

4

 174 184,00 $  10 451,04 $  15 816,00 $      948,96 $        379,58 $                19 242,54 $

5

 170 230,00 $  10 213,80 $  19 770,00 $   1 186,20 $        474,48 $                25 052,26 $

6

 166 276,00 $    9 976,56 $  23 724,00 $   1 423,44 $        569,38 $                31 326,76 $

7

 162 322,00 $    9 739,32 $  27 678,00 $   1 660,68 $        664,27 $                38 103,23 $

8

 158 368,00 $    9 502,08 $  31 632,00 $   1 897,92 $        759,17 $                45 421,80 $

9

 154 414,00 $    9 264,84 $  35 586,00 $   2 135,16 $        854,06 $                53 325,87 $

10

 150 460,00 $    9 027,60 $  39 540,00 $   2 372,40 $        948,96 $                61 862,26 $

11

 146 506,00 $    8 790,36 $  43 494,00 $   2 609,64 $      1 043,86 $                71 081,56 $

12

 142 552,00 $    8 553,12 $  47 448,00 $   2 846,88 $      1 138,75 $                81 038,40 $

13

 138 598,00 $    8 315,88 $  51 402,00 $   3 084,12 $      1 233,65 $                91 791,79 $

14

 134 644,00 $    8 078,64 $  55 356,00 $   3 321,36 $      1 328,54 $               103 405,46 $

15

 130 690,00 $    7 841,40 $  59 310,00 $   3 558,60 $      1 423,44 $               115 948,22 $

16

 126 736,00 $    7 604,16 $  63 264,00 $   3 795,84 $      1 518,34 $               129 494,39 $

17

 122 782,00 $    7 366,92 $  67 218,00 $   4 033,08 $      1 613,23 $               144 124,26 $

18

 118 828,00 $    7 129,68 $  71 172,00 $   4 270,32 $      1 708,13 $               159 924,52 $

19

 114 874,00 $    6 892,44 $  75 126,00 $   4 507,56 $      1 803,02 $               176 988,81 $

20

 110 920,00 $    6 655,20 $  79 080,00 $   4 744,80 $      1 897,92 $               195 418,23 $

21

 106 966,00 $    6 417,96 $  83 034,00 $   4 982,04 $      1 992,82 $               215 322,01 $

22

 103 012,00 $    6 180,72 $  86 988,00 $   5 219,28 $      2 087,71 $               236 818,09 $

23

   99 058,00 $    5 943,48 $  90 942,00 $   5 456,52 $      2 182,61 $               260 033,86 $

24

   95 104,00 $    5 706,24 $  94 896,00 $   5 693,76 $      2 277,50 $               285 106,89 $

25

   91 150,00 $    5 469,00 $  98 850,00 $   5 931,00 $      2 372,40 $               312 185,76 $

 

Whoa, that’s an excel spread sheet! To make things easier, we calculate the result of a Smith Manoeuvre done on a yearly basis (instead of monthly). We used an 8% yield to calculate the “investment + growth” column and a 40% marginal tax rate to calculate the tax deduction. Please note that we didn’t use any of the tax deduction for investment, this is cash in your pockets.

 

If you look at the 25th year, you will notice that the couple still owe 190K ($91,150 + $98,850) but their investments worth $312,185! On top of that, they are receiving a nice cheque of $2,372 (and still increasing) for the government as tax deduction. We’ll go deeper in this chart analysis in the next post. Until then, get your calculator and mind going!

Similar Posts:

You Want More? Sign-up! ->
TFB VIP Newsletter


If you liked this articles, you might want to sign for my FULL RSS FEEDS. If you prefer to receive the posts in your email, subscribe CLICK HERE


Comments