Furthermore as you have been informed many times and have ignored many times, you don’t invest 100% of your home equity in SM, typically it is 25% which means that your investments would have to go completely to hell and stay there before this “risk” would manifest. And if the market crashed that badly and stayed there, the poor bastard with his 35 year amortization is not going to be doing a dance of joy either.

It’s obvious from surfing around to all these SM discussions that right from moment one you saw the Smith Manoeuvre as some sort of threat to your core beliefs and you are fighting to hang on to those by attacking the concept using various disingenuous methods. I don’t know why you continue doing that, but I suspect there is a part of you that realizes it is about ego and defensiveness, and little to do with concern about the strategy itself.

One has to wonder why “victims” of the Smith Manoeuvre aren’t coming forward in droves to back up your concerns about SM. Forget droves, how about a handful?

The key point is that anyone implementing the SM should know that they are taking more risk than just investing their money and be willing and able to bear that risk. To claim otherwise is incorrect.

Having said that, on a long term basis, there are very slim chances that you will lose by investing on the stock market (unless you are taking unnecessary risk playing with penny stocks, emergent markets and small cap). After ten years, you will surely benefit from more money than just having a HELOC sitting there and not using it to its full potential.

If you want to play safe, you can buy index funds. History has proven overtime that the growth is there. I think risk with leveraging strategies are more linked to a cash flow issues and sleeping well at night. As I just started my SM 3 months ago, only time will prove me right… or wrong!

FB.

The fact is that you can take out a secured line of credit (when you have a job) that you can use in case of an emergency situation. So, my question remains: what extra protection does the SM offer?

Nonetheless, I don’t think that stock market is necessarily related to your financial situation. As an example, western part of Canada is doing much better than the eastern part right now. As the TSX is driven by the financial and resources industries, there is a possibility that you may lose your job if you work in Ontario but the stock market is doing fine. The key here is that the Smith Manoeuvre gives you access to more liquidity than a regular mortgage.

You can sure extend your amortization without qualifying at the bank but your financial institution is not dumb enough to give you more money on your house if you just lose your job.
Cheers,
FB.

In fact, SM is more risky because you are likely to lose your job and be unemployed for a long time when the economy is in a recession or worse. You think stocks will do great in such a situation?

Regardless changing the payment schedule was never a problem. I never broke the contract – the option was always there to change the amortization to either increase or decrease the monthly payment.

Mike

Withdrawing from the rrsp should only be a last resort – however my point was that if it’s absolutely necessary, the rrsp is a good safety blanket.

One thing I like about financial blogs is that it gives you the opportunity to debate on several points of view.

1. You can always try to refinance your mortgage in order to change the amortization and then reduce your payments. However, the bank will surely reconsider your present situation and charge more interest as you would be representing a much higher risk without a job. Keep in mind that you were able to do it as you almost lost your job. If you walk into a branch without any sources of income, it might end-up differently.
2. Personally, I make a distinction between regular mortgages and HELOC. Even though HELOC’s are mortgage, they are way different than regular mortgage with fixed payments. Having said that, if you have a HECLOC in place, you rather use it to its full advantage by leveraging.
3. I strongly not suggest dipping in your RRSP account to compensate any income loss if it’s possible. RRSP contributions are limited by your income level and once they ware withdrawn, you can’t put this money back into your RRSP. Therefore, you can’t benefit from the tax deferment over a long period of time. It defeats RRSP program’s benefits.

I appreciate your comments and surely add-up comments feed shortly.

Cheers,
FB.