May 6, 2008, 6:50 am

My Smith Manoeuvre – April Update

by: The Financial Blogger    Category: Smith Manoeuvre
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The recent drastic drop of interest rate occurred by the Bank of Canada made me think twice about my Smith Manoeuvre Strategy. With payment of $1,400 a month, I could easily drop more than $400 in my Investment account. But on the other side, I have about 30 months left to pay off a 31K debt. So leveraging over a short period of time is very risky. In fact, it is more like gambling than investing!


In fact, my original repayment plan was the following: 2 years ago, I wanted to start a Smith Manoeuvre and reimburse the debt after 5 years with this money. While 5 years is a little bit short for a leverage strategy, I was willing to take the risk as my income is still increasing at a steady rate years after years.

Now 2 years had passed and I only started my strategy last year. In fact I did put in place the SM 2 years ago, but I had to cash in all my investment when I bought my second house. This is why I don’t have this much in my account.

So considering that I have now $7,100 in the account (still positive, yeah!) and that I invest $400 per month, I would get about 19k at the time of repayment. Hum… it seems that I am not going to payback in time, right?

Well this is because I decided to not put everything in the Smith Manoeuvre. Am I getting nervous about the market? No way! But I am getting nervous about the fact that I need 31K in 30 months and I don’t think it is too smart to invest that money in highly volatile funds like the Sprott Canadian Equity Fund.

Therefore, I decided to pay back a part of my mortgage at the same time. So there is another $450 per month used to pay down my mortgage. So in 30 months, I have about $13,5K in equity in my property. In the end, chances are that I will be able to refinance my mortgage, reimburse my debt and not touch my Smith Manoeuvre Investment.

So the strategy is steadily going on without much difference this month. I still shove another $400 into it and, thx to Mr. Sprott, the account is positive for a third month in a row :-D.

The idea of buying international funds is still on the table but since I didn’t have much time to think about it recently, I am not planning on making any move in the short term. I’ll probably reconsider this option later on this summer, once all my exams are done!

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Comments

[…] Financial Blogger presents My Smith Manoeuvre – April Update In fact, it is more like gambling than […]

[…] first way to the top would be my Smith Manoeuvre account. Counting a $400 month deposit with a 7% return, I should get about 120K in investment on my 40th […]

Hi, I’ve read with great interest your Smith Maneuver progress, especially since I was thinking of doing it when my current mortgage comes due with an All-in-One as well. However, I’m still confused about how it works in this situation (with made up numbers). Perhaps you could explain it to me? Say a home is valued at $400K, so the bank would give an All-In-One (Ai1) up to $300K. Now, assume the property has a current mortgage of $200K. Then I could split the Ai1 into a $200K mortgage portion and an immediate $100K investment LOC. Would I then have to pay my regular mortgage payment plus the interest on my investment LOC each month? I understand that I could “capitalize the interest” but, doesn’t that make some of the LOC not invested in investments, hence, not being eligible for the tax deduction? Sorry for the question if you’ve answered it before! Best of luck to you in your endeavours.

by: The Financial Blogger | May 21st, 2008 (8:57 am)

Hello Jeff,

I think you have a really good question and I will write a full post about it tomorrow morning.

Cheers,

FB.

[…] I had a question on my latest Smith Manoeuvre Update. Since it was a good situation, I decided to write a full post about Jeff’s question. Here’s […]