For those interested in The Smith Maneuver (SM), here is a primer- very basic.

Let us say you take a 25 year mortgage for $200,000 at 5.1% on monthly payments.The amortizations for the first year are as follows.

1 01/29/2007 1,167 337 831 199,663
2 02/28/2007 1,167 338 829 199,325
3 03/28/2007 1,167 339 828 198,986
4 04/28/2007 1,167 341 827 198,645
5 05/28/2007 1,167 342 825 198,303
6 06/28/2007 1,167 344 824 197,959
7 07/28/2007 1,167 345 822 197,614
8 08/28/2007 1,167 347 821 197,268
9 09/28/2007 1,167 348 819 196,920
10 10/28/2007 1,167 349 818 196,570
11 11/28/2007 1,167 351 817 196,219
12 12/28/2007 1,167 352 815 195,867

When you pay the first installment of $1,167- $337 is the principal and $831 is the interest.
1. Asa this is paid, the bank advances you a secured line of credit (LOC) at prime equal to the principal - $337. This is then invested.
2. When the 2nd payment is made, the principal is $338. Your line of credit is increased by this amount to $337 + $338 = $675.The new amount of $338 is again invested.
3. And so on continuously for the length of your mortgage. Your LOC keeps increasing accordingly and so does the book value of your investments
4. Let us say that at the end of the year you have a LOC of $4,133 invested in say mutual funds. This over the long run of 25 years should give you a positive return based on historical performance.
5. On the LOC of $4,133 you will pay a certain amount of interest. Let us say that amount is $200. If you are in the 40% bracket you will get back $80 from the CRA. If further it is invested in a labor-sponsored fund (LSIF) you will get a further tax break.This latter tax break of LSIFs will be phased out by 2011.
6. Every year this effect is compounded as the principal part of your mortgage payment increases and the LOC increases accordingly and your investments increase and the interest you pay on the increasing LOC goes up and the tax returns from the CRA goes up. At the end of the situation you will have a hefty LOC invested in investment vehicles and you will keep on getting tax refunds from the CRA on the interest you pay as long as you carry this loan.
In theory it is very very cool, provided you have the necessary amount to keep making the interest payments on the LOC. There are currently investments that give you a monthly dividend to help you pay the interest.

It is really a neat manner of paying down your mortgage loan and building your savings. Those who have availed of it are really content, esp in light of the fact that global markets, incl Canada, are smoking.

There you guys have it in a nutshell.

There are plenty of add-ons and enhancements.

Just FYI, if investments are made into segregated funds, gains can be locked in, but keep in mind these management expenses ratios are higher than normal mutual funds.

There are also guaranteed returns mutual funds as well that automatically lock in your gains every month with the MER decreasing over time. Extremely few in the Canadian market though. I can only think of 4, but there may be more.

If any body wishes to add, correct or make any comments on the basic outline, please feel free to do so.

Perhaps the mods of the forum would wish to make the explanation of the Smith Manoeuvre a permanent feature. If so, I can give a more complete rundown of it as I have done several such presentations with graphs and the like. Other planners on the forum may wish to modify until we have a flawless version. I have also engineered several such deals, even for people who have only paid 10% of their mortgage.

Hi,

Somebody sent me a msg regarding the term "collateral mortgage"

Here is the equiv should anybody wish to know.

Collateral Mortgage - Provides security over real estate when loans are provided for purposes other than, or in addition to, the purchase of the land. This type of mortgage often secures a revolving loan. Also sometimes referred to as a “Home Equity Loan” or an “Equity Take Out Mortgage”.