The vast majority of people that get a HELOC style mortgage either use that equity to do renovations or just save it for emergencies. While there is nothing wrong at all with either of those options, the bank wants you to spend that money and preferably never pay it back or pay it back really slowly. There is one guy though, named Fraser Smith, who came up with another option that you could use your HELOC equity for and that is to use that equity to invest and grow your portfolio and net worth even faster while also getting a tax break from your interest payments. In order to be able to do this maneuver you do need to have a HELOC style mortgage (some lenders call them different names) where you can take out a loan or line of credit once you have paid enough of your house off.
Generally speaking you do not usually want to borrow money to invest, but this maneuver is one of those situations that can be an exception to that rule. HELOCs tend to have very low interest rates and if you use a margin/Taxable account you can write off any interest payments on your loan/line of credit against any money you make reducing your taxes. There are a few things that you do want to make sure you do if you are going to do the Smith Maneuver (aside from reading the book, he is the ‘expert’ after all).
The first thing you need to do is make sure you are using a taxable account. This is the only way that you can write off any interest expense otherwise you lose this benefit when you use a tax-sheltered account. You really don’t want to be paying interest in a tax-sheltered account if you can avoid it. Every year you should be able to see on your statement how much you paid in interest on your loan and you can put that into your tax return to get the tax break.
The second thing you really want to make sure you do is buy stocks that pay a higher dividend than what your interest payments are. The dividend being higher than your interest not only allows you to make more than your expenses but also gives you to increase your investments a little after every dividend and after your interest is paid. This also allows you to hold your investments if they happen to go down without having to worry about covering your interest payments out of your pocket.
The third thing you want to make sure you do is to make sure you are buying stocks that you feel are relatively safe from market drops and that have long histories of paying and increasing their dividends. The last thing you want to do is buy MEME or hype stocks with borrowed money and take big losses. Personally when I do start to do the Smith maneuver, (I am not currently because it would only be a short term holding right now and I don’t want to have to sell at a loss later if the market drops a bit), I will probably be investing in Manulife, Scotiabank, and BMO. They all have long histories of paying dividends and have fairly high dividend yields upwards of 4% at the moment. The main reason I would do these 3 companies is because they all pay dividends in different months and this would allow me to get paid monthly which would make it easier to cover my interest payments and gives me a marginal amount of extra safety just in case one company runs into trouble of some kind. They are all in the same or similar industries so any market drop would affect all 3, but no investment is completely risk free.
The last thing you need to consider if you are going to do the Smith Maneuver is exactly what you want to accomplish with it. The standard Smith maneuver is to max out your HELOC for investing, never pay off your house at all and permanently use your interest payments as a tax break while continuing to use any extra dividend money to increase your investments. You could also use the Smith maneuver to just pay off your house faster by borrowing against your HELOC and growing your investment until you hit a certain dollar value and then pay off your house completely with it. The last thing you could do is borrow some against your HELOC to buy a big dip in the market (like last March), and then once the market recovers use that money to pay off your house a little faster or whatever you choose to use those gains for.
The Smith Maneuver can be a fantastic tool to use in order to grow your net worth and portfolio very quickly while also giving you an extra tax break on your investments (on top of all the other tax breaks the government already gives on investment and dividends). That being said I probably wouldn’t attempt the maneuver if I was a newer investor or without reading the book first to make sure you know all the pros and cons and little tricks involved. If you are a fairly experienced investor and are confident in your investing abilities this could be a good method for you to look into to increase your portfolio value.
Disclaimer: I am not actively doing the Smith Maneuver. I am long on all the stocks mentioned in this article. Research and do your due diligence before making investing decisions.