Episode 152: The Million Dollar Mistake Most Canadians Are Making Part 3 | Smith Maneuver Edition

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Are you making the million-dollar mistake most Canadians don’t realize until it’s too late?

If you’re laser-focused on crushing your mortgage as fast as possible, it might feel like the smartest move — but what if that strategy is silently costing you hundreds of thousands in long-term wealth? In this episode, Jon Orr and Kyle Pearce break down the numbers behind three key financial paths, and reveal how smart structuring — not more money — is what truly builds wealth. Whether you’re curious about investing early, optimizing tax strategies, or leveraging your home equity, this is a must-listen.

Here’s what you’ll learn:

• Why paying off your mortgage faster could leave you significantly worse off — and what to do instead

• How the Smith Maneuver can turn your mortgage into a wealth-building tool without increasing your monthly contributions

• The specific numbers behind three real-life financial scenarios — and which one leads to over $600K more in long-term net worth

Hit play now to uncover how small shifts in strategy could lead to massive financial gains.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 
  

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

In this episode, we explore whether paying off your mortgage early or investing is the smarter financial move, especially in the context of rising interest rates. We discuss leveraging tools like a HELOC for real estate investing and how strategies like Canadian investing, infinite banking, and bank on yourself through participating whole life insurance, permanent life insurance, or universal life insurance can help grow your wealth while minimizing income taxes and enhancing estate planning.

Transcript:

Jon Orr: All right, this is part two of the million dollar mistake that most Canadians are making. know, I guess, Kyle, it’s really kind of part three, because part one, we did a while ago, and then we kind of did a spin off this week on on how to think about, you know, paying down your mortgage faster or say investing that difference. And today, we’re going to kind of put a spin on it in this in this new version of it. So let me just give you a quick, quick, quick.

recap of what we talked about in a previous episode, which was about this this conundrum, you know, should if I have extra funds, should I pay off my mortgage fast? And and then therefore wait and pay off it faster than normal. And then when it’s done, when I when I have no mortgage left, do I now take the funds that I was dumping into my mortgage and my mortgage payment and now invest into

an investment and let you choose the know, the investment. I think in our example, we did a like a 7 % you know, rate rate of return on average. So should I do that? Or what should I do is not double up my mortgage or take the value of what I was going to dump on my mortgage as extra is start investing now, and then see where I’m better off and what we came to the conclusion, we’re gonna we’re gonna encourage you to go rewind because we get into the weeds, we get into the details, we talk about some nuances in there, but the outcome

from that episode was that you were better off investing now, that extra payment instead of doubling up that mortgage. And really when it comes down to it, when you think about it, what we really uncovered there was that doubling your investment is worse off than say doubling the time invested. And I think we kind of know that, but we have that proof now because we extrapolated and we use that spreadsheet to kind of extrapolate that.

that outcome. And if you are considering trying to pay off your mortgage faster, this is the million dollar mistake, you know, we’ve often said here on the show is that we think we need to pay off our mortgage faster, but actually you’re worse off, you’re off by, you know, uh, it’s going to be that million dollar mistake. If you decide to do that versus say, get started on that investing now and then pay it off. Now this episode, the spin, the spin is to take that exact same scenario and now go, Hmm, if I go down that road, What happens if I embed or bring in the Smith maneuver into this scenario?

Kyle Pearce: Yeah, so John, had, we know we’re gonna have a lot of people asking about Smith maneuver. I think for those who understand what we’ve covered in the Smith maneuver, it should buy by logic by reason. If you’re really comfortable with the four episodes we did specifically on Smith maneuver, you’re probably like, Okay, well, if we know that doubling our mortgage payment versus taking that doubled payment, that extra payment and putting it into into the market or into investments is going to put us in a better spot.

then by nature of Smith maneuver, it should be even better if we were to double our mortgage payment and then use Smith maneuver to reinvest the principle put into our homes. And the answer is yes, absolutely. The answer is it is going to be better. And if we take a deeper dive here, I wanna make mention, we started with a mortgage of 500,000. And in this example, we’re actually only gonna use the Smith maneuver.

until our line of credit is equivalent to the original principal owing of 500,000, meaning we’re going to just use Smith maneuver to put extra money on the home to pay down the original mortgage balance, but we’re going to be increasing our home equity line of credit balance up until the maximum of $500,000. And over here, you can see that process taking place for those who are.

with us on YouTube, you can see it up on the screen here, that you’ll see each and every year, our blind to credit balance continues to grow as we’re putting our extra payments into the mortgage and as we’re taking the additional principal that’s been paid down and we are utilizing that amount in order to make an investment. Now, quick refresher on the Smith maneuver, okay? A lot of people right there are going like, remember,

like lines of credit typically have a higher interest payment than the mortgage. Now, that’s actually what I just said is actually not true. The payment itself is not higher because the payment on a line of credit is interest only. That is your minimum payment. Whereas on a principal and interest mortgage, which is your traditional 20 year and 30 year and mortgage, you’re paying a larger payment amount. So you actually have a smaller payment. But yes, the interest

being charged is typically higher. That’s for the convenience of it, that’s for the, we’ll call it the days that maybe you’re not borrowing versus you are borrowing, there’s less certainty for the lender. So therefore they’re charging you a premium for that. Here, if we look at a prime plus .5 home equity line of credit, which a lot of people typically have, people have between prime and prime plus one.

So I picked prime plus 0.5 as sort of a middle ground for some people. Right now, as of today’s date, that would put the interest rate at about 5.2%. Now, if you recall over here on the actual mortgage, we had a 5 % mortgage as the example. Of course, we could play with these numbers. Like if the mortgage balance or the actual mortgage has a lower interest rate, then obviously there’s gonna be a little bit difference in the arbitrage there. However, remember,

The big win is the actual dollars being reinvested into something that’s earning more than what we are paying in interest, specifically more than what the house is gonna earn on its own just through appreciation.

Jon Orr: Right, right. So let’s keep going with the example here. And the other thing to consider is that, you know, the nice thing about the Smith maneuver is you’re not only getting the, you know, when you think about those arbitrage between the interest rate on your mortgage and the interest rate on your home equity line of credit, you are getting the tax deduction, you know, when you say, because what you’re doing, right, the Smith maneuver is shifting from non-taxable deduction to a taxable deduction.

is on using, you know, the same funds that you would have been doing. because you get that benefit, and we did an episode on this earlier this year, specifically going through the differences that you can, the Smith maneuver does make sense in even high interest rate environments, where if the interest on your home equity line of credit is much greater than your mortgage, you still win. You still win in the long term. which is a good chunk of that is because the tax deduction.

Kyle Pearce: Yeah, absolutely. And in this case, you’ll see here the tax deduction we’re assuming, we’re assuming an average tax rate of 27.5%. So that’s not like marginal tax rate, right? As you know, the graduated system, as you move up, up, up all the way through the, the different tax brackets, you might have a higher marginal tax rate, but here we’re just using a simple average tax rate of about 27 and a half percent. That would bring like a 5.2 %

line of credit interest rate down to around 3.77%. If we were just to look at the difference in terms of the savings on interest based on the tax deduction. So we’re looking at, know, basically as we convert this traditional mortgage to our line of credit, in this scenario, we’re actually getting a better rate over time.

as we convert this over because the other interest rate was 5 % right so in a way because of the way interest rates are falling with a lot of people fixed at higher rates. We’re now starting to see like the arbitrage going the other way so it’s actually a nice benefit here but like you said John don’t fixate on that here because that’s not going to collapse this idea the big idea here is that if we’re able to earn we’ve put an average rate of return of 7 % now again.

market volatility as we record this the VIX is at about 40 and it was at 60 at two days ago. So, you know, as we’re recording this, you know, the market is super volatile right now. So 7 % might not be realistic for today or for next month, but over the longer term, you can likely expect assuming you are well diversified a 7 % return on average from the market. So you got to be in this for the long term.

Here we’ve got like a 10 year ish runway before the mortgage is paid off and the line of credit balance has been beefed up with the investment loan balance. And what you’re going to notice over here is that our investments here, we start with like $125,000 investment right upfront. And that pile just continues to grow until

the entire mortgage balance is paid off. It’s gonna get paid off in the same amount of time as the first scenario without the Smith maneuver. Why? We’re doubling the payments, so it’s going to exhaust the initial mortgage by about year nine or 10 in this case. And at the same token here, we have now brought our line of credit balance up to 500,000. So there’s a little bit that you have to be okay with mentally that you’re like, wait a second.

I still owe the same amount that I owed when I started the initial mortgage. And we are not going to borrow any more from this property. You will do better if you did continue to do that. But we’re just using one example here to go. We put all the extra money on the traditional mortgage. We’ve paid it down. We’ve created a tax deductible investment line of credit here, all the way up to $500,000.

and you’re gonna notice that that investment fund at 7%, you can be more conservative, go down to 6 % if you want it. You’re still going to win in this particular case. We’re up to about $831,000 in total home equity and investment. So I wanna be very clear here, like this is $831,000 when we take the value of the home plus the value of the investment bucket minus

the actual money owing on the home, is $500,000. Okay, so your actual investment itself is like 584, but you also have some or actually what I should say this is just the investment. So investment minus the equity. So I’m going to say that again. Here we go. So what we have here, if we actually look at it by the time this traditional mortgage is fully paid off, now keep in mind, we do have $500,000 on our home equity line of credit. So we do owe money here against this property. We’ve got an investment bucket that’s grown to about 584. Now we owe 500. A lot of people are going like, that doesn’t feel like a lot. It’s only like $84,000 more than what I owe. However,

We also have the value of the home here to consider and the value of the home has appreciated to about $746,000. We’re using a very conservative 2 % appreciation rate. So that’s consistent across all the scenarios here. So really home appreciation is not gonna be the big winner or anything here, but the difference is the fact that we were saving on interest through the tax deduction and that gave us more money

that we could reinvest all through these 10 years of compounding. And if we look at them all side by side, just by the time the traditional mortgage is paid off, you’ll notice if we just paid off or doubled up on the mortgage payments by year nine or 10, we’re just gonna have the value of the home. That’s like $746,000. We have no mortgage now and we can start investing from there. As we saw in the last episode,

That’s actually not gonna be as helpful because we’ve lost all of that time value of money in the investment that we could have been making. Now, if we invested instead of paying down the mortgage with the extra or the doubling of the payment, we took that double payment amount and we put it into an investment bucket and instead we got a total of investments plus equity in the home to about 810,000. So you’re about.

$65,000 ahead there, which is great. That’s awesome. You’ve improved it. But with the Smith maneuver, we are now at 831 or 832 when it comes to my total investment bucket, my equity in my home. And when we subtract off the $500,000 owing on the tax deductible line of credit balance, we are now well ahead. We are looking at 50 80 what $86,000 or so.

ahead of the game by year nine and 10. That’s only a 10 year runway. And some people might be like, that doesn’t feel like enough for me, you know, like sometimes we get a little greedy.

Jon Orr: Yeah. Well, I know you’re going to make a case for it even better if you wait longer, And whoever, because now if the mortgage is going to eventually get paid off down the road, like that makes sense. And I think everyone’s anticipating that it’s going to get better because of the time value of money. Like that gap does grow. But consider like what you’ve just done, though, right? Like you have not changed any sort of amount that you’re contributing to any of these scenarios. It’s the same amount.

every single time. It’s just structure you’re using to create the extra value, right? And the extra equities. Like for example, like that first scenario, like you’re just doubling up your mortgage and then shifting that payment over to your investment. Create $746,000. Great, awesome. But you created, you know, over $50,000 free. Like it’s free.

in the same time period, the same investment, because you structured by saying, I’m going to invest that extra first, or at the same time as paying off my mortgage. And then you’ve created an extra $30,000 or $20,000 on top of that by just saying, I’m going to use the Smith maneuver to do all of this. Like, it’s the same amount of money every single time. It’s just the amount of equity and value you’ve created by just being careful about the structures you’re using to create it, which is the secret sauce here. Right? Like this is, this is the secret to doing the same thing.

Kyle Pearce: Yeah. And I would say too, and I appreciate you saying that because I think it’s easy for us to kind of like overlook that. And, know, I’m slowly on YouTube, just scrolling down through the years. We only did a 25 year runway because that was the original amortization on the mortgage, but you’ll notice here, you know, in the first case, if you just doubled up your mortgage payments, like don’t get me wrong, like it’s a good place to be, you know, like your, your, your investments in your home value is worth about 3.1 million. That’s amazing.

If you doubled up on the mortgage payments and started investing after the mortgage was paid off, which is around year 10 from year 10 to year 25, that gave you a 15 year investment runway instead of 25. You’re now at about 3.4 million. That’s like, that’s awesome. Like, you know, you, you created a couple hundred thousand of extra value of net worth. Amazing. And of course, if you go one step further and we look at the Smith maneuver, we doubled up the payments, but then

reinvested the principal all the way through until the full mortgage was paid off and we’re holding this $500,000 line of credit, which is creating a tax deduction for us, which can be more meaningful for those who have higher incomes as well. Like let’s not forget that the more income you earn, the more valuable that tax write off will become for you over time. So the wealthier you become, the more important this type of move becomes for you, right? In terms of tax savings.

But now we’re up at like 3.78 million versus 3.4 versus 3.1. So we are looking at, there’s like a $600,000 swing, more than $600,000 swing from just doubling up your payments to utilizing a doubling of payments and the Smith maneuver with, hey, just paying your mortgage off slowly and investing the double payment is sort of somewhere in the middle.

And we’re not here to tell you which one’s right for you. We’re here to give you the information so that you can make the decision that makes the most sense for you because everyone is different. And let’s be honest, rational thinking is easy. It’s super easy. We get to say this one’s the better option. But the reality is, that emotionally we have to be OK with and this is where risk tolerance and you know, actual risk capacity.

sort of comes into the mix. Like we have to be really aware of that and know that everyone is different and not every strategy is perfect for everyone, which is why 100 % equities for some people is amazing. And why being 50-50 in terms of fixed income and equities is amazing for someone else, right? Because it’s all about how it’s gonna make you feel and how comfortable you’re gonna be. The one thing that I want to caution people who are

very rational, maybe not emotional enough, is that we can get caught up when we do something like what we’ve demonstrated here with the Smith maneuver. And instead of doing something that is slow and steady, like having a diversified portfolio or having someone else manage it for us, we wanna do it ourselves. And sometimes when we wanna do it ourselves, we start to get a little greedy. And when we get a little greedy, we start to like Solana or we like…

to, you know, like fart coin or we like, you know, whatever the crypto thing or whatever the risk on thing is because FOMO starts to take over. So the one thing that we will caution people against is that we’re using very conservative numbers here. And we would argue that staying conservative with the investments that you do make.

is going to be the only way that you’re gonna get these types of outcomes because if you make a big mistake based on FOMO, that could actually put you in a scenario where, my gosh, you’re gonna wish you took option one, which was just paying off the mortgage quicker because you took a 50 % bath on something that’s not coming back.

Jon Orr: like, I’m so glad you said that because it’s like, part of it is the waiting game, right? Like, this is the nice thing about doing the charts that we do, like the spreadsheets, like extrapolating, because if you feel like you’ve hit a goal by extrapolating the numbers to go like, am happy with $3.78 million for just, you know, my home’s value, the equity I have in my home in that timeframe, then

why like all you got to do is be patient and stick to the plan. And know, patience is waiting around like figuring out what to do in the meantime. So just be patient, figure out what to do in the meantime and let it happen. Like Kyle said, because if you get impatient, because we’re comparing ourselves or we’re looking at and then we have the FOMO, then this plans, the plans don’t work out. And I think when we switch plans, this is where it also doesn’t work out.

Right? So we’ve talked about that in episodes too. So sticking with the plan is essential. And, you know, I think we outlined, you know, that this is a very valuable kind of way to look at your numbers of your equity. But I think we also solved that million dollar problem that most Canadians are making or a million dollar mistake that most Canadians are making and giving you some three different versions of that so that you can make the right decision for yourself.

Kyle Pearce: Yeah. And the one piece that I think forces or I say forces it, it encourages people to not be patient is when we start to do real planning for the future and we start to look at numbers and we’re not happy with where we are. And when we’re not happy with where what we’re doing is going to take us based on more conservative projections, what we start to do is we say, well, could I get there if I had a higher

rate of return. So then we start to move the needle on what we are expecting out of ourselves. And when we do that, we then start to look at things that can potentially get us there. But that’s the key word is that if it potentially gets us there, could potentially get us something different. And these are pieces that I think are really critical when you know, when people are doing their plan is like we want to plan for the base case. So always thinking about how do we get the base case?

And then at what point and what buckets make the most sense to take a little bit more risk and take that up a little bit. Because at the end of the day, I’ve never met someone who gets to that financial freedom number and they are better than what they had projected. I’ve never heard someone saying like, darn, my numbers were off. You know, like I had projected too low for this financial freedom number that I was after. It’s like, no, they’re.

they’re happy, they’re excited, they’re ecstatic that they’re like, stuck to my plan. And the result is better than what I had planned for, versus it being the other way around, which is disappointment. Because let’s be honest, I don’t think there’s anyone out there, except for someone with a defined pension plan, like where you know what it is you’re going to get where you have a defined not contribution, but actual defined benefit pension plan where they know exactly what they’re going to get.

No other plan ever works out to be exactly what you had planned for. It’s either gonna be better or it’s gonna be worse. It’s so hard to you know, to land right on that exact number. So let’s make sure that the number is higher instead of lower.

Jon Orr: Right. These are the types of scenarios and, you know, number calculations that we do when we meet with clients to help them create, you know, scenarios, best practices, you know, strategies for reaching those numbers. You know, and we often assess where you are on that pathway. And if you are unsure on the four phases of

of your wealth creation journey, you can discover that. You can head on over to CanadianWealthSecrets.com forward slash pathways. CanadianWealthSecrets.com forward slash pathways. Fill out a quick survey or a quick form there. It will help you discover which of the four phases you’re currently in and give you some next steps and strategies to strengthen that phase and move towards the next phase. So again, CanadianWealthSecrets.com forward slash pathways. And also if you’re looking to kind of get in touch with us and

so that we can co-create and strategize your wealth building journey itself. You can head on over to CanadianWealthSecrets.com for us this discovery, fill out the form there and you can be talking with us and we’d be strategizing together.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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