Episode 81: The Smith Maneuver in a High-Rate Era: Maximizing Canadian Income Tax Deductions

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Have you ever wondered how you can leverage high-interest rates to your advantage when borrowing to invest?

In today’s uncertain economic climate, many Canadians are hesitant to borrow for investments due to rising interest rates. The common perception is that high rates automatically diminish the feasibility of strategies like the Smith Maneuver, which involves converting non-deductible debt on your primary residence into tax-deductible debt. However, our latest podcast episode dives deep into how these high rates can actually be beneficial if approached correctly.

For anyone feeling the pinch of current financial pressures, this episode offers a new perspective. We break down how you can overcome emotional and psychological barriers to make rational, financially sound decisions. Whether you’re an experienced investor or just starting out, understanding the nuances of borrowing to invest during high-rate periods could be the key to unlocking significant long-term benefits. We discuss real-world examples, provide detailed analysis, and share actionable insights to help you navigate these complex waters.

You’ll learn:

  • Learn how to transform your mortgage interest into tax-deductible debt.
  • Discover the long-term benefits of consistent investment using the Smith Maneuver.
  • Understand the potential to pay off your mortgage faster while increasing your net worth.
  • Strategies for overcoming the psychological hurdles that prevent effective financial decision-making. 
  • How to use the Smith Maneuver effectively even in a high-interest rate environment, ensuring you maximize your tax deductions and investment returns.

Resources:

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.

By hopping on a discovery call with Kyle, he will review your specific personal and corporate financial situation in order to determine if there are some quick wins available for you to minimize taxes personally or corporately, provide ideas for how you can increase your personal cash flow, and ensure that the net worth of your estate continues to grow in tandem.

Watch Now!

Transcript:

00:00:00:06 – 00:00:27:10
Jon Orr
Have you ever wondered how you could leverage high interest rates to your advantage when borrowing or investing? Sounds counterintuitive in today’s uncertain economic climate, many Canadians are hesitant. And you may be feeling that way yourself to borrow for investing due to the high interest rate environment. At the time of this recording, the Bank of Canada just announced a quarter percent reduction in the overnight rate.

00:00:27:10 – 00:00:58:20
Jon Orr
But the common perception is that high rates automatically diminish the feasibility of strategies like this Smith Maneuver, which involves converting nondeductible debt on your primary residence into tax deductible debt. However, in this podcast episode, we are going to dive into how these high rates can actually be beneficial if you approach them correctly. We break down how you can overcome emotional and psychological barriers to make rational, financially sound decisions.

00:00:58:22 – 00:01:32:14
Jon Orr
Whether you are an experienced investor or just starting out, understanding the nuances of borrowing to invest during these high rate periods could be the key to unlocking significant long term benefits. In the episode, we’re going to discuss real world examples that provide detailed analysis and share actionable insights to help you navigate these complex waters. Let’s go.

00:01:32:16 – 00:01:37:16
Kyle Pearce
Welcome to the Canadian Wealth Secrets Podcast with Kyle Pierce and John Oliver.

00:01:37:17 – 00:01:41:03
Jon Orr
We are recovering high school mathematics teachers and education consultants.

00:01:41:03 – 00:01:43:14
Kyle Pearce
Whose entrepreneurial spirit led us to begin.

00:01:43:14 – 00:01:51:12
Jon Orr
Multiple businesses in real estate investing, digital courses and coaching and consulting after the bell rang at dismissal time.

00:01:51:16 – 00:02:19:02
Kyle Pearce
Fast forward a decade later where we’ve grown our portfolios and our time freedom to the point where we can now help entrepreneurs, business owners and investors to grow their wealth into a legacy that lasts for generations through hidden investment and tax secrets. Your financial advisors won’t believe our true. Well, there, John, We are going to dig in a little bit today because I’ve been on a lot of calls lately.

00:02:19:02 – 00:02:39:21
Kyle Pearce
I know you and I have been talking about it a lot, and sometimes we know the answers to some of the questions and wonders that folks from the audience and other clients that we serve, they have some hold back and some hesitation, some barriers, and we know the answers. But sometimes even ourselves, like our emotions sort of get in the way.

00:02:40:02 – 00:03:17:01
Kyle Pearce
And sometimes it sort of is the truth. It gets in the way, it gets in the way of actually acting on what you know is rational, logical, the right move and the emotions sort of like talk you out of it. So I’m having a great time here working with some clients through the idea of borrowing to invest and really trying to find ways and kind of almost prove because every client will say to me when we hop on a call, some people talk about the Smith maneuver, for example, especially on that nondeductible interest that we’re paying on our primary residence.

00:03:17:03 – 00:03:45:21
Kyle Pearce
And a lot of people are like, Yeah, I know about that. But and then the big fill in the blank is interest rates are high and home equity line of credit is 7.2 or 7.7. And actually we just got a rate decrease yesterday as of this recording. So now that 7.2 might be more like a 6.95 for some 7.7 might be more like 7.35 or something like that for some or 7.4 or five.

00:03:46:01 – 00:03:59:07
Kyle Pearce
But either way, it’s like they see big rate and immediately they’re like, Well, this strategy obviously doesn’t work. And you and I know rationally it does work, but it’s still hard to overcome that thinking, that mindset.

00:03:59:10 – 00:04:13:16
Jon Orr
I want to say two things to what you just said, because it does seem like it shouldn’t work when you think about and now we’re going to look at the we’re going to dive into some of the math here today to talk about why it does work and how you can actually go about achieving the goals that you’re after.

00:04:13:18 – 00:04:33:18
Jon Orr
But why people are thinking it doesn’t is because when you’re seeing a 7.7 interest rate, you’re like, how do I make sure I get 7.7 rate on my investment? And then how do I make sure I pay this interest bill? Like there’s a lot of logistics in convincing yourself that that’s the right move for you, your family, your business, but be it to speak to you.

00:04:33:18 – 00:05:02:00
Jon Orr
So we’ll talk about that. But to speak to this like the logic or the data says, do it and then I can’t do it or I don’t want to do it like that. Two pieces like I’m reminded of a conversation that our map, if you’ve listened for since the beginning that was on this podcast for the first 50 episodes or about that, and he had that idea of like in order to make a really important decision, the two pieces have to align, the logic has to make sense.

00:05:02:00 – 00:05:21:00
Jon Orr
And at the time, like I don’t know if you remember he was talking about leaving his teaching job and going all in on his his real estate business. And it was like Logic said, financially, it made sense for him, right? It works. But emotionally he hadn’t been convinced yet, you know, at that time that that was the right move.

00:05:21:00 – 00:05:35:23
Jon Orr
But when he was presented with those two options and then he started to think about, he’s like, am I happy every day working this way or working this way? And when he was like, I’m happier here. It was like the trigger for him to go. It makes sense in both ways. And now he all of a sudden took the leap.

00:05:35:24 – 00:05:55:09
Jon Orr
The same has to be true for any financial this like all financial decisions. So when we’re talking Smith maneuver, we’re talking investment, we’re talking real estate investing. You’re talking about anything you have to be able to go. Does the numbers make sense? Does the logic make sense, and am I going to be happy? And you’ve talked about this being like, can I sleep at night?

00:05:55:09 – 00:06:11:21
Jon Orr
That’s the that’s the thing. Like, it’s like, can I be happy with that decision? And then can I be happy now? Can I be happy in a year? Can I happy in ten years? Both of those have to line up. And right now it’s like, how do we help people? And you’re doing this on a regular basis. You’re talking about numbers every time you’re meeting with people.

00:06:11:23 – 00:06:21:01
Jon Orr
Here are the numbers, but you’re also talking about helping them make that decision to be the happiness decision, the the emotional side of things and getting over that.

00:06:21:03 – 00:06:42:18
Kyle Pearce
Yeah. And what it really comes down to, I think, is trust. And when I talk about trust, it’s not just trusting the individual that you’re talking to, it’s trusting that what your rational mind is doing is true, like it’s actually real and there are uncertainties that you can’t control for, for example, we don’t know what interest rates are going to be a year from now.

00:06:42:18 – 00:07:16:06
Kyle Pearce
We can speculate. We know what economists think. We also don’t know what’s going to happen to investment markets. Right. Like so there’s uncertainty there. And I think that always leaves a bit like a cloud of doubt. However, we have so much historical data that at least suggests to us what you can expect. And even if there’s a downturn or even if there’s a this or that or whatever it is, that it’s like if you know the plan and you trust the plan, then you can help to keep your emotions in check.

00:07:16:06 – 00:07:36:23
Kyle Pearce
And something that has always sort of made sense for us as investors is we’ve always borrowed to invest in real estate. That’s just something we know. Even at high interest rates, like we run the numbers and it’s like, you know, there of course is risk. Like there’s always going to be a little bit of risk, but it’s like we know what we’re signing up for.

00:07:37:00 – 00:08:11:21
Kyle Pearce
But when it comes to the Smith maneuver for a lot of people, like there isn’t really a way to truly Smith maneuver real estate. And what I mean by that is like the typical Smith maneuver is the process of turning your non deductible interest debt on your primary residence into tax deductible debt. So like the thought, if we think about that aspect, like I leveraged the idea of the Smith maneuver to borrow against my home equity to buy more real estate.

00:08:11:21 – 00:08:37:16
Kyle Pearce
But it’s not like the process. The process is like, I’m going to take a dollar of my money that I was potentially going to put into an investment like the stock market. And before I do that, I’m going to pay it off on my property to create another dollar of home equity line of credit room. And I’m going to leverage that dollar and then invest it in an unregistered investment.

00:08:37:16 – 00:09:00:02
Kyle Pearce
Now, you can’t really do that month to month, week to week, year to year when it’s like real estate because you don’t have a deal that would allow you to take $1 or $10 or $100. You get a deal, you need this much money and you just take it. So what I want to talk today about is the process of doing something that’s more systematic.

00:09:00:04 – 00:09:22:14
Kyle Pearce
And I’m actually going to challenge, you know, based on the work that we do adhere to prepare for this episode. I feel that doing this work to help our listeners get convinced of why the Smith Maneuver still is worthwhile even in high interest rate environments, has convinced me to start doing the actual process and not just saving my home equity line for the next real estate deal.

00:09:22:15 – 00:09:42:00
Kyle Pearce
I’m going to put it in place and by the end of the day, or like by the end of this episode, we’ll talk about like exactly what I’m going to do and it’s going to keep me accountable to do it. I don’t know if you’re going to do it. You didn’t know I was going to say this on the episode, but I’m actually going to do it because I did so much digging here to help a client that I was like, What the hell?

00:09:42:00 – 00:09:53:07
Kyle Pearce
Why am I not doing this? Like, you know, it’s like I’m doing I’m borrowing for real estate, but able to like I have mortgage debt and I’m paying I’m paying on these IRS calls.

00:09:53:07 – 00:10:03:23
Jon Orr
I’m going to poke holes at it. Right. You know, my brain, I have to like you’ve got the idea. You’re like, we’re going into this. And then I’m like, well, wait a minute, I’m going to play devil’s advocate, so let’s get into it. Let’s give me some details.

00:10:03:23 – 00:10:20:19
Kyle Pearce
Yeah, I’m going to start here with some high level. I want to help with logic, but then we want to actually, like, prove it with numbers because like people, you know, I love a spreadsheet, You love a spreadsheet. And I’m sure a lot of people listening here, like it seems like anyone who books a call to have a conversation, they all like spreadsheets.

00:10:20:19 – 00:10:38:16
Kyle Pearce
Do they? Do they? Everybody says it. So they’re like, Yeah, I want to like, dig in here. So I want to start though, just from a logic perspective. So right as of two days ago when the overnight rate was 5%, we just got a Bank of Canada interest rate decrease or a cut of a quarter of a percent.

00:10:38:16 – 00:11:03:23
Kyle Pearce
So now it’s at 4.75. Some banks, like RBC, for example, have already announced that they are going to change prime. So remember, prime rate is controlled by the bank and the actual Bank of Canada controls the overnight rate. So basically the prime rate we pay as a spread. So like RBC makes money because they can borrow at a lower rate than we can and then they lend it to us for a higher rate.

00:11:03:24 – 00:11:24:11
Kyle Pearce
That makes sense. They have to make money. So as of like when I made the spreadsheet a couple of days ago, we had the average person had a home equity line of credit that was prime plus point 5%. Some is prime plus 1%, some is very like there are people that have prime. So if you have Prime as your home equity line of credit, awesome.

00:11:24:11 – 00:11:45:13
Kyle Pearce
Good on you. But I’m picking the in-between there. Typically it’s between prime and prime plus one. So I have it at prime plus point five. That was at 7.7%. Already. We’re in better shape because yesterday the rate was cut and all the banks are now going to follow suit. But pretend for a second we’re going to live two days ago.

00:11:45:15 – 00:12:08:16
Kyle Pearce
In that case, we’re going to look at why in that world it worked. And then we’ll show what happens now that the rate is coming down just to see how much better it gets. But 7.7% interest feels like a lot because a lot of people have lower mortgage rates on their property. Some people have 5% because some people have 2% backs from a couple of years ago at the all time lows.

00:12:08:18 – 00:12:32:05
Kyle Pearce
Sure. Like I’m trading low interest for high interest. It just logically doesn’t make sense. But what you’re creating is you are really creating a tax deduction for yourself so that 7.7% is going to come back to you through a tax deduction. And if you think about it, if you’re in the 35% average tax rate range, I’m just kind of picking a number.

00:12:32:05 – 00:12:59:02
Kyle Pearce
We’re not assuming everyone’s in the highest bracket or anyone’s in the lowest. We’re just picking 35. You’re in the 35% tax deduction rate. It’s like your home equity line of credit interest rate would be 5%. All right. So you take 35% off of 7.7 and it’s like you’re paying 5% now, John, you’re going. But my fixed rate is 4.5 or my fixed rate is three or my fixed rate is two or whatever.

00:12:59:04 – 00:13:23:12
Kyle Pearce
The reality is, though, is the arbitrage. So you’re saving the interest on a tax deduction, but you’re also creating an investment. So what you’re doing is you’re actually helping to arbitrage here. And as long as basically my hurdle rate on my investment is like as long as the investments over 5%, I’m going to win. And here’s the crazy part.

00:13:23:12 – 00:13:53:16
Kyle Pearce
The longer I do this and the more I convert more of my nondeductible interest into deductible interest. Has that balance gets bigger, that home equity line of credit has a bigger and bigger balance and your house balance goes down and down. What you end up getting is a bigger and bigger tax deduction in each and every year, which can have a significant impact on the amount of money you keep in your pocket while also building an investment such as an index fund.

00:13:53:16 – 00:14:02:23
Kyle Pearce
S&P 500. Paul One of my co-coaches was wondering what is SMP on a recent episode? It’s the S he’s.

00:14:03:00 – 00:14:07:01
Jon Orr
Listening to you saying that that’s the way. Yeah, the S and P.

00:14:07:01 – 00:14:19:03
Kyle Pearce
500, the 500 top companies in the U.S. and we’re just trying to be super conservative here. You are going to be net ahead and we’re going to dig into some of the actual numbers here. Yeah.

00:14:19:05 – 00:14:48:12
Jon Orr
So I think one of the hold ups that we had initially and you specifically because you locked in your last mortgage all time lows, so you were like you’re looking at a really low interest rate, then you’re comparing it to 7.7 and you’re saying, why would I want to trade debt at one? Whatever, You know, the low, low interest rate, like think of the lowest mortgage interest rate you can get and the highest line of credit rate we’ve seen.

00:14:48:15 – 00:15:15:01
Jon Orr
So it’s like, why would I want to trade that? Because it’s like I’m just swapping debt to pay more interest. And I think the reason like we were saying that, but what we were doing is at the time is and correct me if I’m wrong here on your thinking, is that is it we’re just trading the debt and going I’m going to swap it to create more available capital then that doesn’t make sense right now to me, Right?

00:15:15:02 – 00:15:33:23
Jon Orr
Because all I’m doing is now I’m going to pay more. Just which does create like it doesn’t actually create. In that case, when you go, I’m going to pay off my mortgage, I’m going to take the dollar that I was going to put over in the S&P 500 and I’m going to put it down here. And then I create this capital window or this capital pot of money.

00:15:33:23 – 00:15:59:01
Jon Orr
If I don’t take that dollar now and go over there, then I don’t create the tax benefit for myself. And then you’re saying I’m just trading debt instead of going I’m going to use it to generate money in the arbitrage? That makes sense because now you’ve created this tax relief in a way, you’re going to get a tax credit at the end of the year because you now have this investment that you borrowed to make money.

00:15:59:03 – 00:16:19:01
Jon Orr
You’re paying interest on that. That’s your tax credit. You get to say, I’m going to reduce the amount of income I have because I have this liability or this expense. And then and then the arbitrage makes sense because of this investment. So almost like in our original thinking to compare the two, interest rates actually have no effect in this scenario.

00:16:19:01 – 00:16:27:16
Jon Orr
Right? Like it doesn’t even matter what interest rate your actual mortgages compared to what your line of credit is for this to make sense.

00:16:27:18 – 00:16:56:11
Kyle Pearce
100%. Now, I mean, if forever. So for example, I’m in a really interesting scenario, and like I said, I’m going to take on this challenge and do it anyway, even though in the very immediate term I’m going to pay slightly more interest and it’s not going to give me the immediate benefit because again, it’s like your investment will need time to compound, to build and grow and I’m paying like a super low rate, like my fixed rate on my home mortgage is 1.84%.

00:16:56:13 – 00:17:15:09
Kyle Pearce
All right. Now, it’s crazy. It’s insane. And I’m like, Wow, that’s awesome. So I’ve had it and I’ve had no real urgency to, as you can imagine, like pay it off. I’m like, No, I have enough capital. I have enough home equity line of credit room. I have other asset like I’m good on that front, so I just I’m letting it go.

00:17:15:11 – 00:17:31:11
Kyle Pearce
But here’s the thing that really occurred to me as I was running this scenario for a client. We’re not going to run it at 1.84, by the way. We’re going to go with like more. A lot of people are telling me they’re in the 4% range on their mortgages. People who have renewed and all of those things. So we’ll compare to 4%.

00:17:31:11 – 00:18:00:02
Kyle Pearce
But here is what I realized for myself is that my five year fixed mortgage is coming due next year. And the reality is in one year, if I’m doing the true Smith maneuver and I’m not just taking a boatload of money and paying off a boatload all at once, if I’m taking little bits at a time and a dollar cost averaging into the S&P, my amount of interest that I pay on that small amount in the first few years is so low that it’s negligible, right?

00:18:00:02 – 00:18:29:20
Kyle Pearce
So it’s like it’s not like I’m trading in a big balance for a much larger interest rate. It’s like I’m slowly doing it and then I’m going to have to renew at whatever the rates are at next year anyway, which aren’t going to be as high as they were this year. But I don’t anticipate to be anywhere near where it was then and then I’m going to go, Crap, why didn’t I get this started so that more of the money that I owed on my home is now on this line of credit that is tax deductible.

00:18:29:22 – 00:18:40:19
Kyle Pearce
And noting that your home equity line of credit is variable. So as rates come down, that number is going to get better and better, like it already got better in two days. Now I know it’s not going to always be like that.

00:18:40:19 – 00:18:41:20
Jon Orr
But counting on that, right?

00:18:41:20 – 00:18:59:02
Kyle Pearce
We’re not counting on it. And that’s why we’re going to keep the number where it was, because no one anticipates that rates are going to go higher than where they were at the 5% overnight rate. Could it happen? Of course. But it’s very, very rare that they start to do cuts and then they do a U-turn and then start raising rates again.

00:18:59:04 – 00:19:08:22
Kyle Pearce
It’s likely that we’re going to see some cuts and then some holes and some cuts and so forth To get closer to that 3% overnight rate is what economists believe.

00:19:08:24 – 00:19:27:03
Jon Orr
Yeah. Now here’s the thing that I think some people who get hung up like me gets hung up on the details, you know, like, what does it look like? And you say, I’m going to take this dollars, let’s say first, in order for me to do this, I have to have this extra money that I’m going to put in, say, my investment.

00:19:27:03 – 00:19:45:16
Jon Orr
So I’m looking to pad for my future. I’m looking to try to do this and I’m putting it in an unregistered account. That’s why we’re saying we’re going to switch to do this method. So you not only have to have this, let’s say it’s like a pot of money, part of your budget that you’re putting over here to generate your future investment.

00:19:45:18 – 00:20:10:00
Jon Orr
So you not only have to have that, you’re going to take that, you’re going to put it into the onto your mortgage instead if your mortgage allows it. So you have to look at those details. That’s going to create the opening. You’re going to take that you’re to borrow it and put it over here. So now not only do you have to account budget wise for the original investment, but you now have to account budget wise for the interest portion.

00:20:10:02 – 00:20:28:24
Jon Orr
You have to make the cash flow work for yourself, right? So you can’t just say, I’m going to do this. If I got 12 grand every year I want to put towards this, I’m going to put a, you know, $1,000 every month into this. It’s going to create $1,000 a room. I’m going to bore the thousand dollars and then have no plan to pay the interest that you’re now going to accumulate over the course of that year.

00:20:28:24 – 00:20:45:10
Jon Orr
Like at the end of that year, you can have a $12,000 addition into your line of credit that you now have to account for the interest portion of that all along, because the banks are going to say, give me the interest every month. So you have to be able to budget for that as well, right? So that you can’t just say it’s okay, hey, I’m just going to all of a sudden do this and it’s going to work.

00:20:45:10 – 00:20:58:13
Jon Orr
You have to go, okay, maybe 12 makes sense. Maybe I hold back a thousand throughout the year every time. But then what you said is, if you do this year to year, year ten, this looks very much different than your year one.

00:20:58:15 – 00:21:27:09
Kyle Pearce
You talk about a really important part, which is budgeting for the interest that you’re going to be dealing with, especially initially, because remember, what we’re trying to do is we’re trying to essentially convert nondeductible interest into deduct double interest, which means there’s going to be a delay for when you get this sort of payoff. Right. Because you have to file your taxes next year and claim that deduction.

00:21:27:09 – 00:21:56:10
Kyle Pearce
Right. So I could be let’s say I put in $1,000 extra into my mortgage and then I take a thousand bucks and I invest it. Well, now I have $1,000 I need to pay interest on for the rest of my year or really until I choose to pay down this debt, if ever. So by the end of a year, you might have, let’s say, $12,000 while I have to pay the interest on that, which as we know, that interest rate on a home equity line of credit right now is going to be a little higher.

00:21:56:10 – 00:22:17:13
Kyle Pearce
We talked about prime prime plus point five or prime plus one, and that money has to come from somewhere. Now, of course, you could borrow from your line of credit to pay off the interest, but I would argue just budgeting for that in the compound. Exactly. Like don’t let it compound. I mean, we could run it and show you that, you know, your price still going to be in that ahead anyway.

00:22:17:13 – 00:22:42:09
Kyle Pearce
But I think it’s going to eat into some of the benefit. So rather if I’m planning to take $12,000 over a full year, maybe it’s monthly, maybe it’s weekly, maybe it’s whatever you choose. But that 12,000, I’ve got to consider the fact that, hey, if interest is 7.7% on a home equity line of credit, then I’m going to be paying will call it an extra 900 ish dollars.

00:22:42:09 – 00:22:56:12
Kyle Pearce
Let’s call it $1,000 to be safe. So you want to budget in your mind that it will be 1300 dollars or $13,000 over that year? Right. So does that make sense or is I clear on that or is there anything I missed on that there? John?

00:22:56:13 – 00:23:13:01
Jon Orr
No, I think I like that. So you just have to account for that in your planning, right? Like you if you’re going to and this is the point I was making. It was was that you just don’t think that I’m going to like take this and put it here and it’s going to work out. Even Steven, we do need to count for that interest.

00:23:13:01 – 00:23:38:10
Jon Orr
You’re going to pay. But I like that you threw in there about the delay because it’s like you have to pay the interest upfront, but then trust that the calculations, the analysis that you did on the arbitrage or the interest rate change between what your growth is on, let’s say putting it into the S&P after the fact and what you’re paying that fight, like we said, break even was five.

00:23:38:10 – 00:23:54:14
Jon Orr
As long as you’re making over five, you’re making a profit. So it’s like because if I’m paying 7.7 and I’m making nine, there’s that difference. But then you’re saving on the tax rate. So the tax delay says, look, I’m going to get I’m going to put all this, I’m going to pay this tax. I’m going to pay the interest.

00:23:54:14 – 00:24:21:20
Jon Orr
Now, at the end of the year, I’m going to file my taxes. I’m going to show that I paid interest on this investment, this tax money is going to come back in the form of dollars, and that’s supposed to help offset this tax you paid upfront or the tax you paid out or the interest you paid upfront. And now you’re going to go, I’m just going to dump that back down on that loan, take that tax return, put it on the loan, and it’s going to start to feel a little bit better in that case.

00:24:21:22 – 00:24:40:16
Jon Orr
But it’s going to be hard for you, Kyle, you know that I like and we talk all the time about clean data. It just doesn’t feel clean when you start to do some of the comparisons and everything the way and then like this money is this and it’s not always perfect, but there’s no clean data coming out of here saying exactly what percentage you made that year.

00:24:40:17 – 00:25:02:05
Jon Orr
You maybe you can get real details, but I know you won’t. But the idea is that it will offset and then because you’re going to continue of this process year to year to year, because, you know, you’re 9% on average is a 20 year average on the S&P. It’s not like you got to trust that you’re doing this for the long run and it will work.

00:25:02:07 – 00:25:04:22
Jon Orr
But you got to kind of plan for it hundred percent.

00:25:04:22 – 00:25:29:09
Kyle Pearce
And, you know, I love in our analysis, we’re about to dig in to here. We’re not going to really tell you or show you what you did with, say, the tax refund. You get to decide what to do. But I loved your ideas there. And for some people it’s like, hey, take the refund and invest that, too, or take the refund, roll it into the home equity line of credit and then pull more like you get to decide those things.

00:25:29:09 – 00:25:57:07
Kyle Pearce
But we want to look at this at a high level anyway. And I just want you at least in the first few years, to kind of recognize that you want to budget in that additional cash flow cost to yourself. Right? So if you were doing $12,000 into investments anyway, now maybe you want to do 11,000 into investments, meaning you’re going to go 11,000 into the hillock and then borrow the 11, put that into the investment, because now the extra thousand is there.

00:25:57:13 – 00:26:17:14
Kyle Pearce
Exactly right. So usually you decide. But really what I think for anyone who is investing, if you have a mortgage and you’re investing, then you’re going to see here that this is really a no brainer. And the other thing you have to be okay with as well, which I think is hard emotionally, is that, hey, let’s say you start this process right after listening to this episode.

00:26:17:14 – 00:26:33:06
Kyle Pearce
You’re like, you know what? I’m convinced I want to do this. I’m doing it. And you start doing it. You put the first thousand in, you borrow it, you throw it in the S&P. You do this, let’s say for the whole year, and then the market tanks, Right? What do we want to do? What do we want to do emotionally?

00:26:33:06 – 00:26:50:08
Kyle Pearce
We want to pull everything out and then, you know, again, so make sure whatever it is that you’re doing, the strategy with, that you’re comfortable for a longer period of time. You’re mortgage is a long period. Your mortgage was supposed to be 25 years maybe, or maybe there’s 11 years left or whatever you’re at in your mortgage journey.

00:26:50:10 – 00:27:09:05
Kyle Pearce
It’s a longer term idea. So think about this investment fund. I would ultimately open up a brand new account and it’s sort of like you’re set and forget sort of Smith Maneuver account. So we’re going to assume that you’re going to go into an index for us. We like the U.S. equities over, say, Canadian equities or other countries.

00:27:09:05 – 00:27:30:19
Kyle Pearce
So we would do an S&P 500. Paul so that you will be able to get over the long term a nice return because it’s going to be up and down. And right now we are at highs and you can wait and say, you know what, maybe the market’s going to rip down, but maybe it won’t. And you just want to slowly dollar cost average.

00:27:30:19 – 00:27:53:17
Kyle Pearce
So this kind of forces you into a dollar cost average situation. So what I want to share with you, John, is a random scenario and this is up on the screen for those who are watching on YouTube. If you’re not, go check out Canadian While Secrets on YouTube, Hit the subscribe button and follow along with us here. But we’re going to look at a home and we’re going to just pick some nice, easy numbers.

00:27:53:17 – 00:28:14:00
Kyle Pearce
The home is worth $500,000, and the mortgage on this home is $300,000. All right. We just picked two numbers and we’re going to work from that. But you’re going to see similar results rates. We are amortizing this over 25 years. So of course, it’s going to be a little different if you’re, you know, only have ten years left on your mortgage.

00:28:14:02 – 00:28:35:12
Kyle Pearce
It’s going to be even more helpful for you if you, let’s say, have 29 years left and you did a 30 year amortized mortgage. But this will give you a good perspective. And what we’ve done is we’re taking this home. We’re showing in the left, like in this column, see here, this is showing the home. And then we’re assuming a growth rate of about 2% on the value of the home.

00:28:35:17 – 00:28:58:16
Kyle Pearce
Okay. An appreciation rate, 2%. Again, we don’t know what that’s going to be. That’s fairly conservative over the longer term, especially in Canada and particularly in some of the spots like the GTA. But what we’re going to do is we’re going to use this to try to figure out like how much better off when we just consider your home or when we just consider the Smith maneuver with your home.

00:28:58:16 – 00:29:28:08
Kyle Pearce
So we’re not thinking about any other assets you have. And you’ll notice that the mortgage balance, after paying down just a typical 25 year mortgage, is listed here in column D. So you see that slow decline over time. And what we’re going to do is we’re going to play here the game of adding $1,000 each month in additional principal payments to this particular mortgage payment to get our Smith maneuver going.

00:29:28:08 – 00:29:51:10
Kyle Pearce
Now, John, you’re the mortgage guy. What kind of mortgage do people need to have in order for this to actually make sense for the Smith maneuver? Because, hey, if I have a traditional mortgage and I throw my thousand dollars in and you wait on the other side and you’re like, where’s the thousand dollars? You don’t have a really Barnstable mortgage in order to get that new balance that you’re going to require.

00:29:51:10 – 00:30:21:18
Jon Orr
Well, you need the REO Barnstable Mortgage with your home equity line of credit. But one of the things to consider is looking at how flexible your payment options are. Are you having the anniversary double up payment? You know, double up payments allowed? Are you allowed to have your anniversary 10% or 20% deposit it like you want to check some of those features that when you’re choosing a product, choose carefully that allow for you to pay off your mortgage in faster rate so that you can use the Smith maneuver.

00:30:21:18 – 00:30:34:23
Jon Orr
Because if you if you don’t choose one of those products, then you’re out of luck. You know, you’re out of luck being like they’re going to they’re locking you in to get their interest the way that they set up the interest in there. You’re not, say, being able to double up a payment to get that extra thousand dollars in there.

00:30:34:23 – 00:30:51:08
Jon Orr
Or maybe you’re waiting to the end of the year on the anniversary date or up to the anniversary date. You’re putting your 12 grand down because it’s less than 10% of the purchase price or the mortgage amount. So make sure you’ve got some of those details in place before you think that you’re going to be able to do this.

00:30:51:10 – 00:31:22:05
Kyle Pearce
So, yeah, flexibility is key. I’m glad you mentioned about the prepayment because, hey, if I have a re advanced able mortgage, but there’s 0% prepayment that I can do each year, which I think is fairly uncommon nowadays, but it can still happen, you typically see ten or 20% prepayment options on the balance per year typically. But make sure just make sure because depending how much or how aggressively you want to pay down and how big your mortgage balance is, you’re going to want to know those things and make sure it’s set up appropriately.

00:31:22:05 – 00:31:42:19
Kyle Pearce
So over here, mine is set up to make much larger payments and what I’m doing in this scenario. So I’m good. I’m in the clear and I’m going to start putting this thousand dollars in. And what we did is we took the amortization table, the original, and what we did is we actually added this extra $1,000 prepayment each month towards the balance.

00:31:42:19 – 00:32:02:06
Kyle Pearce
Now, some people might be familiar with doing that without the Smith maneuver, just saying, Hey, I just want to aggressively pay down my mortgage. And you’ll notice, just like you might suspect, like with this particular payment, I think it was about 1500 bucks a month on this particular mortgage. And by adding that extra thousand dollars per month, you’ll notice.

00:32:02:06 – 00:32:24:00
Kyle Pearce
And if you did it consistently from the start to the end, it will be done in less than 13 years instead of the 25 years. So that’s a good thing, right? You’re like, Oh, that’s amazing. So remember, though, we’re going to apply the Smith maneuver, which means we’re actually going to create you new debt. So you’re not necessarily debt free, but let’s look at the actual impact because what’s going to happen each year.

00:32:24:06 – 00:32:43:23
Kyle Pearce
So you can imagine your line of credit is going up by 12,000 a year. We’re assuming here that we’re not compounding the interest, meaning the typical home equity line of credits requires you to pay interest only every month. So we’re going to make that payment. You get to decide where it’s coming from. It comes from that budget, as we discussed straight John.

00:32:44:04 – 00:32:46:03
Jon Orr
That we talked about that. So we’re good there.

00:32:46:05 – 00:33:11:02
Kyle Pearce
So over here, I’m using 7.7% for a home equity line of credit interest rate that is reasonable for prime plus point five in our 7.2 prime rate environment, we’re now going to, as we mentioned, 6.95 for most big banks. So that number is actually going to come down for a lot of people. But we’re going to run the numbers as they were just a few days ago.

00:33:11:04 – 00:33:34:11
Kyle Pearce
And I’m going to assume you’re in a tax bracket of, say, 35% or at least your top end of your salaries in 35%. Of course, if you’re 40, if you’re 53%, if you’re in these higher brackets, and obviously you’re getting a bigger benefit, if you’re in lower brackets, you’re going to get a lower benefit. But just with that deduction, I want you to look over here at the real interest cost.

00:33:34:11 – 00:33:49:10
Kyle Pearce
So 7.7% is really a 5.01% cost for this person in the 35% tax bracket simply because of the tax deduction.

00:33:49:12 – 00:34:25:03
Jon Orr
Yeah, let’s make that clear. Right. Let’s make that clear to our listener here is to say I’m paying 7.7% in interest. Now. But remember, we talked about that come tax time, which is going to be you’re going to claim that you’ve paid out in this case. What is this is my year right now. So we’ve got in year one, let’s say in year one, you’ve paid after year one, you’ve paid $800 in interest on that line credit, which you now get to claim as an expense for your investment.

00:34:25:05 – 00:34:51:01
Jon Orr
And that’s going to give you back $640 in rebate at the end of the next year, if you think about it that way. Right. So now it’s like, okay, that’s a good chunk of money. And that’s where when you think about that. So then the 647 is really that savings. So when you think of the difference, that’s the amount of actual interest you paid and that accounts for about 5%.

00:34:51:03 – 00:35:12:07
Kyle Pearce
Exactly. Exactly. So when you look at that, you go, okay, like that doesn’t feel as bad. And that’s why we wanted to really make sure that that is clear for everyone that, hey, listen, high interest rate doesn’t look good. Now, mind you, on this particular mortgage, I forgot to mention this, but the mortgage rate we picked for the original mortgage, the traditional mortgage amount was 4%.

00:35:12:07 – 00:35:35:06
Kyle Pearce
So again, a just up adjust down. You’re going to obviously have some differences here. But we picked 4% just because it’s kind of in the middle of where people may have been landing in the fixed environment over the past couple of years. And basically what looking at, of course, there’s 7.7 doesn’t look as good as four. And even after the tax, 5% doesn’t look as good as four.

00:35:35:06 – 00:35:56:23
Kyle Pearce
However, remember, the intent of building this line of credit right balance is so that we can create investable income. We’re not taking 12,000 and just leaving it there. We’re taking that 12,000. We’re not going to spend it. We’re going to actually buy an investment. And of course, dollar cost averaging into an index fund is one of the easiest.

00:35:57:00 – 00:36:16:11
Kyle Pearce
It’s also one of the most liquid ways to. So this is the other thing is that, hey, listen, if something changes in your life down the road, you have access because it’s in the public markets. You’re not locked in for a time or anything like that. You have access to it. So what we’re going to do and again, we’re not going to tell you what to do with the tax deduction.

00:36:16:11 – 00:36:33:03
Kyle Pearce
I mean, there’s some obvious things. You can reinvest it. You can use it to pay down more home equity line of credit, whatever you want to do, or just pay down interest that it’s totally up to you or pay down the line of credit balance. So we’re not really factoring this number in. We’re just saying what the real interest cost is.

00:36:33:03 – 00:36:57:08
Kyle Pearce
So when you’re one $600 instead of nine something, right, instead of 924, it’s really 1200 dollars in year two instead of 1850, it’s really $800. So you’re noticing it’s like your interest costs are going up and that can be scary. Your balance of the line of credit is going up, your real interest cost is going up. But what we also see here is investment bucket.

00:36:57:08 – 00:37:21:04
Kyle Pearce
In this investment bucket, we have it going up at 9%. We can play well, play with a couple of numbers here, but 9% typically on average, if it’s an S&P type index, seems like a reasonable amount, we’re not going to put 12% like Dave Ramsey would do on mutual funds because that’s not realistic for most mutual funds. But for an index fund that is equity focused for sure.

00:37:21:04 – 00:37:40:18
Kyle Pearce
If you want something more conservative, you can bump that down to and we’ll do that in a few minutes to show you what happens. And what I want to show you here is what your net worth over time would be. And I actually I just want to lock up my rows here for those who are watching. We’re going to lock up these and we’re going to lock up these right here.

00:37:40:20 – 00:38:06:22
Kyle Pearce
And you’re going to see that with out the Smith Maneuver. You are paying down your mortgage alone and your net worth right away. You got $500,000 home. The mortgage amount was 300. So you had a net worth of 200,000. You’ll notice as you go down that your net worth increases, you have principal paydown happening and you have this low appreciation happening on the properties.

00:38:06:24 – 00:38:27:16
Jon Orr
Here’s something to consider. Did you factor also in if I was considering the Smith maneuver or not, the Smith maneuver is I have this extra thousand dollars that either I can use the Smith maneuver and put on the mortgage, but or I maybe I don’t use the Smith maneuver and I just have this thousand dollars to completely stick in the S&P right now.

00:38:27:18 – 00:38:46:05
Jon Orr
Right. So I wonder what that net worth looks like if I put my thousand dollars in the S&P now and did not use this Smith maneuver versus eventually, because I know you’re not showing yet what the net worth looks like when using the Smith maneuver. You’re just saying when I’m not using the Smith maneuver. But I did have this thousand dollars.

00:38:46:05 – 00:39:03:05
Jon Orr
Otherwise, what are we doing? Right? So it’s like, let’s look at that scenario and go, okay, well, what do we got here? If I just go straight to the S&P, which is what people are typically doing, right? People are typically going, I have my mortgage payment. I also have my investment funds that I contribute to on a regular basis.

00:39:03:05 – 00:39:11:22
Jon Orr
Maybe RRSPs me, it’s tax free savings account, maybe it’s unrest registered. So let’s put my thousand dollars in my 9% investment now and see what this comes out to be.

00:39:11:24 – 00:39:38:05
Kyle Pearce
John I’m so happy you’re here because I didn’t actually that didn’t cross my mind, but I’m sure it’s crossing some other people’s minds out there as well. So I just added that column here really quickly and it’s a really good one to look at and to consider. So something that’s really important that I’m going to mention and you’re going to notice here that what you’ve suggested it’s going to take you longer to sort of make this feel like it makes sense or worth is worthwhile.

00:39:38:05 – 00:40:02:01
Kyle Pearce
But what I want people to recognize is that by increasing your taxable interest or sort of tax deductible interest on that line of credit, as your net worth grows, typically your income tends to grow as well. So as you, you know, let’s say, get better positions at work and so on and so forth, you’re actually going to want to have more deductions later.

00:40:02:01 – 00:40:35:08
Kyle Pearce
So you’re going to actually want to build up this tax deduction bucket over here. And you’re going to see that in just a couple of minutes. So right now on the screen, you’re seeing the net worth with the additional 12,000 just going straight into the investment. No interest, none of that stuff happening, none of the arbitrage. So you’re noticing that, of course, your net worth in year one is to 12 now instead of 200, because you’re investing the 12, you’re noticing it’s, you know, a little more than 24,000 in year two because of course, that 12,000 each year compounding.

00:40:35:10 – 00:40:58:21
Kyle Pearce
And now when we compare it to the net worth with the Smith maneuver, what you’re going to notice is that for the next a little bit here. So at first in year one, you’re actually behind in both cases, right, because you’re paying interest. Remember that initial interest you’re paying is like, oh, I’m actually a little bit behind just paying down my mortgage normally.

00:40:58:23 – 00:41:41:08
Kyle Pearce
And I’m a little bit I’m much more behind the other investment because that 12,000 is now going straight into the S&P. And you’ll notice that in year two, I’m still behind your three, behind your four, but I’m getting closer and you’re going to notice that by one, two, three, four, all the way this year it looks like at your eight, you’re going to see that the net worth with Smith Maneuver starts superseding in this particular scenario of the just regular mortgage paydown and the investment straight into the S&P and you start to see the growth starting to take off.

00:41:41:13 – 00:42:08:14
Kyle Pearce
And in this particular case, we’re only showing your net worth comparative to when the mortgage is paid off, which is in year 12 to 13. So you’re noticing here that you’re, you know, compared to just paying off your mortgage, which is for 41 your net worth with the Smith maneuver. 767 So that’s a substantial change. That’s about a 300 a $300,000 improvement.

00:42:08:16 – 00:42:32:04
Kyle Pearce
Now, when you compare it, those just to investing straight in the S&P, you’re only about what, $30,000 higher. But the real benefit now is what happens in these later years. And so I’m glad you shared that because, John, that is a really important piece that if you don’t do Smith maneuver, you’re still going to have a ballooning net worth, which is great.

00:42:32:07 – 00:43:00:22
Kyle Pearce
But the Smith maneuver under these conditions and again, we picked 4% for the mortgage. We picked 7.7% for the home equity line of credit. Remember, as rates continue to come down, we’re at, you know, 20 year highs and interest rates as that number keeps creeping down, these numbers are going to get better and better and better. But what we want to show is that the Smith maneuver still works in in a high interest rate environment, assuming all other things are equal.

00:43:00:22 – 00:43:24:22
Kyle Pearce
And of course, the lower your fixed mortgage amount is or the higher the fixed mortgage amount is, that is going to impact your will call it break even point, your catch up point. But ultimately what you’re doing is you’re taking this process to sort of converting over as much money into tax deductible interest as possible. So I’m going to pause there and see if there’s any thoughts or wonders you have.

00:43:24:22 – 00:43:33:03
Kyle Pearce
John, before we show what happens after the homes paid off, if we were to invest your mortgage amount that you were doing.

00:43:33:08 – 00:44:05:07
Jon Orr
By putting the extra money down that you were going to put in the investment you’ve just shown that after I think it was year eight, all of a sudden the interest, you know, the net worth was taking over. So you’re already gaining extra money in this scenario, year eight. But then if we are paid off in year 13 because we paid it faster in this technique, then you get to now take your mortgage payment and dump it down on your line of credit and now you’re going to start to pay off that line of credit with this extra payment.

00:44:05:07 – 00:44:22:13
Jon Orr
And now every one of those because it’s like paying directly to like the principal in a way. Right? If you use the same term as your mortgage, you’re just paying straight into the because you’re already paying the interest off with that extra money you’ve been budgeting for. So now you’re going to pay off that line of credit in every payment to that.

00:44:22:13 – 00:44:35:22
Jon Orr
So every 1500 dollar payment you’re now putting in there is straight 1500 dollars to your net worth. So you’re already speeding this process up and then that net amount is going to be paid off and you didn’t have to contribute anything extra.

00:44:35:24 – 00:44:59:03
Kyle Pearce
I love I love it. So now, John, we looked at just the Smith maneuver alone getting to the end of the mortgage. So the mortgage is paid off after 13 years in this particular scenario, we saw that the we’ll call it the break even point on when it becomes helpful with these numbers was around year eight as opposed to taking that thousand and just throwing it straight into the S&P.

00:44:59:05 – 00:45:26:11
Kyle Pearce
So, again, investing is the key, right? Like investing is the important part here. But if you want to maximize what you get, the benefit you get by doing the Smith maneuver is this mortgage payment was 1583. Think of what happens after year 12 and a half ish when your mortgage is done. You had $1,000 going on to the balance of the mortgage in order to grab that money and reinvest.

00:45:26:16 – 00:45:50:17
Kyle Pearce
Here’s something we didn’t factor in here that as your mortgage gets paid down, you’re actually opening up more balance as well. So you could actually be borrowing more than $3,000 every month because your principal is opening up more re advanced double line of credit. So we did not factor that in. Right. So that’s money. That’s more investment dollars that you didn’t have and that you could repurpose here.

00:45:50:17 – 00:46:21:01
Kyle Pearce
We’re just going straight up apples to apples with this extra thousand. But after the mortgage is paid off, instead of taking 1583 and then finding something else in your life to spend it on, take that 1583 and continue investing it into that same investment or some other investment. And if we assume it’s the same investment at the same rate without adding any new debt, So you’re going to notice the line of credit is at 156 here and we just keep it as is for now.

00:46:21:03 – 00:46:55:14
Kyle Pearce
You’re going to notice that your net worth with the Smith maneuver as opposed to without it is continuing to balloon. So by year 25, when the mortgage should have been paid off, you’re $1.5 million better. And that’s without actually utilizing more of the equity in your home. You’ve only utilized $156,000 worth of it in order to create a real interest cost of 70 $800 a year and a tax deduction of 40 $200 a year.

00:46:55:14 – 00:47:12:21
Kyle Pearce
So if you were to double that number, you can imagine that these numbers are going to about double as well, or more giving compounding. And I want to show you another option. Some people are like, you know what? I just don’t like the idea of having a balance. Like I want to pay it off for the feeling. Well, guess what?

00:47:12:21 – 00:47:31:24
Kyle Pearce
After the house is paid off, you could then take part of your investment and just pay off the actual line of credit. Now, you don’t get any tax deductions for it, so you’re in a low income bracket, then that makes sense. You’re like, Well, I guess I don’t really need it anymore. Maybe I’m getting close to retirement. I’m 55.

00:47:31:24 – 00:47:41:09
Kyle Pearce
In this particular case, and you’ll notice that your investment bucket goes down by the 155 ish that we paid off or 156 Here’s and.

00:47:41:09 – 00:48:09:16
Jon Orr
Think that I’m going to stop you here for just a sec. But because it’s like we’ve talked about this idea before is like if you pay off this balance. So it’s like it’s a mindset thing in a way, because if you carry the balance, like in the other scenario, you had a huge improvement because you’re taking the mortgage, you’re putting it into the investment, it’s going to grow over a good chunk another years and you’ve got an extra 1.5 million in just improvement if you or verse is not doing it, which is huge, right?

00:48:09:16 – 00:48:37:06
Jon Orr
It’s huge. So that’s an important moment. But you did is you used like you made this clear, you use the equity to make that happen and that’s avoiding that pitfall of owning an asset and then keeping debt equity in the asset. So for that, we’ve talked about that on previous episodes too is like having debt equity doesn’t help you create your wealth.

00:48:37:08 – 00:48:58:22
Jon Orr
The fact that you’re going to now make a choice to go pay off your line of credit is, actually saying, I’m creating debt equity every time I put a dollar in there and just because I want to satisfy my mind and that maybe it’s maybe your life change, maybe maybe you can’t afford the interest component anymore, which was about seven grand a year, right?

00:48:58:23 – 00:49:13:11
Jon Orr
That was like, can I afford that? And the interest difference between, you know, what the actual interest was in the tax rebate, It was about seven grand a year at its most in this scenario. So if like in your life, maybe you can’t afford that anymore, you have to change things. So it makes sense to maybe pay some of that off.

00:49:13:12 – 00:49:29:19
Kyle Pearce
I’m even going to argue though, John, like it’s like if worst case, like worst came to worst, like the mind is key. I think 100% what you said is what is important for us to recognize that that 70 $800 think of what you’re gaining by having that real interest costs.

00:49:29:21 – 00:49:51:15
Jon Orr
5 million in just improvement. That’s the balance. Like that’s how much extra you got. And just by keeping the mindset that you were using this equity in your home, which you created more value than the actual equity in the home because you use this technique. Now, I know you said at the beginning of the episode that you were going to like challenge yourself.

00:49:51:17 – 00:49:53:13
Jon Orr
You’re challenging yourself to do this, aren’t you?

00:49:53:16 – 00:49:56:10
Kyle Pearce
I totally am. I’m before I tell you what I’m going to.

00:49:56:10 – 00:49:57:08
Jon Orr
Do, do this right now.

00:49:57:09 – 00:50:19:14
Kyle Pearce
Yeah, exactly. Because I think we had mentioned at the top of the episode, or at least briefly, is that we’ve been utilizing we’ve been borrowing our home equity to buy real estate, but not in any sort of systematic way. It’s when a deal comes, we use it. So in my mind I’m going, well, I have a balance on my traditional portion and I have a lot of room in my home equity line.

00:50:19:16 – 00:50:39:04
Kyle Pearce
I’m like at minimum, what I should be doing is I should be applying a certain number of dollars per month to do this process just because it’s going to give me an investment that I’m not doing right now. Like I am not putting a thousand, 5000 anything into the S&P. I’m not doing that. That is not me right now.

00:50:39:04 – 00:50:58:17
Kyle Pearce
But I’m like, Why wouldn’t I do that? When I look at these numbers and I want to show you one more thing here. For those who are watching on YouTube, I give the other scenario and I said, Imagine if you kept borrowing the 12,000 every year. So that means your line of credit keeps going up instead of stopping the process.

00:50:58:17 – 00:51:22:19
Kyle Pearce
Right. So if you just kept the habit of borrowing $1,000 a month and you were reinvesting the 1500 dollars that you were going to utilize and so forth, what you end up doing is sure your line of credit will get big. And when I’m in year 2005, the line of credit has 312,000 owing on it. You’re like, Oh, I thought I wanted no mortgage by then.

00:51:22:21 – 00:51:49:10
Kyle Pearce
But then I look at where my house is at a 2% appreciation rate. My house went from 500000 to 820000. Now, in recent times, like your house would have tripled, it seems like. But we’re using conservative numbers. So basically your line of credit amount is the amount of equity you owned or that you earned through passive appreciation. This entire time you bought for 500,000, your line of credit is 312.

00:51:49:10 – 00:52:10:05
Kyle Pearce
The properties worth 820. It’s like the equity that you gained over those 25 years in this illustration is essentially the balance of this mortgage. So it’s like, Oh, that’s not that bad. My real interest cost is about 15,000, which you’re like, I don’t like that either. So it’s maybe a tax bracket thing for you that you’ve got to decide.

00:52:10:07 – 00:52:34:07
Kyle Pearce
You might have a tax issue later in life, Who knows? But what I can tell you is the investment that I created that bucket at 9% per year in the game with 9% per year, every single year is not going to happen. It’s going to be 20%. One year, it’s going to be minus ten another year. But on average, that bucket is going to be about one six, almost 1.7 million, just the investment bucket.

00:52:34:07 – 00:52:58:08
Kyle Pearce
So it’s like I’ve got $312,000 in debt. And at the drop a hat, I could take that money out of this investment bucket and pay it off. But mathematically it doesn’t make any sense to do it. And you are, in this particular case, about 1.3. This is without reinvesting the 1500, I believe. Yeah, we haven’t invested the mortgage payment.

00:52:58:08 – 00:53:05:22
Kyle Pearce
I should have added that in there as well. Maybe I did. Yes, here it is. I did. I continued borrowing 12. I kept investing.

00:53:05:23 – 00:53:07:15
Jon Orr
12. This is coming out right now.

00:53:07:16 – 00:53:30:18
Kyle Pearce
Oh, my gosh. It’s amazing. And then you look at this scenario like it’s 1.6 million, right? So you could keep going here and you can look at all these scenarios and say like there is a massive upside side and you’re saving tax on your taxable income. So unless you have a low tax bracket, the numbers here are going to be beneficial for you later in life.

00:53:30:20 – 00:53:37:05
Jon Orr
All right. I got one more pinprick here to figure out, hey, if you’ve been listening in this whole time, you’re like, man, these guys have been talking.

00:53:37:06 – 00:53:40:00
Kyle Pearce
Maybe we got to cut it up into two episodes, chatting.

00:53:40:02 – 00:53:53:08
Jon Orr
About this for a while. But here’s a pinprick. It’s like, okay, you say the investment in the net worth bah bah bah bah bah is worth this much money is great, but how much interest do they pay over the course of that 25 years out of my pocket?

00:53:53:10 – 00:53:54:21
Kyle Pearce
Oh, I love that you want to see.

00:53:54:21 – 00:54:02:11
Jon Orr
So let’s. I want to see like. Like somebody’s going to be like, you know what? But I paid all this interest, so it’s like. But that maybe that was $1,000,000 worth of interest.

00:54:02:13 – 00:54:40:19
Kyle Pearce
Yeah, totally. Totally. Well, let’s look at it. Let’s look at the invest the difference scenario, for example. So we just have that balance of 156, your real interest cost, your real interest cost over time has been 156,000 basically basically works out the amount of debt that you have, 156,000. Now, my wonder for you though, is now and we don’t have access to this this second, but I’m wondering how much interest did you save by paying off your mortgage in 13 years instead of 25 years?

00:54:40:20 – 00:54:44:00
Kyle Pearce
Like we can go down that rabbit hole. I mean, you know, John, I will keep going.

00:54:44:01 – 00:54:46:23
Jon Orr
You you know, I know you will. You will.

00:54:47:00 – 00:55:19:23
Kyle Pearce
But but ultimately, like, the big thing for me is I look at it at at minimum, I don’t know how I’m going to feel emotionally in ten, 20 years, but what I can say is this, is that if I can in the meantime and we’ll call it in my earning years, where our tax brackets tend to be higher, if I can create and convert more of my mortgage debt into tax deductible debt, growing a pot of money here as like I’ll call it in a way like an emergency fund, if something went sideways on this strategy.

00:55:19:23 – 00:55:47:05
Kyle Pearce
Right. Who knows what can happen down the road and pay off my traditional mortgage in 13 years or under 13 years instead of 25 years, and then at that point have the option to go, I have this bucket of money that I may not have had otherwise. I can now take this bucket and I can use a small percentage of it as we saw the paying down the debt and then investing.

00:55:47:05 – 00:56:14:05
Kyle Pearce
The difference when I look at that and go, I can still have a nice improvement of even $300,000. Like, so if you’re like, I don’t want to have debt beyond sorry, let me look at this one. The improvement would be 1.5 million after 25 years when you pay off the debt after your mortgage has officially wrapped up. So I’m going to say that one more time because that was probably a super tongue twister.

00:56:14:07 – 00:56:31:14
Kyle Pearce
But if you don’t like the idea of debt, it’s like get yourself to a place where the mortgage is paid off. You now have a bucket that I can use this bucket to pay down the line of credit if I choose. You don’t have to make that commitment to yourself now, but you just know it’s an option for yourself.

00:56:31:16 – 00:57:09:04
Kyle Pearce
You are now in a better spot. By year 13, you’re going to be $374,000 ahead. And by year 25, as long as you leave the bucket after paying off the debt and just let the bucket ride, you’re going to be at about 1.2 or $1.3 million ahead. So there’s so many different variations. And of course, keeping as much capital coming towards that investment over time instead of repurposing the mortgage payment that you no longer have or whatever it might be, you can keep that cash flow going into the investments.

00:57:09:06 – 00:57:34:10
Kyle Pearce
It’s like I just think about how it can accelerate your mindset around your progress. When people are thinking like, I just don’t feel like my investments are growing hard enough or fast enough, it’s like when you’re able to do something like this, you’re essentially supercharging the situation without necessarily bringing in in the early as there is that interest cost up front, you’re not bringing a whole lot of additional capital to the table.

00:57:34:12 – 00:57:43:08
Kyle Pearce
You’re just changing your mindset and changing the process to try to maximize the outcome for you and for, of course, those you care about.

00:57:43:10 – 00:58:15:23
Jon Orr
Yeah, the secret sauce here really is being emotionally okay. And remember convincing yourself logically with the numbers working out. You know, sometimes not everyone could create a spreadsheet like Kyle has has here. This is probably why we’ve created this is to help you see that the numbers will work out. And part of it is being emotionally okay with going, I know this looks weird when I see this debt and I’m creating more debt or I’m transferring one debt into another debt with a higher interest.

00:58:16:00 – 00:58:39:10
Jon Orr
But trust the fact that if I’m in and a long enough horizon that this arbitrage between the interest will create, it’s almost like I don’t want to say magically, but it is magically, but it’s like this is how we create wealth. Is you thinking about different strategies and being okay with it? Because it makes sense that you all of a sudden have this extra pot of money that you’ve created wealth from.

00:58:39:10 – 00:58:55:06
Jon Orr
Really nothing. It really, in a sense of just restructuring the way you think about how your debt looks on paper. That’s the secret sauce for me, is thinking about how do I make myself okay with that? And knowing the numbers is a really great way to do that.

00:58:55:08 – 00:59:16:13
Kyle Pearce
I think, you know, kind of building on your idea, the secret sauce of this idea of good debt and responsible debt. Okay, Because a lot of the strategy that we share involve debt, like real estate purchases typically involves debt. Right. And people feel a little better about that because people typically, if they own a home, have had that sort of debt.

00:59:16:13 – 00:59:47:02
Kyle Pearce
Well, the same is true here. We’re going listen, we’re just repurposing the debt to be more efficient and we’re essentially releasing that debt equity or at least some of it, because, again, like I said, this isn’t even a strategy to utilize all of the debt equity. You can go more aggressively if you chose, if you’re confident, but the part that I think people I want them to take away as a secret sauce here is that understanding what is going on is necessary for you to keep your emotions in check.

00:59:47:04 – 01:00:11:05
Kyle Pearce
And why I say that is because, John, you and I, there will be times where we sort of like wake up and we this feeling like, okay, you are we okay? Are we on the right track? And you know what? The only thing that works for me, I can’t speak for you or anyone listening, but the only thing that works for me to get the emotions under control is to convince myself of why I did it in the first place.

01:00:11:07 – 01:00:35:15
Kyle Pearce
So for me, it’s like you can’t blindly go into, say, the Smith maneuver. You can’t blindly go into a permanent hole life policy and leverage for investments without being 100% certain that you’re going. I get why I’m doing it. I have a plan with maybe multiple options down the road, but I understand the options and I know which option I might take in a different scenario.

01:00:35:17 – 01:00:59:05
Kyle Pearce
And then along the journey, this is the part that I want people to really think on, is that you’re going to have doubts. And when you do, you need to pause and you need to remind yourself, Why did I do it? It might require talking to someone in your network, talking to us or back to whatever it is that you did to convince yourself initially to engage in that process.

01:00:59:07 – 01:01:21:00
Kyle Pearce
And I’m telling you that is the way that you can stick it through because it’s so easy when things aren’t going exactly as I’d like for you to go, Oh, this is a bad move. So hopefully you took this episode and it gives you some ideas of maybe something you might be able to do. And I’m going to challenge people, As I mentioned to you, John, I’m going to start this process.

01:01:21:00 – 01:01:43:03
Kyle Pearce
I’m going to be doing $1,000 a month and I’m going to use $1,000 and I’m only going to I have home equity line or like line of credit room right now, but I’m going to do it to chop down this mortgage and reinvest the difference because I’m not doing a DCA and to the S&P and this is proven to me that I’m like, why not?

01:01:43:05 – 01:02:00:09
Kyle Pearce
Let’s do that? So I’m going to do it. And along the way will update folks how things are going and we’ll hopefully hear from some folks who are also going to follow along, whether it’s 1100 or maybe it’s something larger each month in how they’re going to apply what they’ve learned here today.

01:02:00:11 – 01:02:21:18
Jon Orr
Folks, if is your first episode, we applaud you for listening to the end of this one of our longer episodes, and we encourage you to hit the unsubscribe button or the follow button. We put out. Episodes every Wednesday have been doing this for almost one and a half years or longer. This is episode 81, so you know, it’s around that.

01:02:21:18 – 01:02:28:16
Jon Orr
If you’ve listened to a few before, we encourage you to hit the right rate and review button. Leave us that rating and review.

01:02:28:18 – 01:02:54:14
Kyle Pearce
Friends, I’m having a blast chatting with all of you. Canadian Wealth Secret Seekers on Discovery calls. I’ve had people calling asking about the Smith maneuvers, some people asking about some of our PAS whole life strategies. And I would say our secret sauce moves with some of the leveraging techniques that go alongside it. Listen If you want to hop on a call and share your situation, we’ll do our best.

01:02:54:16 – 01:03:18:16
Kyle Pearce
Try to provide you with your next step forward, especially those business owners. If you are an Inc. business owner or investor, we’ve got some secret sauce strategies that you should be implementing already but probably are not. So make sure to reach out over at Canadian Wealth Secrets dot com forward slash discovery and I can’t wait to chat with you soon.

01:03:18:18 – 01:03:37:03
Jon Orr
All right Canadian Wealth Secrets seekers. We’ll see you next time.

01:03:37:05 – 01:04:12:09
Kyle Pearce
Just as a reminder, my friends, the content shared here is for informational purposes only. You should not construe any such information or other as legal tax, investment, financial or other advice. John. Or is a mortgage agent with bricks. Mortgage License number m23006803 And Kyle Pierce is a licensed life and accident and sickness insurance agent and is the VP of Corporate Wealth Management with the Bancorp team that includes corporate advisors and Penn Financial.

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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