The Smith Manoeuvre Debt Swap is Irrelevant When Rates are Low!

Google “Smith Manoeuvre” and you’ll find dozens of articles saying that the point of SM is to convert non-deductible mortgage debt into deductible HELOC debt. Even Robinson Smith himself repeatedly emphasizes this point in his sales pitch as a guest on many Canadian finance podcasts. He tells people to pump all disposable income into the mortgage to pay off the mortgage faster and convert as much as possible.

But it astounds me that nobody mentions that this idea is nonsense when rates are low! Here’s an example using real numbers from today’s low interest rate environment (March 2021). 

5-year fixed mortgage rate = 1.5%

HELOC rate = prime + 0.5% = 2.45 + 0.5 = 2.95%

Say your marginal tax rate is 43%. This means the HELOC rate after the tax deduction is 2.95 x (1-0.43) = 1.68%.

It makes no sense to convert 1.5% debt into higher 1.68% debt. 

If your mortgage rate is higher, then yes it can be a true debt swap. But you have to run the math. 

I don’t mean to say SM only makes sense when rates are higher. I mean to say it makes no sense to pay more than your normal mortgage payment when rates are low. It’s still valuable, no matter what, to reinvest your home’s dead equity via SM.