Dr. Garth

They may be stacked up in the local ER, waiting endless hours to see a nurse for their viral overload, but here at the GreaterFool Clinic & Vet Service, treatment’s as quick as it is dubious.

Let’s get right to the first patient. Wassup, Todd? Where does it hurt?

“I want to say that I am a long-time reader, and it saved me from refinancing my mortgage last year into a VRM,” he replies, sucking up.

I bought my house in 2017, 5% down, after seeing prices starting to climb and knowing I’d be priced out shortly. Since then, prices have skyrocketed. I got in at a decent time, but it was pure luck.

In May, I set up a HELOC and bought into the market. The market has since done what it does, and knowing the Smith Maneuver is a long-term strategy does not worry me. However, with interest rates rising (as you said in today’s post) upwards of 8% in HELOCs come spring, I wonder if it is the right strategy. Would you have any advice on this strategy in this rising interest market?

First, Todd, taking out home equity to invest, making interest-only payments and deducting them from taxable income isn’t the Smith Maneuver. That dubious and discredited strategy involves using a systematic withdrawal plan from mutual funds to service an investment loan. Don’t go there. Simply setting up a HELOC then using it to buy ETFs, claiming the interest expense is a timeworn tactic. It cn make considerable sense with inflated houses and depressed markets.

Yes, rates are going higher. Another full 1% perhaps. And they’ll stay elevated, with no return to the 2-3% range for a generation. Maybe never. Meanwhile financial assets are fully expected to rebound in 2023 as (a) inflation heads lower, (b) CBs pause their rate tightening, (c) corporate profits and GDP plump and (d) the crazy Ukraine war winds down. Why would you sell funds now, on the cusp of growth, when the interest payments on your line are fully deductible?

You’re fine. Go home.

So, here we are now, at the doors of our Montreal clinic. Say Bonjour to Jacques. More HELOC worries.

I’ve been reading your blog almost daily for well over a decade now and I’ve learned so much and usually get a good chuckle. It’s made a huge difference in our family’s life.  I have a quick question when you get a few minutes. Is it worth liquidating out our TFSAs to pay down our HELOC?

Being naturally financially conservative having been born in the 60’s, my wife and I bought the worst house on the best street we could afford on the West Island of Montreal. We paid $154k in 1999 with $60k down and so we borrowed $100k at 5% at the time. By the time the mortgage renewal came up, we had enough equity to qualify for a $250k HELOC. We took it and paid the mortgage with it. So, we replaced our mortgage with a $100k Variable Rate HELOC.

As the interest rates continued to go down, we only paid the interest. After more than 20 years in the house we are ready to sell in 2024 when we retire. We would probably get around $850k and over time the HELOC has grown to over $200k. Now, as the price of the loan increases with interest rates going past 7%, we were thinking of liquidating our investments in our TFSAs and paying down the loan. Once the house is sold, we would take the gains from the house and contribute $100k each back to our TFSA. This would decrease the monthly payments and would give us room on the HELOC for other projects like renovating a small retirement house we bought in NS.  Are there any major downsides to this strategy other than the obvious opportunity cost? Am I missing something?

The good news is that J & épouse increased their cash flow for two decades by making cheap, interest-only house payments. The bad news is they weren’t tax-deductible. Moreover, without an amortized loan that could have gone to zero by now, they used the HELOC like an ATM and doubled the debt load.

So what now? Hoover the TFSAs to pay off the line prior to selling? Nah. There’s no advantage in doing so since the loan will be paid upon closing from sale proceeds. Might as well maintain assets that are growing tax-free. Given the fact rates are rising, have yet to crest and will stay elevated, new HELOC borrowing no longer makes sense. Soon the effective rate will be higher than inflation, so without a tax-deductible, interest-only payment (which is the case with money going into a TFSA, as opposed to a non-registered account) it’s a bad plan.

I like the Nova Scotia part, though. Sounds like you bought before that province brought in its anti-Canadian tax. Bluenosers are going to regret that one. Especially after our special Dr. Garth NS user fee.

About the picture: “We are young snowbirds in our very early 50’s,” write Todd and Lisa. “The photo is of our dog Salsa, who we adopted the fall of 2018 in San Carlos, Sonora, Mexico, where we spend our winters.  They call them Sonoran Shorthairs.  She was tiny when we adopted her and thought she would be Chihuahua sized, but she’s just under 50 pounds, but has the long legs of a Greyhound, which makes for some discomfort in the night when she decides to stretch (as she sleeps between us)!  We love your blog and find it to be not only informative but entertaining.  Your weekly phone calls provide valuable insight into current events that impact our nest egg and help us to understand current conditions and make better decisions.”