A Smith Manoeuvre mortgage is a particular type of home loan that allows homeowners to use the equity in their homes to pay down their mortgages faster. The Smith Manoeuvre is named after its creator, Fraser Smith, who developed the strategy in the early 1990s. Under the Smith Manoeuvre, homeowners take out a home equity line of credit (HELOC) and use the proceeds to pay off their mortgage principal. This has the effect of turning their mortgage into a low-interest loan, which can be paid off much faster than a traditional mortgage. Homeowners can also use the Smith Manoeuvre to invest in other assets, such as stocks or mutual funds.
Make Your Mortgage Tax-Deductible - Legally You've probably always been told your home is an asset.
But an asset makes you money, it doesn't drain you of it. What actually what happens is; month after month, year after year, you pay your mortgage, your property taxes, house insurance, maintenance, repairs, etc. You build up equity in your home, but you can't spend that.
Or can you?
I can show you how to - legally - access the equity in your home to invest in money making assets AND probably pay off your house sooner.
The Smith Manoeuvre: The Loophole Canadian Real Estate Owners Use To Lower Taxes
The majority of Canadians are limited in their ability to deduct mortgage interest on their taxes, like in the US. Some argue this is a trade-off for the capital gains exemption Canadian homeowners have. However, one of the worst-kept secrets and least-used strategies in finance, is mortgage interest can be turned into a tax deduction. One of those strategies is the Smith Maneuver, created by BC-based Fraser Smith in the late1980s and early 90's. For over 40 years, wealthy Canadians have deducted mortgage interest AND received tax-free capital gains simply because they knew how to leverage the available tax laws. Let’s take a dive into the basics of how the Smith Manoeuvre works.
The Smith Manoeuvre is a legal tax strategy to convert mortgage interest on your primary home into deductible interest. It is highly recommended you work with Smith Manoeuvre Certified Professionals(SMCP) such as myself, to properly implement this strategy. It works like this:
- Obtain a readvanceable mortgage. The bank regulator formally calls these Combined Mortgage-HELOC Loan Plans (CLP). In the mortgage industry, we refer to them as re-advanceable mortgages. These are mortgages that make the principal payment immediately available in the Home Equity Line of Credit(HELOC). You will need 20% equity in your home or as the down payment to obtain a re-advanceable mortgage.
- Make regular mortgage payments. The payments you make against the principle are then available as credit on your HELOC.
- Use HELOC credit to invest. Every payment made on the mortgage principle is made available to be withdrawn from the HELOC, and used to buy income-earning, eligible non-registered investments.
- Deduct the HELOC interest. The interest paid on the HELOC is now considered a tax-deductible loan since it’s used to generate income. You then get a portion back on your tax return.
- Use the tax return to pay down your mortgage. A little extra acceleration to build your portfolio faster.
- Repeat steps 2 to 5 until the mortgage is paid off. Once the mortgage is paid off, you either start paying off your HELOC or repeat the process. At a certain point, the write-offs are no longer worth the interest, so you should run the numbers.
In the end, if done properly a homeowner should be left with:
- No mortgage. It should be paid off, remember?
- An investment loan with tax deductible interest. This is the HELOC debt you borrowed, which should be the size of the original mortgage.
- A Substantial Investment Portfolio. You contributed the size of your mortgage to this portfolio. Even with modest compounding, your portfolio would be substantial in size. Not a great idea to YOLO in this one.
What Kind of Investments Are Eligible?
Not all investments are eligible for loan interest deductions, but many are and that is why working with a SMCP is so important. Technically loan interest is deductible only if the loan is for income-earning investments. The CRA has a dense guide on the topic, for those that want a deep dive. Some wealth advisors suggest only using non-registered dividend-paying stocks for this reason. However, the CRA is a little more ambiguous in its wording which allows for other investments such as private equities, investment in real estate or even a business you own.
Generally, the CRA considers interest costs in respect of funds borrowed to purchase common shares to be deductible on the basis that at the time the shares are acquired there is a reasonable expectation that the common shareholder will receive dividends.
Accelerate Your Wealth and Mortgage Conversion
There are also several ways that you can accelerate the conversion of making your mortgage tax deductible, building your wealth and paying it off. These are well covered in the book and as an SMCP I help my clients with ensuring they maximize what is possible for them. Having used the Smith Manoeuvre and accelerators myself back from 2005 to 2007 I fully converted our mortgage interest to be 100% tax-deductible, reaping the investment returns and tax deduction benefits since then.
Make Your Mortgage Tax-Deductible - Legally. You've always been told your home is an asset The idea of how to use it to build wealth is much different now than when our parents and grandparents owned a home as the values are also much different. Would you be happy if your investments of a few hundred thousand dollars earned you nothing or near nothing every year? Why are you willing to accept that from the investment you made in your home?
An asset should make you money, and not drain you of it. What actually happens is; month after month, year after year, you pay your mortgage, your property taxes, house insurance, maintenance, repairs, etc. You build up equity in your home, and it does nothing to grow your wealth for retirement. This is why many retired persons end up being house-rich with poor quality of life. They can't afford to travel or fully enjoy the life they had hoped to because the income they have coming in is only enough to live off of from month to month.
Are you prepared to ensure that is not you?
I can show you how to - legally - access the equity in your home to invest in money-making non-registered assets AND pay off your house sooner. The fact is both private and public pensions are not keeping up with inflation and the government is going to tax RRSP withdrawals at 30%. YOU DESERVE MORE!
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