Get the most out of your mortgage

In Canada, homeowners and residents aren’t able to deduct the interest paid on their mortgages from their taxes. Most Canadians wish that instead, they could reap the benefits of a tax-deductible mortgage interest that American homeowners have. However, luckily for Canadian homeowners, there is a loophole that can help, the Smith Manoeuvre.

What is the Smith Manoeuvre and how can you use it?

For starters, the Smith Manoeuvre was developed in 2002 by financial planner Fraser Smith in his book. Broadly, the Smith Manoeuvre is what some call a conversion strategy. Since mortgage interest isn’t tax-deductible for Canadian homeowners, this method provides a way to convert mortgage interest into tax-deductible investment loan interest. What this means is any interest paid on a loan used to purchase investments (such as stocks, mutual funds, etc.) is tax-deductible.

The premise of the Smith Manoeuvre is to take the equity out of your home and use it to invest. Many Canadians already take equity out of their homes, for example refinancing. So what makes the Smith Manoeuvre different from refinancing and why is it better?

Well for starters, with refinancing there are many fees that come along with it. Since you’re breaking a mortgage agreement, that gets followed up with financial penalties and appraisal fees. That’s why the Smith Manoeuvre presents itself as a better option for Canadians since those fees aren’t attached. Basically, the Smith Manoeuvre is a home equity line of credit, also known as a HELOC.

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To carry out this strategy, Canadian residents will need to get a mortgage that is re-advanceable. This is comparable to a mortgage line of credit, however, with the re-advanceable mortgage, there are two important elements. A mortgage and a line of credit allow you to both pay down and borrow from. As a result, the amount you can borrow from your home equity line of credit grows with each payment you make on a re-advanceable mortgage (HELOC).

Risk vs Reward

When used properly, the Smith Manoeuver can have great benefits and result in a tax refund. But since this method is using a leveraged investment as a way to claim interest through tax deductions, it’s important to consider the risk associated with it.

Before starting this process, it is important to sit down with your financial advisor to discuss the pros and cons of the Smith Manoeuvre considering your financial status. For example, if you are someone who likes to play it safe, then this may not be the financing avenue for you.

Read More: Hybrid Mortgages In Canada

With the Smith Manoeuvre and depending on how you approach the method, you probably wouldn’t like to see a large fluctuation of value in your portfolio. However, if you’re someone who likes taking risks and you have a keen eye for good investments, then Smith Manoeuvre might be a good option for you. Another important point to remember is this method is strictly a conversion strategy. In other words, it doesn’t let you reduce your debt.

The Smith Manoeuvre’s main goal is to pay off your regular mortgage and then move the debt to a line of credit that can be deducted from your taxes. At the end of the day, it’s about evaluating whether this method is for you because like most financial strategies there are both pros and cons.