The Smith Manoeuvre is a Canadian financial strategy that turns the interest on a mortgage into tax-deductible investment interest. It involves using a re-advanceable mortgage to borrow against home equity and invest in income-producing assets.
How It Works
Each time you make a mortgage payment, part of it reduces the principal. With a re-advanceable mortgage, that principal amount immediately becomes available to borrow again through the HELOC. Instead of spending it, you invest the borrowed funds into assets like stocks, ETFs, or mutual funds. The investment loan interest is then tax-deductible in Canada.
Benefits
- Tax efficiency: Converts non-deductible mortgage interest into tax-deductible investment interest.
- Wealth building: Allows homeowners to invest while paying off their mortgage.
- Flexibility: Can be tailored to different risk levels and financial goals.
Risks
The strategy relies on investments performing well over the long term. Poor market returns, rising interest rates, or over-borrowing can make it risky. It also requires discipline to reinvest consistently rather than spending borrowed funds.
Final Thoughts
The Smith Manoeuvre can be a powerful tool for building wealth and reducing taxes, but it is not suitable for everyone. It should be approached carefully, ideally with professional financial advice.