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Smart Investor Tip of the Day
Devised back in 2002 the Smith Manoeuvre is a clever, yet simple, approach to converting your regular mortgage into a tax-deductible mortgage.
To use this method correctly you need to have what is called a readvanceable mortgage from your financial institution (bank). With this type of mortgage your Home Equity Line of Credit (HELOC) increases for each dollar you pay towards your mortgage. And so with the Smith Manoeuvre you can then turn around and use this line of credit to invest into stocks — ideally fixed-income securities (dividends). You cannot use RRSPs, RESPs, nor TFSAs. The Smith Manoeuvre can only be applied to non-registered accounts — they are the only types that are tax deductible. So in other words you can’t use the HELOC funds to make non-investing purchases like buying a car.
By making your usual mortgage payments you will experience the benefit of also having the ability to use dividends earned from your investments and tax credits you receive from investment interest paid. With all this paying going on towards your mortgage this will in effect open up more room in your HELOC giving you more to invest.
Now if you continue this approach repeatedly you will, over time, pay off your mortgage significantly faster and have an impressive investment portfolio to boot! And let’s not forget that your debt will now be tax deductible.
You will end up with a large amount of credit debt when your mortgage is paid off but you will then have a few choices to explore to help pay it off: Use some of your dividend income. If dividends earned is covering more than the interest on that credit line it may be wiser to keep the debt indefinitely. Another option to explore is to sell some of your stocks to pay off the debt entirely.
The Smith Manoeuvre isnt for everyone since it requires one to have strong discipline to pay monthly interests owned on time while carrying a growing debt and juggling the volatilities of the stock market.