THE SMITH MANOEUVRE EXPLAINED

The Smith Manoeuvre is a Canadian financial strategy that helps homeowners make their

mortgage interest tax-deductible while building investments for the future. Think of it like turning

your home's value into a tool that works for you in two ways: paying off your house and growing

your savings.

Here's how it works in simple terms:

1. Special Mortgage Setup: You start with a special kind of mortgage called a

re-advanceable mortgage. This combines a regular mortgage with a Home Equity Line of

Credit (HELOC). As you pay down your mortgage, the amount you've paid off becomes

available to borrow again through the HELOC.

2. Investing Borrowed Money: Each time you make a mortgage payment, you reduce

what you owe. With the Smith Manoeuvre, you borrow that paid-off amount back using

the HELOC and invest it in things that can earn money, like stocks or bonds. This way,

your money is working to grow more money.

3. Tax Benefits: In Canada, the interest you pay on your mortgage isn't usually

tax-deductible. But, when you borrow to invest, the interest on that loan can be deducted

from your taxes. So, the interest you pay on the HELOC can reduce the amount of tax

you owe.

4. Using Tax Savings: The money you save on taxes can be used to pay off your

mortgage even faster. This means you can own your home outright sooner and have a

growing investment portfolio at the same time.

By repeating these steps, the Smith Manoeuvre helps you turn the money tied up in your home

into investments that can grow over time, all while giving you tax breaks and helping you pay off

your mortgage quicker.

How to Implement the Smith Manoeuvre

Step 1: Get the Right Mortgage

● You need a readvanceable mortgage, which is a combination of a traditional mortgage

and a Home Equity Line of Credit (HELOC).

● As you pay down the mortgage, your HELOC increases by the same amount.

● Not all banks offer this type of mortgage, so talk to a mortgage broker or financial expert

to find the best option.

Step 2: Make Regular Mortgage Payments

● Every month, when you make a mortgage payment, part of it goes towards paying

down the principal (the amount you originally borrowed).

● As this happens, your HELOC automatically increases by the same amount, giving you

access to more borrowed money.

Step 3: Borrow from the HELOC and Invest

● Instead of letting the HELOC sit unused, you borrow from it to invest in

income-producing assets, such as:

○ Stocks

○ Bonds

○ Exchange-Traded Funds (ETFs)

○ Rental properties

○ Mutual funds

● The key is that these investments must generate income (like dividends or rental

income) so that the interest on the HELOC becomes tax-deductible.

Step 4: Claim the Tax Deductions

● Because you borrowed money to invest, the interest you pay on the HELOC is

tax-deductible.

● When you file your taxes, claim this deduction to reduce your taxable income and get

a tax refund.

Step 5: Use Tax Savings to Pay Off the Mortgage Faster

● When you receive your tax refund, use it to make extra payments on your mortgage.

● This reduces your mortgage principal even faster, which increases your HELOC limit.

● You then repeat Step 3 (borrow from HELOC and invest) to keep the cycle going.

Step 6: Continue Until Your Mortgage is Paid Off

● Over time, your mortgage will be fully paid off, and instead of just owning a home, you

will also have a large investment portfolio.

● Your HELOC remains, but the interest is tax-deductible, and your investments should

ideally be earning more than what you pay in interest.

Important Considerations

✔ Risk Management – Investments can go up and down, so be prepared for market

fluctuations.

✔ Stick to the Plan – The Smith Manoeuvre works best when you consistently reinvest and

use tax savings wisely.

✔ Seek Professional Advice – Speak to a mortgage broker, accountant, or financial

planner before starting.

By following these steps, you can use your mortgage to build wealth over time, pay off your

home faster, and reduce your tax burden—all while growing an investment portfolio for the

future!

This blog is prepared by David Hansen.