You don’t have to wait to be wealthy to think wealthy - let’s talk about The Smith Manoeuvre.

While most everyday Canadians are stretching themselves thin to make ends meet, it’s hard to comprehend investing in our futures. But if you are a homeowner, then you hold the keys to a strategy that could, with some planning, save you money now while creating wealth for your future.

The Smith Manoeuvre has been changing the lives of Canadian homeowners for decades, but is still met with hesitation from many young families. Here’s a simple breakdown of how the strategy works, how it is not nearly as complicated as it might seem, and how it could truly shift the trajectory of your finances today and for your future.

What is The Smith Manoeuvre?

In the simplest terms, the Smith Manoeuvre is a tax strategy that allows homeowners to convert their non-tax deductible mortgage interest payments into tax-deductible investment interest payments - in essence, converting “bad” debt into “good” debt.

But, even stripped down to that single sentence definition - what does the outcome of the strategy actually mean for Canadian homeowners? Well, here is one quick example because in my eyes, numbers speak louder than words.

• The Jones Family has a home worth $500,000 and a $400,000 mortgage balance. By implementing the Smith Manoeuvre today and with no extra cash up front they will:

  • Pay off their mortgage 8.92 years faster

  • Receive tax deductions totalling $407,980 over the original amortization

  • Increase their cashflow by $166,084 over the original amortization

  • Improve their net worth by over $300,000

Sounds great, right? But wrapping your head around how moving debt around and deducting interest from your taxes can make any real difference in your long-term wealth can still be overwhelming. So, let’s break it down into parts.

Step 1: Obtain a readvanceable mortgage

A readvanceable mortgage is a specialized lending product that splits a single loan into a mortgage and an associated Home Equity Line of Credit (HELOC). Each time you make a mortgage payment, the amount of principal paid goes back toward your HELOC and increases your available credit by that dollar amount. Remember that mortgage payments consist of principal and interest. So if your mortgage payment is $1500, for example, your HELOC will only grow by the principal amount paid.

In order to qualify for a advanceable mortgage, you will have to have at least 20% equity in your home. This means that you own at least 20% of your home according to its current market value. Not sure what your equity is? Start by subtracting your current outstanding mortgage amount from the current market value. Then, reach out to a mortgage professional who can help you pinpoint exactly how much equity you have, and how much further you have to go to get to the 20% we’ll need to start the Smith Manoeuvre.

Step 2: Invest your HELOC

This is where it starts to look tricky! But rest assured that with a solid plan and proper guidance, it’s not. The cash flow afforded to you by your new HELOC, once you have obtained a readvanceable mortgage is there for spending wisely. In many cases, homeowners use it to renovate their current home or consolidate outstanding debts. In the case of the Smith Manoeuvre, we use that available cash to purchase non-registered, dividend-producing investments such as bonds, ETFs or mutual funds. Some savvy investors even opt to invest in real estate!

When you invest your HELOC funds, you are investing debt, yes. But you are investing debt that you own, leveraged against your home that will build and pay dividends over time. This is a secret that has long been gatekept by the wealthy, but it is actually an amazing tool for regular Canadians as well! Of course, if you have never invested before then the landscape of investing can seem daunting. But the good news? Just like I am a Smith Manoeuvre Certified mortgage professional, there are also certified financial planners and investment advisors that can help you choose the best path.

But the best part of investing the HELOC portion of your new mortgage this way? Well, that leads up to step 3.

Step 3: Deduct your interest

Unlike pesky old mortgage interest, the interest you pay on the investments you’ll make with your HELOC funds is tax deductible. This means that come tax time, you will be able to subtract any interest paid on those investments you purchased from your total taxable income. And what does less taxable income mean? It means a bigger tax refund, of course! This step right here is the key to the Smith Manoeuvre and the secret ingredient to how the strategy got its nickname as the tax-deducible mortgage plan! By investing your HELOC, you essential create a tax deduction out of your mortgage payment that would not have otherwise existed!

Step 4: Take that refund straight to the bank

Now, we have all fallen pray to the trap of getting that sweet, sweet tax refund back and instantly going off to the mall to buy ourselves a little gift. But, for the Smith Manoeuvre to work, you must take that cheque straight back to your mortgage lender, leverage your prepayment privileges and make a lump sum payment on your mortgage. Prepayments go entirely to your mortgage principal, which means not only will you be speeding up the process of paying off your mortgage, but you will be opening up more space on your HELOC that you will then be able to re-invest!

Is it as sexy as buying a brand-new computer or stocking your closet? Probably not. But its certainly a much more pivotal step in setting you up for a strong financial future - without investing one single extra dollar!

Step 5: Lather, rinse, and repeat your way to wealth

Once you have reached this step in your Smith Manoeuvre strategy this process will be old hat for you. Pay your mortgage as you normally would, invest the additional HELOC cash wisely, deduct the interest, get that tax refund and walk it right back to your lender. Within a matter of a year or two, you will start to notice a marked difference in your bottom line as your mortgage principal shrinks and your compounding investments grow!

The big takeaways

In this current economic climate, so many of us are concerned about how to make ends meet that we aren’t able to even consider growing our futures. But with this strategy, homeowners are able to do both!

Remember:

• You do not need any extra cash up front to start this process - you only need a mortgage and 20% equity in your home

• There is a huge difference between bad debt and good debt. The wealthy elite has known this and used it to their advantage for a long time, and now it’s our turn,
  as everyday Canadians, to do the same.

• You are still able to access the HELOC funds you have invested by cashing out when necessary.

• Working with Smith Manoeuvre Certified Professionals such as a mortgage broker (me!) and financial planner is essential to your success and growth with this strategy.

Do you have questions about how the Smith Manoeuvre could work for you? Because I assure you, it probably could! Schedule a no-obligation chat below or reach out to our team any time!