The core concept
As you pay down your mortgage principal, the newly available credit on your home equity line is borrowed and invested, typically in dividend paying stocks or other income producing investments, with the goal of eventually making the interest on that borrowed amount tax deductible.
Why the readvanceable structure matters
This strategy only works efficiently with a readvanceable mortgage because it needs a line of credit that automatically increases as your mortgage balance decreases, giving you funds to invest without a separate loan application.
The risks involved
Borrowing to invest means you're exposed to investment losses on borrowed money, which amplifies both gains and losses. It requires a longer time horizon and comfort with market volatility.
- Investment losses are magnified by leverage
- Requires discipline and a long term investment horizon
- Tax deductibility rules should be confirmed with an accountant
Who this strategy tends to suit
It generally suits homeowners who are comfortable with investment risk, have stable income, and are already maxing out other tax advantaged accounts like an RRSP or TFSA before pursuing this route.
Frequently asked questions
- Is the Smith Manoeuvre legal in Canada?
- Yes, it's a recognized strategy, but the tax deductibility depends on following CRA rules closely, which is why professional tax advice is important.
- Do I need a large amount of home equity to start?
- You can start with whatever equity you have, since the strategy grows over time as you continue paying down your mortgage.
- Is this strategy risk free?
- No, it involves investment risk since you're borrowing to invest, so it's not suitable for everyone and should be considered carefully.