The Smith Manoeuvre is a technique that converts regular debt into tax-deductible debt. In the process, it affords the opportunity to pay off one’s mortgage significantly faster.
The Smith Manoeuvre works basically as follows:
- First find a readvanceable mortgage
- Then sell your non-registered assets (like stocks held outside of an RRSP)
- Use the proceeds as a down payment on your mortgage
- Make your mortgage payments like normal
- As you pay off principal, re-borrow that principal into a line of credit (LOC)
- Invest this re-borrowed money at a higher rate of return than the interest you pay on the line of credit
- Deduct your investment loan (LOC) interest and use the tax savings (refund) to pre-pay your mortgage
- Repeat steps 3-7 until your mortgage is fully paid off.
Fraser Smith, for whom the Smith Manoeuvre is named, stated that the strategy can cut your mortgage payoff time in 1/2, while helping you invest more, sooner.
The Smith Manoeuvre is indeed a powerful strategy, but it’s not for everyone. There are both investment risks and serious tax risks. Your returns could be insufficient, CRA could invalidate your application of the strategy, or you could wind up in a negative amortization scenario if your house value falls.
Therefore, always consult a licensed financial and tax advisor before considering it. Find an advisor that will work closely with your mortgage planner, offers free consultations, and charges no out-of-pocket ongoing fees.
Implementing the Smith Manoeuvre takes more than just refinancing your mortgage and picking some mutual funds. Moreover, there is no off-the-shelf financial or income tax software that efficiently manages the process. The best advice is to get proper advice…from the start.