In the past, I was very much interested in starting the Smith Manoeuvre so that my mortgage interest could be tax deductible and I can make my mortgage work for me. I was intent on using this strategy because it seemed so attractive, so brilliant, and so… well.. scheme-y! And my name isn't Young Scheme-y Thrifty for nothing.
However, it is 100% legal and there isn't anything scheme-y about the Smith Manoeuvre.
There are many posts about the Smith Manoeuvre available written by all the fantastic Canadian PF blogger big wigs (most notably, Million Dollar Journey who is a big fan of the strategy).
If you're interested in reading what the Canadian PF crew's thoughts are on the Smith Manoeuvre, you can check it out here:
- My University Money – Why Is Financial Leverage Only Ok In Real Estate?
- Million Dollar Journey- Should I Start the Smith Manoeuvre?
- The Passive Income Earner- How to assess if the Smith Manoeuvre is Good for You
- Canadian Finance Blog- The Basics of the Smith Manoeuvre
- Canadian Capitalist- The Smith Manoeuvre Debate
- My Own Advisor- Should I Implement the Smith Manoeuvre?
What Is The Smith Manoeuvre, You Ask?
Well, it is a strategy developed by Fraser Smith back in 2002. He wrote a book about it (and named it after himself) and answered the question “Is your mortgage tax deductible?”
Essentially, the Smith Manoeuvre makes your mortgage tax deductible because you can re-invest your mortgage payments because you can earn income on it. The caveat (though this is easy to acquire) is to get a re-advanceable mortgage. Your Home Equity Line of Credit increases (allowing you to invest more) with every dollar you pay down on your mortgage.
Every time you make a payment to your mortgage, your Home Equity Line of Credit grows and you will be able to increase the amount you borrow on your home towards your investments, with the preference for dividend paying equities in a non-registered account (that means no TFSA, RRSP or the sort).
Related: RRSP vs TFSA
Basically, the goal is that you will be able to reduce your mortgage payments faster because the payments are tax deductible. So it is considered a win-win situation (minus the risk of leveraging on your home).
The main thing is that when you receive your tax refund you take that and use it towards paying down your mortgage.
If you are interested in Fraser Smith's book, you can check out and buy his book here from his website.
So is the Smith Manoeuvre Risky?
Well, Ellen Roseman seems to think so. She's a writer for the Toronto Star and disagrees with Fraser Smith's opinion that Smith Manoeuvre debt is “good debt”.
I think that some people consider the Smith Manoeuvre to be the best thing since sliced bread, while others take a more cautious approach and think that it's risky business to be leveraging your home (when essentially its already being leveraged with a large mortgage in a real estate market that is kind of shaky).
However, I haven't embarked on this venture and after much deliberation, I don't think I will embark on it. With interest rates rising I don't see myself being successful with creating the income needed to offset the interest costs. However, it does seem like an attractive idea and if I had more of a backbone or a thirst for adventure, I would go for the gusto and go for the Smith Manoeuvre. I'm more of a Keep it Simple, Stupid type of girl, so likely the Smith Manoeuvre is not for me. I'll stick to my basic strategy of aggressively paying off my mortgage loan and sticking to vanilla index ETFs that I purchase through Questrade, or with monthly pre-authorized contributions to Wealthsimple (my choice out of Canada's top robo advisors).
Therefore Keep it Simple to most means paying off your principle mortgage. No re-advanceable fancy mortgage where you deduct taxes from it to get a big tax deduction (however sexy that sounds).
Readers, do you use the Smith Manoeuvre? What are your thoughts? Yay or Nay?