How To Make Mortgage Interest Tax-Deductible
Paying off your mortgage faster may be done by increasing payment frequency, shortening amortization or making lump sum payments. However, if you want a way to significantly reduce the time it takes to pay it off at the same time create wealth, then the Smith Manoeuvre Strategy is the way to go. Smith Manoeuvre takes advantage of the Canadian tax ruling that allows Canadians to make their interest payments tax-deductible if they are incurred on money borrowed to invest. Using this strategy, you then can make your mortgage interest tax-deductible if you use the money borrowed against the equity of your home to invest. Used wisely, the Smith Manoeuvre can create wealth for you at the same time help you pay down your mortgage significantly faster.
Assuming you are buying or refinancing a home, the Smith Manoeuvre works basically as follows:
- Obtain a readvanceable or line-of-credit mortgage. (This is a type of mortgage that has a home equity line of credit (HELOC) "attached" to a regular mortgage. The credit limit on the HELOC is increased by the same amount paid down on the mortgage principal. Most readvanceable mortgages require 20% downpayment/equity on the property.)
- Make your usual mortgage payments. Each time you pay down your mortgage principal (balance), the amount you pay down gets added to the amount you can freely borrow from your line of credit (LOC).
- Re-borrow the amount you put down and put it in an investment with a higher rate of return than the interest you pay on the line of credit.
- When you file your taxes, deduct the interest you pay on your LOC from your income.
- Apply the tax savings/return and investment income to pay down your mortgage or make payments, and invest the new money that is now available in your HELOC.
- Repeat steps 3-5 until your mortgage is fully paid off.
Fraser Smith, the one who pioneered this strategy, states that this method can enable you to cut the time it takes to pay off your mortgage into half. At the same time, you also build a significant amount of investment portfolio with which to create wealth.
Although it is a powerful strategy, it is not for everyone. There are risks involved, both in terms of investment and tax consequences. Investment returns could be insufficient, Canada Revenue Agency may invalidate your application of the strategy, or house values could decline forcing you into a negative amortization scenario. Always consult a qualfied, licensed financial planner, accountant and/or tax advisor before implementing it.
In summary, to make this strategy work, you need a readvanceable or line-of-credit mortgage that lets you continuously extract equity as you pay your mortgage down. Every time you make a payment and reduce your principal, you then immediately extract that equity and add it to your investment account. Since you've been able to deduct your mortgage interest, at the end of the year, you'll generate a tax refund that you can use to make a lump sum payment on your mortgage, which makes even more funds available for investment.
Combining this tax-deductible mortgage with a sound investment strategy can significantly increase your net worth over the long term. For a free analysis of how the "Smith Manoeuvre" can work for you, give us a call today at 1-888-853-8372.
