If you’re like most people, you tend to compartmentalize things. You have a separate file (at least in your mind!) for your mortgage, your retirement savings and your income taxes. But by dealing with each of these elements in isolation, you may be missing out on huge opportunities and leaving money on the table.
One of today’s most innovative financial strategies can help your mortgage, investments and taxes work together to help you achieve your goals. Often referred to as The Smith Maneuvre (after the Canadian Financial planner who developed it), this holistic approach to finances lets you do something Canadian homeowners have only dreamed of in the past.
For decades Canadians have jealously looked across the border at Americans’ ability to write off mortgage interest on their taxes. The Smith Manoeuvre may not only help create a tax deductible mortgage for Canadians, it can also help you increase your retirement savings.
How it Works
As you know, when you borrow to invest, the interest is generally tax deductible. If you borrow equity from your home to put into investments, the interest on your mortgage may become tax deductible. For instance, if your mortgage payment is $1,000/mth, $400 may be going to principal, so you’ve gained $400 equity. But that equity is paying you zero return (except for the opportunity for capital appreciation). Instead of leaving it here, treat it like a bank account. When you put $400 into your equity account, you can immediately take it out, invest it and earn a return. If you do this consistently over a couple of decades, your investments can grow dramatically. Plus, if you use any increased tax refund to pay down your mortgage further, you’ll have even more equity to invest!
Of course, it takes a special type of mortgage to help implement this strategy. Called a line of credit mortgage (or readvanceable mortgage), it lets you continuously extract equity from your home as you pay your mortgage down. Some products even make it automatic, so you don’t have to think about it.
Increase Your Retirement Savings
Now you may be thinking, “Isn’t there risk involved in putting my home equity into investments?” Of course, every investment strategy carries some risk. But in this case, your overall debt may not increase because your mortgage debt is offset by the assets in your investments (unless they go down). Plus, your return on investment can be enhanced by the tax deductibility. When you pull equity out of your house with a line of credit mortgage, your interest rate would generally be at Prime which is currently 4.75%. However, since the interest may be tax deductible, the net interest cost for most people can be about half that. As long as you earn more than 3% on your investment (after taxes), you’re gaining net worth–and even the most cautious equity investor can usually manage that kind of return.
To see whether this strategy might be appropriate for you, talk to your XPX.ca Mortgage Specialist. We can sit down with you, discuss your goals, analyze your financial situation, gauge how much risk you’re comfortable with and provide objective advice. If we decide to proceed, I have access to today’s most advanced mortgage products and can help set everything up for you.
The Smith Manoeuvre strategy carries risks and may not be suitable for all borrowers. You should consult your tax and financial advisors before acting upon this strategy.
