Smith Manoeuvre calculator: model the strategy and its risks
The Smith Manoeuvre turns your home mortgage into tax-deductible investment debt over time: each payment's principal is borrowed back on a readvanceable mortgage and invested, so the interest on that borrowing may be deductible. It can build a portfolio while the mortgage is paid, but your total debt does not fall the way a regular mortgage does, and your home secures an investment position that can fall. This calculator models the mechanics so you can see both sides; it is not a recommendation.
Smith Manoeuvre
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How to use the Smith Manoeuvre calculator
Choose a strategy, then enter your mortgage and your assumptions. The results update as you type, and your inputs are kept in the page address so you can bookmark a scenario.
Gradual borrows back each month's principal and invests it. Full conversion turns the whole balance into an investment loan on day one, which assumes you already have savings equal to the mortgage to pay it off and then borrow the full amount back to invest. The starting value is gradual.
What you owe today. The starting value is $400,000.
The model charges the same rate on the investment line as on the mortgage. In practice the line is usually variable and its rate can differ. The starting value is 4.5%.
The years left on the mortgage: 15, 20, 25 or 30. The starting value is 25 years.
The average annual return you expect on the invested money, before tax. The starting value is 7%; try lower values, including 0%.
The rate at which the investment loan interest is deducted. In gradual mode the refund offsets the interest you paid; in full conversion it is added to the portfolio at each year end. The starting value is 40%.
How to read your result
The headline compares the strategy with paying the same mortgage the regular way. Read it alongside the debt the strategy leaves you with.
Advantage over regular mortgage
In gradual mode the headline is the portfolio, less the investment loan still owed at the end and the net cost of the interest you paid. With the starting values, a $920,657 portfolio less a $400,000 loan and a $110,701 net cost gives $409,957. It is before any tax on the portfolio's own growth, which you would owe as you sell or receive income.
How the interest is handled
The investment loan's interest is charged every month and paid from your cash flow, on top of the regular mortgage payment, so the loan never grows past the principal you borrow back. The refund on that interest comes back once a year and offsets part of the cost. With the starting values you need $2,241 a month in year 1, rising to $3,678 in year 25 as the loan grows. The interest adds up to $184,501 over 25 years and the refunds to $73,800, a net cost of $110,701.
Full conversion
Full conversion assumes you have savings equal to the mortgage, use them to pay it off, then borrow the full amount back to invest. It compares that with keeping the savings invested at the same return and paying the mortgage the regular way, so the advantage is what the interest deduction adds: $340,911 with the starting values.
The year-by-year table
Follow the mortgage falling while the investment loan rises toward the original balance, and the interest you pay each year rises with it. A regular mortgage reaches zero; with the strategy you still owe the investment loan at the end. That is the trade: more debt for longer, in exchange for a portfolio whose value moves with markets.
Gradual strategy, year by year
The starting values: $400,000 at 4.5% over 25 years, 7% return, 40% tax. The interest on the investment loan is paid from cash flow, so the loan is the principal you have borrowed back.
Portfolio before tax on growth; in gradual mode the refunds offset the interest rather than being reinvested. Interest at 4.5% a year, charged monthly and paid from cash flow.
Risks to weigh before using the Smith Manoeuvre
The key is maintaining a clear paper trail. The loan proceeds must flow directly into the investment account.
Kaetyn St. Hilaire, CFA, on investment loans, in The corporate meltdown strategy
Leverage works in both directions. A market fall shrinks the portfolio while the investment loan stays the same, and it can happen early, when the portfolio is small and the loan is growing. Selling in a downturn to pay the interest locks in the loss.
The investment line is usually at a variable rate. If rates rise, so does the interest you pay each month, while the refund only arrives with your tax return. With the starting values the strategy is only $44,078 ahead at a 3% return, and $110,701 behind at 0%.
The deduction depends on how the money is used and how well that is documented. Personal spending on the same line, or switching to investments that are not expected to earn income, can put the deduction at risk. Get advice from a tax professional before you start.
Whether borrowing against your home fits depends on your income stability, your other debts, your time to retirement and how you would react to a large loss. Weighing that against your whole plan is part of financial planning in Calgary with Kaetyn.
Smith Manoeuvre questions
Answers drawn from the calculator's own rules and assumptions.
A strategy for converting the mortgage on your home into tax-deductible investment debt. Using a readvanceable mortgage, each payment's principal is borrowed back on the linked line of credit and invested in a non-registered account. Because that borrowing is used to earn investment income, its interest may be deductible, and the tax saved can be reinvested or put on the mortgage. Your total debt does not fall to zero the way it would with a regular mortgage.
Interest is generally deductible under paragraph 20(1)(c) of the Income Tax Act when borrowed money is used to earn income from a business or property. Whether that test is met is a question of fact, the deduction is limited to a reasonable amount, and the onus is on you to trace the borrowed money to its investment use. Mixing personal spending on the same line of credit can make part of the interest non-deductible.
Leverage magnifies losses as well as gains: if the investments fall, the debt does not. The investment line is usually at a variable rate, so the interest cost can rise. You carry more debt for longer, secured by your home, and the strategy depends on keeping the deduction, keeping the records and staying invested through bad years.
A readvanceable mortgage, which combines a mortgage with a line of credit that grows as you pay principal down, a non-registered investment account, a plan for the interest on the line, paid from cash flow or added to the loan, and a tax professional to keep the interest deduction properly supported.
It leaves out tax on the portfolio's own growth, changes in interest rates and returns, investment fees and the lender's terms, and it charges the same rate on the investment line as on the mortgage. Treat the result as a model of the mechanics, not a forecast.
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