The Smith Manoeuvre is a personal finance strategy with three goals:
- Convert mortgage debt into tax-deductible debt
- Build a more significant retirement portfolio
- Use tax refunds to pay down the mortgage quicker.
How does the Smith Manoeuvre work?
Here are the basic steps:
- Get a readvanceable mortgage
—i.e., a mortgage linked to a line of credit (LOC)
- Make principal payments on the mortgage
- Reborrow those principal payments from the LOC
- Use the readvanced funds to pay the LOC interest
- Invest the remaining readvanced funds in suitable long-term investments
- Take a tax deduction on the borrowed money
- Use the annual tax refund to pay off the mortgage faster.
Thanks to point #4, the Smith Manoeuvre requires no extra cash flow from the homeowner to work.
There are multiple best practices to be aware of, however, not the least of which is heeding all CRA tax deductibility rules. Therefore, it pays to get good advice from a licensed financial/tax advisor specializing in the Smith Manoeuvre.
What are the best Smith Manoeuvre mortgages?
The best ones have features like instant readvanceability (critical), easy funds transfer options, discounted variable rates, and multiple credit line accounts (which makes tax accounting easier if you also use the LOC for personal purposes).
Other popular features include multiple mortgage portions (for those who like to split their borrowing into fixed and variable terms or lock in HELOC borrowing), the ability to make lump-sum prepayments anytime, direct investing (for convenience) and skip-a-payment.
Here are four Smith Manoeuvre mortgage favourites:
- TD Flexline (if you need portability and direct investing)
- BMO Readiline (if you need multiple LOC accounts)
- RBC Homeline (allows multiple mortgages and LOCs)
- Meridian Flex Line (has a 70% LTV LOC vs. banks' 65% LOCs)