How to Make Your Mortgage Tax Deductible
Did you know in Canada there are 2 ways to make the interest you pay on your mortgage is tax deductible.
The first way, is by owning a rental property. Interest accrued throughout the year on a rental property is a deductible expense from the rental income. This will lower your taxable income on your rental income.
The second way is through the Smith Manoeuvre.
The Smith Manoeuvre sounds confusing to most people, so I suggest researching this strategy to truly understand the concept.
In short, the Smith Manoeuvre uses your Home Equity Line of Credit to fund your investment portfolio.
This strategy requires a higher risk tolerance.
Steps to perform a Smith Manoeuvre:
- Obtain a mortgage with a Home Equity Line of Credit (Heloc) – lending rules allow 65% of the home’s equity to be in a Home Equity Line of Credit. The remaining amount of the mortgage must be allocated to a fixed payment account.
- Each monthly payment is part principal & part interest – the principal amount is re-advanceable.
- Re-borrow the principal amount after each monthly payment and invest in dividend stocks or Exchange Traded Funds. The interest paid on the re-borrowed funds is tax deductible.
- Use the tax refund at the end of the year to pay down the mortgage and continue the cycle.
To make the Smith Manoeuvre profitable, look for investments which pay a dividend yield that’s higher than the interest paid on the Heloc portion of the loan. The current interest rates on a Home Equity Line of Credit range from Prime +0.5%-1% (2.95%-3.45%).
Please note this is a higher risk investment strategy which is not recommended for everyone. Please do your due diligence and research the Smith Manoeuvre to see if this is the correct strategy for you!
For more information on mortgage products & Mortgage Strategies please call/text 778-215-4121 or email me at adamsale@dominionlending.ca
Have a great Thanksgiving weekend!
Sincerely,
Adam Sale