If you’re a homeowner with a mortgage, you probably already know: The era of ultra-low fixed mortgage rates is over.
Many Canadians locked in cheap fixed rates—as low as 2.19%—over the past five years. But those fixed-rate terms are expiring, and homeowners renewing now are looking at much higher mortgage rates.
At the same time, the Bank of Canada just cut its prime interest rates—and more cuts are expected this year. That means HELOC rates are coming down, making it a great time to revisit the Smith Maneuver as a tax-efficient strategy to build wealth while paying off your home.
But is it the right move for you? Let’s break it down in simple terms so you can decide.
What is the Smith Maneuver?
Most Canadians don’t realize this, but when you take out a mortgage on your primary residence, the interest you pay is not tax-deductible. That means you’re using after-tax income to cover one of your biggest expenses.
However, borrowed money used for investment purposes can have tax-deductible interest.
The Smith Maneuver is a strategy that converts your non-deductible mortgage interest into tax-deductible investment loan interest.
Here’s how it works:
- You need a readvanceable mortgage – This is a mortgage combined with a home equity line of credit (HELOC). As you pay down your mortgage principal, your available credit in the HELOC automatically increases, allowing continuous borrowing against your home equity without reapplying for a new loan.
- As you make mortgage payments, your available HELOC credit increases.
- You borrow from the HELOC and invest the funds in income-generating assets (such as rental properties, dividend generating stocks, interest income, etc.).
- Since you’re borrowing to invest, the HELOC interest becomes tax-deductible.
- You use your tax refund and investment income to pay down the mortgage faster – This accelerates the process:
- Tax refunds from the HELOC interest deduction can be applied to extra mortgage payments.
- Investment income, like interest or dividends or rental income, can also be directed toward reducing the non-deductible mortgage balance.
- Most mortgages allow prepayment options, enabling you to pay off the non-deductible portion faster.
🔄 The Cycle Continues: As your non-deductible mortgage decreases, your available HELOC credit increases, providing more funds to invest. This cycle enhances your tax-deductible interest and accelerates wealth-building.
Why Does the Smith Maneuver Matter? The Hidden Cost of Mortgage Interest
Most homeowners only focus on their monthly mortgage payment, but have you ever thought about how much you actually need to earn before tax just to cover the interest on your mortgage?
Let’s look at an example:
If you have an $800,000 mortgage at 3% interest with a 25-year term, you will pay $338,107 in total interest over the life of the loan.
Now here’s the real problem:
That $338,107 comes from your after-tax income—meaning you actually need to earn a lot more before tax just to cover it.
- If you make $90,000 per year, your marginal tax rate is 30% in Ontario, so you need to earn $483K in pre-tax income just to pay that $338K of interest.
- If you make $150,000 per year, your marginal tax rate is 45% in Ontario, so you would need to earn $615K before tax to cover the same interest expense.
What If You Could Cut That Tax Cost?
Now, let me ask you:
What if you could “convert” that non-deductible mortgage interest into a tax-deductible expense?
That’s exactly what the Smith Maneuver does.
Instead of needing $483,000 of gross income at a 30% tax rate, you now only need to generate $338,000—a difference of $145,000!
If you make $150,000, instead of earning $614,000 pre-tax just to cover mortgage interest, you’d only need $338,000—freeing up $276,000 of pre-tax income that can now go toward investments, savings, or paying off your home faster instead of just paying the bank.
This is why the Smith Maneuver is such a powerful tool for homeowners looking to maximize their tax efficiency while building wealth.
Why Is Now a Good Time?
Recent changes in interest rates have created the perfect conditions for implementing the Smith Maneuver:
- The End of Cheap Fixed-Rate Mortgages
- Many homeowners secured low fixed mortgage rates (e.g., 2.19% for 5 years).
- These fixed-rate terms are expiring, and current 5-year fixed rates can be as low as 3.89%.
- The opportunity to hold onto those ultra-low rates is coming to an end, making tax-efficient strategies like the Smith Maneuver more attractive.
- HELOC Rates Are Dropping
- HELOC interest rates are tied to the prime rate, which is going down.
- As of now, Scotiabank’s prime rate is 4.95%, and more rate cuts are expected this year.
- Lower HELOC rates = cheaper borrowing costs for investing.
- The Mortgage & HELOC Rate Gap is Shrinking
- The Smith Maneuver works best when your mortgage rate is similar to or higher than your HELOC rate.
- With HELOC rates dropping and fixed mortgage rates rising, the gap is closing—making now a great time to revisit this strategy.
Is the Smith Maneuver Right for You?
✅ Consider the Smith Maneuver If:
✔️ Your mortgage is up for renewal, and you’re facing higher interest rates.
✔️ You have or can obtain a readvanceable mortgage.
✔️ You’re comfortable investing in income-generating assets.
✔️ You have a stable income to manage HELOC payments.
✔️ You’re disciplined enough to track your finances properly for CRA compliance.
❌ You Might Want to Wait If:
🚫 You’re locked into a low fixed-rate mortgage with years left on your term.
🚫 You’re uncomfortable with investment risk or managing debt.
🚫 Your cash flow is already tight.
🚫 You aren’t willing to keep good financial records for tax purposes.
Real-Life Example: How the Smith Maneuver Can Save You Money
Let’s walk through a real-world scenario to see how the Smith Maneuver works and how much it can save you over time.
Assumptions: Your Financial Situation
- Home Value: $1.5M
- Mortgage Outstanding: $800,000
- HELOC Available (65% LTV): $175,000
- Mortgage Interest Rate at Renewal: 4%
- Mortgage Amortization Period: 25 years
- Monthly Mortgage Payment: $4,222.69
- Marginal Tax Rate: 30%
- Rental Property Monthly Income: $3,300
You own a rental property, which generates $3,300 per month in rental income.
Instead of using this rental income to directly pay rental expenses, you redirect these funds to pay down your primary residence non-deductible mortgage faster.
Then, you borrow from the HELOC to cover all your rental property expenses, ensuring that the interest on the HELOC is tax-deductible.
What Happens When You Implement the Smith Maneuver?
This process requires careful tracking and step-by-step execution, but the long-term benefits are significant.
📌 Year 1:
- You lose $15 after accounting for tax savings.
- You are still in the transition phase as HELOC interest and mortgage repayment adjustments take effect.
📌 Year 2:
- You are already $242 ahead due to increasing tax deductions.
- The savings continue to grow as the mortgage balance decreases.
📌 Over Time:
- You pay off your primary residence mortgage 14 years earlier—by 2036 instead of 2050!
- You save $181,000 in gross income, which would have otherwise gone toward paying mortgage interest with after-tax dollars.
By implementing the Smith Maneuver, you convert non-deductible interest into tax-deductible interest, free up cash flow, and accelerate your path to financial freedom. 🚀
Something to Think About…
Yes, the Smith Maneuver helps you save on interest costs and pay down your primary residence mortgage much faster—but in the short term, you need to be prepared for an additional cash outflow.
Why? Because while you’re redirecting funds to pay down your non-deductible mortgage, your HELOC interest doesn’t replace your existing mortgage payments. Instead, it adds to your total cash outlay.
📌 Key Consideration: Additional Cash Flow Impact
- Your mortgage payment stays fixed (you can’t change your monthly mortgage amount).
- At the same time, you now have extra HELOC interest payments (this is represented in the After-Tax HELOC Interest Cost column).
- In the early years, you are still paying your full mortgage + the additional HELOC interest cost.
- Over time, as your non-deductible mortgage balance shrinks, this extra burden starts to decrease.
So, if you aren’t comfortable with the extra cash outlay in the short term, the Smith Maneuver might not be the best fit for you right now.
How to Manage the Extra Cash Flow Impact
One option to reduce the initial burden is to extend your mortgage term when you renew.
- A longer amortization period will reduce your required monthly mortgage payment.
- This can help offset the HELOC interest costs and make the transition smoother.
💡 Bottom Line: The Smith Maneuver is a long-term strategy, but it does require careful planning and financial discipline in the short term. Before implementing it, run your numbers carefully to ensure the extra cash flow requirement fits within your comfort zone.
Final Thoughts: Is Now the Time to Start the Smith Maneuver?
With mortgage rates rising, HELOC rates dropping, and more rate cuts expected, now is one of the best times in years to consider the Smith Maneuver.
Would you rather pay the bank hundreds of thousands in after-tax interest, or redirect that money toward wealth-building investments?
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
