For years Americans have enjoyed the benefits of being able to deduct the interest paid on their residential mortgages and save on income tax. Some people may say that this benefit is partly why Americans have encountered so much housing trouble as this concept encourages you to keep a high mortgage balance…after all the interest is tax deductible, why not? Luckily or not, in Canada, we are more conservative. While we don’t have all the same benefits in Canada, there is a way to build your net worth and benefit from some legal tax deductions. Fraser Smith popularized this strategy with the release of his book entitled “The Smith Manoeuvre”. He’s not reinventing the wheel with this book; however he does bring forth a lot of common sense and good advice. His book takes up many pages and to offer a summary in this space would not be doing anyone justice, therefore I will offer up the basic idea behind it and give you some recommendations as to whether or not it’s right for you.
The book explains in detail the concept of borrowing money against the equity in your home and then investing that equity in order to make that portion of the interest paid tax deductible. As you build your equity, your investment portfolio builds and so does your tax deduction. It’s in my view a very sensible approach for Canadians and our sensible approach to fiscal matters is perhaps something that has contributed to enabling our real estate market to remain quite stable despite the economic doom and gloom down South.
This strategy is for you if you have at least 25% equity in your home and are not adverse to some risk associated with investments. This strategy is not for you otherwise. It’s a bit complicated to manage and few lenders offer the right type of mortgage product to enable the reallocation of debt from one account to another. Currently I’m aware of 3 lenders who do offer the types of mortgages to keep your accountant and Canada Revenue Agency happy. Merix Financial, FirstLine Mortgages and National Bank offer these types of “all-in-one” sort of mortgages that can automatically reallocate the equity to a readvancable credit line.
For more info or to find out if it’s right for you feel free to call me anytime at 604-790-7253 or send me an email to mortgageteam@live.ca.
It always surprises me when I hear people say they simply renewed with their existing bank or mortgage lender. With today’s historically low rates compared to just a few years ago, it’s important not to be too quick to renew or refinance your mortgage with your existing lender until you check out all your options. Yet approximately 70% of Canadian mortgage holders will do just that, and the usual result is a typically higher interest rate and a mortgage product that might not be best suited to specific needs. Lenders are counting on the fact that most homeowners are too busy to ask all the right questions or to even inquire about getting a better rate. Don’t let this happen to you!