When We Budget, Mortgage Payments Are Often Seen as Expenses.
The Smith Manoeuvre: gradually turning your mortgage payments into an investment lever using the equity in your home.
However, there is another way to look at them. A way to gradually turn your mortgage into a lever for investing, using the equity you build up in your home.
It doesn’t make the debt disappear, but it lets that debt work for you while you pay off your loan. It’s a technique known as the “Smith Manoeuvre”.
How does it work?
Each payment you make on your mortgage frees up a little more equity in your home.
With the Smith Manoeuvre, you use that equity to borrow again through a home equity line of credit… and invest that money in income-generating investments, such as stocks or ETFs.
The bonus is that the interest on this loan is tax-deductible. So you reduce your taxes while growing your wealth.
A concrete example:
Imagine you pay down $1,000 on your mortgage.
With a home equity line of credit, you borrow that $1,000 again to invest in dividend-paying stocks.
These dividends help you pay off your mortgage faster, while your portfolio continues to grow.
The result: You pay off your home faster and you build an investment portfolio at the same time.
Of course, this is not a strategy for everyone, and it is not without risks:
- Market volatility can affect your returns.
- Using leverage (borrowing to invest) increases your risk exposure.
- Poor management could increase your debt rather than your wealth.
It is a powerful strategy for those who know how to manage risk, but it must fit into a well-thought-out financial plan.
If you are wondering whether it could work for you, don’t hesitate to book a meeting with me!
Have a great week!
Who it’s for (and who it’s not for)
Personally, I find the Smith Manoeuvre is best suited to homeowners with a stable income, a long-term investment horizon and, above all, a solid tolerance for risk. If the idea of carrying an investment loan for years would keep you up at night, this probably is not for you. And that is perfectly fine.
It also takes discipline. We are not talking about quick money, but about a strategy that unfolds over many years, one mortgage payment at a time.
The right conditions before you start
- Having built up enough equity in your home, with access to a home equity line of credit.
- Keeping a separate emergency fund, so you never have to lean on the credit line when the unexpected happens.
- Being comfortable holding an investment loan even when markets go through a rough patch.
- Fitting the strategy into an overall financial plan, rather than treating it as a standalone project.
The tax side: rigour above all
For the interest to be tax-deductible, the borrowed money must be used for investments intended to generate income, and you have to be able to demonstrate it. Concretely, that means documenting every loan and every investment, and never mixing investment funds with money used for personal expenses.
Every tax situation is unique. Before jumping in, I strongly recommend discussing it with your advisor and, if needed, a tax specialist: a structural mistake can wipe out the tax advantage that makes the strategy worthwhile in the first place.
If you are wondering whether this approach belongs in your plan, we can talk it through together, no pressure. Contact us.
