The Smith Manoeuvre
Posted on May 7, 2008 - Filed Under Business
Ever hear about the Smith Manoeuvre? This is a technique used by Canadians to be able to start to write of the interest on their mortgages. Developed by Fraser Smith a financial planner out of BC.
For those of you that live in Canada there is a way for you to deduct your interest within your mortgage payments for your personal residence.
The purpose of the strategy is to help you pay down your mortgage faster and receive a nice refund each year from the government. If your home is worth $200,000 and you owe $100,000 then you would be able to go to the bank and set up a new mortgage of $150,000. This would allow you to pay off the $100,000 mortgage you hold, then use the remaining $50,000 for investment purposes. The investments in my opinion work best with real estate and will allow you to pay off your own mortgage faster.
As with the above example when using the $50,000 for investment purposes you can write off the interest. As long as the intention is to make money, so this works great for real estate, someone’s business, or your own business. If you are paying 5% on the $50,000 then you will have about $2,500 each year in tax write offs and at 40% this will work out to a refund of $1000. Each and every year you are using the system for earning money.
Of course if you receive 10% on the $50,000 you will need to pay tax on the $5000 you have earned. The difference here lies in the fact that the tax will come out of the earnings, and you keep the rest. Along with this you keep the $1000 of refund that you get for using this strategy.
This is the difference between good debt and bad debt. No real magic here, but a good way to use the equity in your home to build a solid retirement package.
According to the tax man this is 100% legal, in fact they are happy to allow this. The reason they are happy to allow this is simple, the more money being poured into investments the better the economy. And the more people that are creating long term wealth, the less the government has to support when they retire.
The same strategy can be set up using a line of credit against your house. The difference is that when you use a line of credit you are given a certain amount against the property. After a few years you will have paid down your house a significant amount and to access these new funds you will need to apply for an extension on your line of credit. Where as when you use a re-advancable mortgage this is automatic. Both work great for real estate deals.
Interested in learning even more on how this may work for you? Check http://www.home-and-car-repair.com/The_Smith_Manoeuvre.html
Kelly P Kramer owns a real estate investing company in Edmonton, Alberta
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