"Why have I never heard about this before?"
This financial technique was developed by Fraser Smith in Vancouver over twenty-five years ago. So, it is named after him the Smith Manoeuvre. Although the Canadian financial press has written about it extensively, most people have no time to read all the financial press. You can look at some of those articles about the Tax-deductible mortgage by opening the links at the bottom of this page.
You also have not heard about the Tax-deductible mortgage, because your banker and mortgage broker would not make as much money off you if they offered it to you. It was simply not in their interest to tell you about it.
Of course, every time money is borrowed there is an inherent risk. When you borrowed money to buy your home, the mortgage, you accepted a certain degree of risk.
That risk will also remain attached to the Tax-deductible mortgage. However, while your traditional mortgage is secured by your house and so is the Tax-deductible version, in addition you would have a sizeable investment fund at your disposal to have a greater degree of financial security. Therefore, the risk is actually less.
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Most Canadians believe that in Canada mortgages cannot be Tax-deductible. This is not so!
Although mortgages are not directly Tax-deductible, by rearranging the homeowner’s finances properly, it will become Tax-deductible.
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If you have some equity in your house
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If you have a regular income and
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If you have a reasonable credit rating
Then you will qualify.
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A traditional $300,000 mortgage costs, depending on your tax rate, around $700,000 dollars to pay off, after taxes and interest. The Tax-deductible mortgage, by continuously re-borrowing and investing the paid up principal, greatly reduces this cost. If the property has at least 20-25% paid-up equity, then some of this equity can be invested.
There are numerous reasons and advantages that justify this rearrangement: |
• The immediate advantage is that the monthly payments are substantially less than in the case of a traditional mortgage.
• A tax refund is received by the home owner every year; it grows year after year and this extra money also helps greatly in paying off the home.
• As a result, the home can be paid off in a much shorter time than the usual twenty-five years.
• At the same time, the homeowner can save and accumulate a substantial retirement fund that otherwise, while paying off a traditional mortgage, would be difficult to do. |
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Whether it is a home purchased some years ago, or just in the process of being bought, as long as there is at least 20-25% equity in the home, it would be suitable for the Tax-deductible mortgage. Anybody who already has a mortgage, or would qualify for one, can also qualify for the better, Tax-deductible mortgage as well. The requirements are the same: sufficient income, and reasonable credit rating.
For an example, please look at the following illustration of an actual case, where the outstanding mortgage principal was $290,000 and the remaining time to pay off the traditional mortgage 21 years. This is a comparison of the two and their results: |
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In this case the Tax-deductible mortgage will pay off the house in 12 years. That however is not the full story.
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The traditional mortgage after 12 years is only 57% paid off, while the Tax-deductible way the house is completely paid off.
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The traditional mortgage costs $130,000 more just in interest, than the Tax-deductible mortgage, and all it gives is a paid-off house.
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The Tax-deductibe mortgage provides, beyond a paid-off house, a lower interest cost, a "perpetual" yearly tax refund and a net gain of $972,000 after 21 years.
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You could also explore whether it is suitable for you. There is nothing to risk and much to gain from learning about the Tax-deductible Mortgage. |
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