Decision Studio
The Smith Manoeuvre
Use repaid mortgage principal to borrow and invest. See how investment returns, borrowing costs and your taxes change the outcome.
How the Smith Manoeuvre works
- You make your normal mortgage payment, reducing what you owe.
- A readvanceable mortgage can let you borrow that repaid principal through a home equity line of credit (HELOC), subject to available credit.
- You invest the borrowed money in a taxable account with investments expected to earn income.
- Eligible investment-loan interest can reduce taxable income. You use the tax savings and after-tax investment income to pay down more mortgage, then repeat.
Your mortgage shrinks while your investment loan grows. You still owe the HELOC, secured against your home, and investments can fall in value. The strategy works only if the overall investment and tax benefits outweigh its costs.
Why might CRA allow the deduction? The borrowed money is used to earn investment income. The use of the funds must be traceable, and other eligibility rules apply. Personal spending, TFSA/RRSP contributions and investments capable of producing only capital gains do not qualify. See CRA’s interest-deduction rules.
This calculator uses Canadian tax assumptions. US investment-interest deductions have different limits and itemizing requirements; IRS rules are not modelled here.
Year 15 · Conditional on your assumptions
The strategy is $33,010 ahead.
Compares the cumulative cash and debt positions, including an estimated portfolio sale after tax. Borrowing is limited by modeled credit room. The result is conditional on the entered rates and returns.
Portfolio before exit tax
$407,341
HELOC still owed
$307,476
Smith mortgage remaining
$192,524
Baseline mortgage remaining
$267,539
Credit limits & cash needs
The model reserves combined debt above 65% of the lending value for amortizing mortgage debt. The overall 80% ceiling and any lower approved HELOC limit also apply. OSFI’s combined-loan guidance
Lending value at year 15
$800,000
Projected home value $800,000. Modeled appraisal $800,000.
Credit remaining after draws
$20,000
At year 15, subject to the mortgage balance and lending limits.
First month with a reduced draw
None
A credit constraint can reduce investment advances or move HELOC interest to cash.
Peak extra cash in one month
$2,882
Highest net monthly cash requirement above the baseline over 30 years.
Taxes included at year 15
Edit your tax ratesThe tax benefit and the tax bills both matter. Income tax is taken from distributions before mortgage prepayments. Capital gains tax is estimated once, as if you sold at year 15.
Interest-deduction tax savings
$27,276
Refunds received by year 15, at 25% of eligible interest up to $5,000 per year.
Tax on investment income
$11,348
Cumulative tax on distributions at your 25% effective rate.
Capital gains tax if you sell
$12,483
12.50% of the positive gain, rather than the full portfolio.
HELOC interest incurred so far: $129,387. Tax savings are based on cash-paid interest attributable to investment draws and arrive the following year.
Portfolio $407,341 − invested principal $307,476 = $99,866 gain / loss.
Estimated sale tax: $99,866 positive gain × 50% included × 25% personal rate = $12,483.
Portfolio after sale tax: $394,858, before repaying the HELOC.
Actual savings depend on your taxable income, province and brackets. Your refund also depends on the rest of your return.
How the strategy unfolds
30-year projection. Returns and rates stay constant. Debt & portfolio shows gross balances; the advantage also accounts for exit tax and cumulative cash costs.
Mortgage payoff & the full 30-year model
Smith mortgage repaid
19.6 years
HELOC remains outstanding.
Baseline mortgage repaid
25.0 years
Mortgage interest saved
$57,329
Total over 30 years, separate from HELOC interest.
Tax refunds received
$102,276
Received within 30 years; year-30 interest refund falls outside the model.
Peak HELOC
$500,000
Highest revolving balance over the full 30 years.
Scheduled mortgage payment
$2,767/mo
How the assumptions change the result
Year 15 difference versus the baseline. The 6% and 7% cases hold income yield fixed and adjust price growth. Each case still applies the credit limits, costs and relevant taxes.
Annual breakdown & export
The CSV includes all 360 months, with approved limits, requested and funded draws, cash interest and the tax calculation.
| Year | Mortgage | HELOC | Credit left | Portfolio | Exit tax | Advantage |
|---|---|---|---|---|---|---|
| 1 | $488,779 | $11,221 | $20,000 | $11,447 | $28 | -$80 |
| 2 | $476,772 | $23,228 | $20,000 | $24,212 | $123 | -$227 |
| 3 | $463,803 | $36,197 | $20,000 | $38,533 | $292 | -$296 |
| 4 | $449,786 | $50,214 | $20,000 | $54,567 | $544 | -$233 |
| 5 | $434,629 | $65,371 | $20,000 | $72,487 | $889 | $21 |
| 6 | $418,231 | $81,769 | $20,000 | $92,480 | $1,339 | $535 |
| 7 | $400,479 | $99,521 | $20,000 | $114,754 | $1,904 | $1,386 |
| 8 | $381,253 | $118,747 | $20,000 | $139,535 | $2,598 | $2,659 |
| 9 | $360,419 | $139,581 | $20,000 | $167,071 | $3,436 | $4,450 |
| 10 | $337,833 | $162,167 | $20,000 | $197,635 | $4,433 | $6,867 |
| 11 | $313,336 | $186,664 | $20,000 | $231,524 | $5,607 | $10,028 |
| 12 | $286,755 | $213,245 | $20,000 | $269,065 | $6,977 | $14,066 |
| 13 | $257,900 | $242,100 | $20,000 | $310,614 | $8,564 | $19,130 |
| 14 | $226,565 | $273,435 | $20,000 | $356,563 | $10,391 | $25,384 |
| 15 | $192,524 | $307,476 | $20,000 | $407,341 | $12,483 | $33,010 |
| 16 | $155,603 | $344,397 | $20,000 | $463,342 | $14,868 | $42,139 |
| 17 | $116,110 | $383,890 | $20,000 | $524,481 | $17,574 | $52,431 |
| 18 | $73,845 | $426,155 | $20,000 | $591,192 | $20,630 | $64,060 |
| 19 | $28,594 | $471,406 | $20,000 | $663,945 | $24,067 | $77,215 |
| 20 | $0 | $500,000 | $20,000 | $723,212 | $27,902 | $92,002 |
| 21 | $0 | $500,000 | $20,000 | $755,683 | $31,960 | $107,558 |
| 22 | $0 | $500,000 | $20,000 | $789,612 | $36,201 | $123,652 |
| 23 | $0 | $500,000 | $20,000 | $825,064 | $40,633 | $140,308 |
| 24 | $0 | $500,000 | $20,000 | $862,108 | $45,264 | $157,550 |
| 25 | $0 | $500,000 | $20,000 | $900,815 | $50,102 | $175,402 |
| 26 | $0 | $500,000 | $20,000 | $941,260 | $55,158 | $194,580 |
| 27 | $0 | $500,000 | $20,000 | $983,521 | $60,440 | $215,965 |
| 28 | $0 | $500,000 | $20,000 | $1,027,680 | $65,960 | $239,658 |
| 29 | $0 | $500,000 | $20,000 | $1,073,821 | $71,728 | $265,761 |
| 30 | $0 | $500,000 | $20,000 | $1,122,033 | $77,754 | $294,383 |
How the calculation works
Opening balances determine returns and interest. The mortgage payment and permitted prepayment reduce principal before month-end HELOC draws. With interest financing enabled, borrowing room pays HELOC interest first. Remaining room funds investments up to the principal repaid that month. Any unfunded interest is paid from cash.
The estimated refund multiplies the prior year’s eligible cash-paid interest by the entered savings rate, up to the annual refund cap. The model allocates cash interest proportionally between investment draws and amounts borrowed to fund interest. On an illustrative exit, the inclusion share and sale-year rate apply once to a positive gain over invested principal. Tax treatment is simplified to the entered rates and limits.
Smith position = portfolio − illustrative exit tax − HELOC − mortgage − cumulative external cash − cumulative scheduled mortgage payments. External cash = prepayments + cash-paid HELOC interest − after-tax income − refunds. Unused income and refunds reduce external cash costs. Baseline position = − remaining mortgage − cumulative payments. Their difference is the reported advantage.
Home value is common to both paths. New draws use the lower of the projected market value and the last modeled appraisal. Lenders can require requalification, a new appraisal or a lower limit. The model holds rates and returns constant, assigns zero return to saved cash and freed payments, and excludes lender fees and penalties.
Interest deductibility depends on the use and tracing of borrowed funds. The tax estimate excludes interest covered by new borrowing and interest on the portion of the loan used to fund interest. See CRA’s interest deductibility guidance and FCAC’s HELOC guide.
CRA explains interest deductions, capital gains and inclusion, and Canadian dividend tax credits. The 50% inclusion default is an editable planning assumption, not a tax-law forecast over 30 years. Interest on money borrowed for registered accounts such as a TFSA or RRSP is not deductible; investments that can produce only capital gains do not satisfy CRA’s income-earning test.
Illustrative planning only, not tax, legal or investment advice. Confirm your circumstances with your lender and tax adviser. Calculator inputs are not saved or transmitted.