Build Wealth While Paying Off Your Mortgage: The Smith Manoeuvre Explained
- Medvisory Team
- May 1
- 4 min read
Paying off a mortgage is one of the biggest financial commitments most Canadians make—and unfortunately, the interest isn’t tax-deductible. But what if there were a way to turn that “bad” debt into something that actually helps you build wealth?
That’s where the Smith Manoeuvre comes in. This made-in-Canada strategy helps homeowners gradually convert their mortgage into a tax-deductible investment loan, allowing them to build a portfolio while paying down their home. It’s not magic—but it’s pretty close.
Whether you’re a first-time homebuyer navigating your pre-approval, or a seasoned investor building out a portfolio, understanding the mechanics of how mortgages work is critical. More than just a way to finance a home, mortgages represent one of the most lucrative and predictable business models in finance. And for anyone, they offer both insight and opportunity.
So, what is the Smith Manoeuvre?
At its core, the Smith Manoeuvre is a financial strategy that allows you to deduct the interest on your mortgage—something the average homeowner in Canada can’t usually do. It works by using a re-advanceable mortgage, which is a type of mortgage that includes both a standard loan and a home equity line of credit (HELOC).
As you make regular payments toward your mortgage principal, your HELOC limit increases. You can then borrow from the HELOC to invest in income-producing assets like dividend-paying stocks, ETFs, or rental property. Since the money is borrowed for the purpose of earning investment income, the interest becomes tax-deductible.
How does it work?
Here’s a simple breakdown:
Set up a re-advanceable mortgage This is essential. Not all mortgages qualify. Most major banks in Canada offer versions (e.g., TD FlexLine, RBC Homeline Plan).
Make your regular mortgage payments Every time you make a payment, the principal portion reduces your loan and frees up the same amount in your HELOC.
Re-borrow that available credit to invest As soon as your HELOC increases, you borrow that amount and invest it in something that generates income.
Deduct the interest on your investment loan Since the borrowed money is used for investments, the interest qualifies as a tax deduction.
Repeat monthly Over time, your mortgage shrinks, your investment portfolio grows, and your tax deductions accumulate.
A quick example
Imagine you have a $500,000 mortgage and each month you pay off $1,000 in principal. That $1,000 becomes available in your HELOC. You borrow it and invest in a diversified portfolio. Over time, this cycle continues—your original mortgage is being replaced by tax-deductible investment debt, and your investments are (hopefully) growing in value.
If your investments generate an average return of 6% and you’re in a 35% marginal tax bracket, the tax savings can be meaningful—even in the first few years.
Why people love this strategy
Turn “bad” debt into “good” debt Regular mortgage interest isn’t deductible. But investment loan interest can be—as long as the investment is income-generating.
Start investing sooner Many people wait until their mortgage is paid off to start investing seriously. With this approach, you can do both at the same time.
Build tax deductions The interest deductions can add up year after year, reducing your tax burden and freeing up even more cash to invest.
Things to keep in mind
This strategy isn’t for everyone—and it does come with risks. Here are some important things to consider:
You’re using leverage: Borrowing to invest always involves risk. If the market drops, your investments may lose value while your debt remains. This is a long-term play.
You need discipline: This strategy works best when followed consistently. That means re-borrowing monthly and investing the funds—not spending them on vacations or renovations.
CRA rules apply: For the interest to be deductible, the borrowed money must be used to earn investment income. Using the funds for personal expenses disqualifies the deduction.
You’ll need some professional support: It’s a good idea to work with a tax advisor, mortgage broker, or financial planner familiar with the Smith Manoeuvre. The setup needs to be airtight to ensure compliance and maximize benefits.
Frequently asked questions
Is this only for mortgages?
Yes. The strategy is designed specifically for homeowners with re-advanceable mortgages. While similar ideas (like cash damming) exist for self-employed individuals, they’re not quite the same.
What kind of investments qualify?
The key is that they must have the potential to generate income. This includes:
Dividend-paying stocks or ETFs
Rental real estate
Bonds or other interest-bearing instruments
You can’t use the funds to contribute to a TFSA, buy your own home, or make personal purchases.
Final thoughts
The Smith Manoeuvre isn’t a trick or a loophole—it’s a legitimate, long-term strategy for turning your mortgage into a wealth-building engine. It rewards patience, consistency, and discipline. And while it’s not for everyone, it can be a game changer for those in the right position to take advantage of it.
If you’re curious whether this strategy might work for your situation, talk to a trusted financial advisor. The sooner you set it up, the more years you’ll have to let it work.
