by Neil Mathieson, CPA, FICB
Fraser Smith was a British Colombian Financial Planner. He conceived of an investment process as follows. As you make mortgage payments, you reborrow an equivalent amount against the mortgage and invest it.
It does help if you secure a line of credit with the property to ensure proper association of interest expense.
The investment must be a product that either does or could pay income or dividends. For example, you could purchase a stock which does not yet pay income or dividends, but has the potential to do so.
To avoid conflict with the CRA, however, investment in securities that currently pay income or dividends are preferred.
The benefits are that the mortgage is paid down and that you can build an investment portfolio.
Another advantage is that the interest in the investment portion of the loan is tax deductible.
An important risk to consider is that your total debt remains at the same level.
This investment method also depends on how risk adverse you are to debt, since you are basically shifting your debt from one type to another, rather than paying debt down in the conventional manner.
Before making the decision to use the Smith Manoeuvre, you will require careful and sound investment advice from a financial planner.
If you want to learn more about how this method of investment may benefit you, do not hesitate to contact me so that we can do a full evaluation of your financial situation which will include a clear risk assessment of your asset to debt ratio.
Neil Mathieson