How does the “Smith Manouvre” work? Why is it considered risky?


A financial advisor at my bank said I can use this manouvre to make my mortgage interest tax deductible, which would lower my taxable income and result in a larger tax return which could be used to pay my mortgage off faster.

I was reading about it online and the articles all said this strategy is for risk-loving, ot at least high-risk tolerant investors. Why is that? Where is the risk coming from?

In: 1

The Smith Maneuver consists of a slightly different type of mortgage called a “readvanceable,” which is a mortgage tied to a “home equity line of credit,” a vehicle that lets you borrow against the equity you have in your home.

Using Smith, every time you make a payment towards the principal, you borrow the same amount from the HELOC and tuck the cash away into an investment — the stock market, typically. You want the return on this investment to exceed the interest rate you’re paying on the mortgage bundle. This works out the way it does because in Canada, the interest paid on mortgages isn’t tax-deductible, but the interest on loans for investment **is.** The Smith Maneuver basically converts one into the other.

This is risky because the investment’s value can go down, but you’d still be left holding the bag — regardless of the investment’s value, you still own the same amount on the HELOC.

I drew this information from [this page](