# Re-mortgage to write off investment interest?



## Addy (Mar 12, 2010)

I imagine there's a thread or few about this, but I was unable to find it via the search function - I may have been searching for words that didn't quite match, so if anyone knows of any appropriate threads please let me know.

We are mortgage free, our house is worth approx $150K (may be 20K more, I'm being conservative here). We are a dual income family making about 100K/yr. We have about 50K in equities, which are way down in value but any stock we purchase now is generally dividend paying and Canadian.

My boss today was trying to explain how we could get a 100K mortgage (arbitrary number), invest it into some investment of our choice, and write off the interest we pay on the 100K loan.

To me, this is interesting but doesn't add up somehow. I don't see how paying (and we're talking interest only payments here on the 100K) the interest we would pay could be less than what we would earn on 100K of investments (unless we luck out and pick a riskier investment that happens to pay off, but I prefer GIC's or something fairly solid).

Can anyone either explain what my boss was most likely trying to explain, or steer me in the direction of a good thread or website that explains this?

Thank you!


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## andrewf (Mar 1, 2010)

Read up on Smith Manoeuvre. 

With dividend paying stocks it makes sense because your after tax-deduction interest rate is (1-marginal tax rate)*interest rate, while your dividends are taxed more favourably as are capital gains. So, your after-tax-deduction interest rate for someone in the 35% tax bracket and a 5% mortgage is (1-0.35)*5% or 3.25%, whereas a dividend paying stock yielding 4% would be able to just about cover that interest, after tax. Then you get any capital appreciation on top of that.

This is much tougher with GICs, as interest income is not taxed favourably like dividends and capital gains. Thus, the GIC would have to yield more than your mortgage interest rate for it to make any sense at all. That generally doesn't happen. AFAIK, the best 5 year mortgage right now is 4% and the best 5 year GIC is 4%. You'd come out exactly nothing ahead, except you'd need cashflow to cover the mortgage payments in the mean-time.

All that said, I'd strongly caution you to make sure you really understand how this process works, all the tax implications. Also ensure you are comfortable with investing and aren't liable to make emotional decisions about your investments. Investors are their own worst enemy.


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## the-royal-mail (Dec 11, 2009)

This sounds too complicated.

Get a loan you don't need and jump through hoops to write off the interest? Why? Just don't get the loan, then. Your house is paid. Forget about it. Enjoy living rent-free. That's your "income" right there.

There are no good investments out there right now. Best you can hope for is 1 maybe 2%.

This sounds like a lot of complication for nothing. Keep it simple.


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## Four Pillars (Apr 5, 2009)

It's called leveraged investing.

Basically you are just increasing your risk profile, which is ok for some people but not most. It sounds like a bad idea for you.

I did this for a few years..

http://www.moneysmartsblog.com/leveraged-investing/

But eventually, I stopped

http://www.moneysmartsblog.com/the-leveraged-investing-plan-investing-loan/


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## cardhu (May 26, 2009)

Don’t waste your time researching the Smith Maneouver ... that only applies to people who have an existing mortgage, and you don’t.  

Leverage can work for equity investing, if you can stomach the risk ... it generally doesn’t work well for GICs or most other fixed income, so if that’s your investing temperament, then forget about it.


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## kcowan (Jul 1, 2010)

I agree that moving into leverage in this uncertain environment is not worth it.

Leverage is OK when things go up, but really bad when things go down.


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## andrewf (Mar 1, 2010)

cardhu said:


> Don’t waste your time researching the Smith Maneouver ... that only applies to people who have an existing mortgage, and you don’t.
> 
> Leverage can work for equity investing, if you can stomach the risk ... it generally doesn’t work well for GICs or most other fixed income, so if that’s your investing temperament, then forget about it.


I recommended reading up on SM because it is extensively discussed and because leveraged investing is a critical component of the scheme. It's not exactly the same thing, but many of the considerations are common between the two.

The key tends to be investments that are taxed more favourably than interest. That means investing for dividends or capital gains. For instance, if you're confident that the banks won't cut dividends in the future, you can leverage a portfolio of bank stocks where the dividends will cover the interest from the mortgage. It makes no sense to borrow to buy a bond that yields an equal or lower rate than the loan. A positive, risk-adjusted interest rate differential is essential, and unfortunate that is hard to find.


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## Cal (Jun 17, 2009)

andrewf said:


> I recommended reading up on SM because it is extensively discussed and because leveraged investing is a critical component of the scheme. It's not exactly the same thing, but many of the considerations are common between the two.
> 
> The key tends to be investments that are taxed more favourably than interest. That means investing for dividends or capital gains. For instance, if you're confident that the banks won't cut dividends in the future, you can leverage a portfolio of bank stocks where the dividends will cover the interest from the mortgage. It makes no sense to borrow to buy a bond that yields an equal or lower rate than the loan. A positive, risk-adjusted interest rate differential is essential, and unfortunate that is hard to find.


Agreed. Similar to simply getting a Home Equity Line of Credit (HELOC), to use to invest, claiming the interest payments as a tax deduction, and (hopefully) earning more with your investments than your interest or principle/interest payments (depending upon your strategy).

Not a strategy for GIC's though.


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## Addy (Mar 12, 2010)

Thanks everyone! I hope the comments and tips keep coming in. I highly doubt this is something that we will actually do, but I would at the very least like to much more about it before dismissing it.


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## cardhu (May 26, 2009)

andrewf said:


> I recommended reading up on SM because ...


Fair enough ... no offence intended ... clearly there is a leverage aspect to the SM ... however, my experience is that promoters of the SM tend to gloss over the leveraged investing aspect, are overly (ie. dangerously) simplistic in their descriptions of such, and that the rare nuggets of actual useful information tend to be buried beneath mounds of excruciatingly detailed and arcane debates over the mechanics of the maneouver ... and if that weren’t distracting enough from the real meat of the matter, there is the quibbling over whether what is being described is truly a Smith Maneouver, or whether it more closely resembles the Jones Gambit, the Snotelski Variant, or the recently observed Gheremezian Ploy ... everyone who comes up with some slight variation seems to want their name hung on the damn thing ... I believe the only thing differentiating the Snotelski Variant from the Jones Gambit is that Snotelski makes his “extra” mortgage payments electronically, while Jones drives over to his bank branch for a face–to-face transaction ... in the little-known Franklin subGambit, the user rides his bicycle to the bank branch instead of driving.  Its all rather tedious. 

I maintain that leveraged investing is rather simple and that there is plenty of material available on that subject without having to endure the irrelevant debates over the mechanics of prepayments and reborrowings, none of which is actually relevant to the matter raised by the OP.


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## Maltese (Apr 22, 2009)

About 15 years ago I leveraged $20,000 and purchased mutual funds. Back then, GICs were paying great rates but I was told that they are not eligible for leveraged investing. I kept the funds for 7 years as the adviser had recommended and then sold barely breaking even. 

I doubt that I will ever do this again. When the funds were gaining it was great. But the losses were magnified when the market dropped significantly because I still had to make payments on the amount borrowed.

When I sold the funds, it was also the beginning of the end of my mutual funds investing.


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## andrewf (Mar 1, 2010)

cardhu said:


> Fair enough ... no offence intended ... clearly there is a leverage aspect to the SM ... however, my experience is that promoters of the SM tend to gloss over the leveraged investing aspect, are overly (ie. dangerously) simplistic in their descriptions of such, and that the rare nuggets of actual useful information tend to be buried beneath mounds of excruciatingly detailed and arcane debates over the mechanics of the maneouver ... and if that weren’t distracting enough from the real meat of the matter, there is the quibbling over whether what is being described is truly a Smith Maneouver, or whether it more closely resembles the Jones Gambit, the Snotelski Variant, or the recently observed Gheremezian Ploy ... everyone who comes up with some slight variation seems to want their name hung on the damn thing ... I believe the only thing differentiating the Snotelski Variant from the Jones Gambit is that Snotelski makes his “extra” mortgage payments electronically, while Jones drives over to his bank branch for a face–to-face transaction ... in the little-known Franklin subGambit, the user rides his bicycle to the bank branch instead of driving.  Its all rather tedious.
> 
> I maintain that leveraged investing is rather simple and that there is plenty of material available on that subject without having to endure the irrelevant debates over the mechanics of prepayments and reborrowings, none of which is actually relevant to the matter raised by the OP.


I wouldn't call the leverage involved in the SM all that bad, or not as bad as critics make it out to be. If you leverage all of the equity in your home that you are able to, you get 80% LTV. If you use that to buy investments, then you are have a 0.8/1.8 leverage ratio. And that is worst case, more or less. Most people who implement SM don't use all of their equity in their home or have additional RRSP/TFSA savings besides.

I agree that it isn't magic and shouldn't be treated as such. But realistically, the risk isn't in the leverage (which is equivalent to a healthy downpayment on a house for a new home buyer), but it the quality of the investment. Being capable of managing investments to reduce risk is pretty important.


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## Four Pillars (Apr 5, 2009)

cardhu said:


> Fair enough ... no offence intended ... clearly there is a leverage aspect to the SM ... however, my experience is that promoters of the SM tend to gloss over the leveraged investing aspect, are overly (ie. dangerously) simplistic in their descriptions of such, and that the rare nuggets of actual useful information tend to be buried beneath mounds of excruciatingly detailed and arcane debates over the mechanics of the maneouver ... and if that weren’t distracting enough from the real meat of the matter, there is the quibbling over whether what is being described is truly a Smith Maneouver, or whether it more closely resembles the Jones Gambit, the Snotelski Variant, or the recently observed Gheremezian Ploy ... everyone who comes up with some slight variation seems to want their name hung on the damn thing ... I believe the only thing differentiating the Snotelski Variant from the Jones Gambit is that Snotelski makes his “extra” mortgage payments electronically, while Jones drives over to his bank branch for a face–to-face transaction ... in the little-known Franklin subGambit, the user rides his bicycle to the bank branch instead of driving.  Its all rather tedious.
> 
> I maintain that leveraged investing is rather simple and that there is plenty of material available on that subject without having to endure the irrelevant debates over the mechanics of prepayments and reborrowings, none of which is actually relevant to the matter raised by the OP.


+1.

I find it ridiculous when people call any kind of leveraged investing the "Smith Maneouver".


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## Robillard (Apr 11, 2009)

There are two fairly famous recent tax cases that went all the way to the Supreme Court regarding schemes to make mortgage interest tax deductible. They are:
The Queen v. Singleton (2001 SCC 61); and
Lipson v. Canada (2009 SCC 1).

They are interesting reads. It should also be noted that these cases have established precedent. In the Singleton case, the taxpayer's deductions were permitted by the court, whereas in the Lipson case, they were denied, or at least the benefit of attributing the interest payments to the spouse who could make use of the deductions was denied. The Lipsons were caught under the General Anti-Avoidance Rule (GAAR) because they abused the spousal attribution rules. In the Singleton case, GAAR was not an issue.


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## Sampson (Apr 3, 2009)

Robillard said:


> The Queen v. Singleton (2001 SCC 61); and
> Lipson v. Canada (2009 SCC 1).


I think these two examples have set the 'range' of acceptable standards when it comes to mortgage interest. Pretty extreme cases, where one party clearly was trying to get away with as much as possible.


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## cardhu (May 26, 2009)

andrewf said:


> I wouldn't call the leverage involved in the SM all that bad, or not as bad as critics make it out to be.


Andrew ... you misunderstood... I never said that leverage involved in the SM is any worse than any other leverage ... although any leverage “package” purchased from a _“Smith Maneouver Professional”_ could very well be worse ... what I said was that discussions about the SM tend to gloss over the actual leverage aspects, and pretty much ignore the risks altogether, in favour of arcane debates about the mechanics. 



Four Pillars said:


> I find it ridiculous when people call any kind of leveraged investing the "Smith Maneouver".


Yeah, that and “the Derek Foster method”.



Maltese said:


> About 15 years ago I leveraged $20,000 and purchased mutual funds. Back then, GICs were paying great rates but I was told that they are not eligible for leveraged investing. I kept the funds for 7 years as the adviser had recommended and then sold barely breaking even. ... I doubt that I will ever do this again.


Yes, packaged leverage/mutual fund “products” that are sold by advisors are best avoided. Incidentally, if it was your advisor who told you that GICs are not eligible for leveraged investing, he was lying as part of his sales pitch ... they are eligible ... nevertheless, leveraging GICs is generally not viable unless you can lock in an interest rate on the loan that is less than the rate on the GIC, which is rare ... 

The kind of leverage that is most often referred to in DIY forums is not the “packaged”, “advisor-sold” variety, and doesn’t necessarily have the baggage that goes along with those. There are many ways of using leverage and some of them are more conservative than others.


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