Smith Manoeuvre

Turn non-deductible mortgage debt into tax-deductible investment debt using a readvanceable mortgage. Your total debt stays about the same, but you build a portfolio and the interest becomes deductible.

1. Pay your mortgage
Each payment's principal frees up the same amount of HELOC room.
2. Re-borrow and invest
Draw that room right away and invest it in a non-registered account.
3. Deduct the interest
HELOC interest is tax-deductible.

Market scenario

Stress the plan against bad markets or higher rates.

Markets compound at your target return every year.

Portfolio after 10 yrs$553,778Funded by $250,000 of HELOC debt

Interest cost after tax$41,875$90,054 before the 53.5% deduction

Net difference+$261,903$303,778 gains − after-tax interest

Return vs. after-tax borrowing cost+7.93 ppHELOC 4.45% costs 2.07% after tax

Portfolio value

Pre-tax interest

Year by year

End-of-year balances and annual flows.

Year	HELOC rate	Mortgage	HELOC	Portfolio	Borrowed & invested	Returns	Interest (after tax)	Tax refund	Net difference
1	4.45%	$484,870	$140,130	$153,168	$140,130	$13,038	$2,700	$3,106	+$10,338
2	4.45%	$468,770	$156,230	$185,149	$16,100	$15,881	$3,019	$3,473	+$23,201
3	4.45%	$451,637	$173,363	$221,391	$17,133	$19,108	$3,358	$3,863	+$38,952
4	4.45%	$433,405	$191,595	$262,385	$18,231	$22,763	$3,719	$4,279	+$57,996
5	4.45%	$414,005	$210,995	$308,681	$19,401	$26,895	$4,103	$4,720	+$80,788
6	4.45%	$393,360	$231,640	$360,885	$20,645	$31,559	$4,512	$5,191	+$107,836
7	4.45%	$371,391	$250,000	$416,061	$18,360	$36,816	$4,946	$5,691	+$139,706
8	4.45%	$348,285	$250,000	$457,668	$0	$41,606	$5,173	$5,952	+$176,139
9	4.45%	$324,258	$250,000	$503,434	$0	$45,767	$5,173	$5,952	+$216,732
10	4.45%	$299,272	$250,000	$553,778	$0	$50,343	$5,173	$5,952	+$261,903

Assumptions & limitations

Mortgage payments are fixed at the amount needed to amortize the starting balance. The mortgage compounds semi-annually and the HELOC monthly.
Every month the principal you paid is re-borrowed from the HELOC, up to the approved limit, and invested in a non-registered account.
HELOC interest is deducted at your marginal rate, since the money is borrowed to earn investment income. The refund arrives at the end of each year.
Returns are total returns compounded monthly. Annual tax on distributions isn't modelled. Capital gains tax (50% inclusion) is only applied to the “net worth vs. not doing it” figure, as if you sold everything at the horizon.
Net difference is cumulative investment gains minus cumulative after-tax HELOC interest.
When either mortgage is paid off, the freed-up payment is invested in both cases so the comparison stays fair.
This is an educational model, not financial or tax advice. Talk to a fee-only planner or accountant before borrowing to invest.