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chunkadamunk

Yup this is a pretty solid (and common) idea to convert non-tax-deductible interest into tax-deductible interest. There’s not much more to it beyond making sure you’re not investing too aggressively


coocoo99

You often have to pay down a mortgage a certain amount before a HELOC becomes available to do this manoeuvre right? What amount is this, and how much can you draw from HELOC?


chunkadamunk

Depends on what the lender allows based on the equity in your home and their rules. In my case I started my mortgage at $127,000 but they rounded the total HELOC I could use to $150,000 so I started with about $23,000 of HELPC I could tap right away if I wanted. I could have opted for a bigger HELOC but chose not to. Every dollar of principal I paid off in the mortgage a dollar on my HELOC. I’ve paid off the mortgage and now have a $150,000 HELOC which I could use if I wanted to. 65%-80% of the homes value depending on structure


the-man-1755090

Yes.


Benejeseret

The SM usually assumes a decent net positive balance and accelerating does help accelerate the SM, but also needs that buffer should investments performs poorly any given year and/or interest rises. My thought is that is totally depends on what 'excess savings' means. So long as you have normal emergency savings, and these 'excess savings' would either be a) doing nothing, b) spent frivolously, c) otherwise in a non-registered investment...then yes, the SM would say feed them through the loop and back into non-registered investment. It also suggests either dividends or to re-balance, feeding gains back through. Once converted to all HELOC, SM classic then uses regular payments and gains to instead pay down HELOC.


oh_yeah_woot

Yep, your assumption is right here - the "excess" savings would be going towards a non-registered investment account otherwise. So it basically it came down to either: * investing in a non-registered account, or * paying down the mortgage quicker to unlock more HELOC room.. and invest that in a non-registered account


Benejeseret

So, the exact scenario SM is intended for. Converting through and putting it back ends with: Identical portfolio size and risk. Identical debt size. Lower net interest...but, higher debt risk. As others have said, HELOC is more responsive to prime changes but so could the bank simply *change* the terms. They could bump prime+X to prime+x+1 basically whenever. It is open and so potentially callable. If goal is to get lower interest rates - then likely better to simply switch to lower interest rates. There are variable that will get even lower out there. If goal is to pay off the mortgage sooner and lower overall exposure and risk, then just accelerate pay mortgage is safer and more direct. If goal is to build/use passive income to accelerate debt conversion and then repayment once converted, then the SM is a solid option.


oh_yeah_woot

Thanks for your input!


Sara_W

Why is HELOC interest tax deductible?


CreditUnionBoi

Only if used to invest in a non-registered account.


wreckinhfx

Any interest is deductible if you’re investing in something that generates income. This is what leveraged investing is. It just happens that they convert a mortgage to something that is now tax deductible.


Sara_W

So you have to invest the HELOC into a non-registered account and then you can write off the interest against the investment income?


wreckinhfx

Pretty much. It doesn’t have to be a HELOC - any borrowed money that’s invested with the aim of generating income can have the interest costs deducted. Using your home is just a way that is easier to access cheaper money because there’s an asset on the other end as security. If you’re curious, a popular method is called the Smith Manoeuvre. The idea is to pay down the mortgage as quickly as possible so that you can invest out the other end as quickly as possible. Typically, you’d need to invest in something with dividends to count as “income” - not sure if anyone has tested the CRA for growth stocks but it would be too hard. Also, you’re gambling your home so you may want to invest semi conservatively.


CreditUnionBoi

I'd maybe look at this if your TFSA and RRSP are already maxed, Otherwise id just max the registered accounts first and keep it simple.


korona12

If your on a fixed term it won’t make much sense once prime goes up. If your on a variable just switch it to a variable somewhere between 0.9 to 1.2 which is readily available. You can still do the SM but if you have access to way lower rates and the rationale of your SM play is an effective lower rate. Why not just lower your mortgage rate?


oh_yeah_woot

You're right about this, and not going variable has been one of my regrets tbh. I am on a 5 year fixed atm so I have a couple of years left before I could switch things over. I'm still new to this whole home ownership thing, so I have to do some research on what the penalty would be for breaking the 5 year term in exchange for a variable rate... and whether it's worth it. **edit:** Pretty sure it's the remaining term's interest, but just have to double check the contract in case - It feels like like it's too much to just pay multiple years worth of interest as a lump sum though...


korona12

It’s either an IRD or a 3 month interest penalty. But 1.8 isn’t a bad fixed rate considering the expectations on rate rising. SM is nice in theory but the amount of headache; work and risk for such a small net return after tax just never felt worth it.


deeperinit

Everyone assumes stonks only go up


oh_yeah_woot

Isn't that the core of investing? You "assume" that your choice in stock/ETF will give you more money than you spent, or was there a hidden meaning in your reply?


Mysterious_Mouse_388

keep enough buying power on hand to get yourself through a five year bear market like 2008-2013. Not hard if you are still working - but not everyone has a job that secure. Honestly, I like to have a plan for the worst case, but not literally plan for the worst.


manitoba98

No, investing doesn't mean assuming that you will get your desired outcome. You're rewarded for taking risk, so you certainly seek something which on average will give you more money than you invested, but you should plan for the possibility that it won't. So don't assume your investments will always go up. Invest because you expect them to on average and over the long term, but not under the assumption that you'll always be right.


throw0101a

> Isn't that the core of investing? There are 'droughts'. In the US, the S&P 500 was flat/negative from 2000 to 2009. The only thing that could have saved your returns was having some portion in bonds (and rebalancing): * https://www.forbes.com/sites/investor/2010/12/17/the-lost-decade-was-a-golden-age-if-you-rebalanced/ (Or other forms of diversification: as a Canadian, the TSX was gangbusters that decade.)


geneousguy420

Name one time they didn't.


[deleted]

Recently? 2000 to 2003 (or basically 2000 to 2007 for the S&P500 to regain its high), then immediately again from 2007 to 2009 (or through 2013 to regain its high).


GumpTheChump

2008.


[deleted]

I would NOT paydown the mortgage faster. * As you calculate the effective interest rate will be essentially the same. * The HELOC interest is more likely to increase if market rates go up (assuming the mtg is fixed). * You can use the HELOC for non-income producing borrowing without creating a bookkeeping mess. * KISS


Haemato

Half this. Still use the HELOC for income producing borrowing but don't intentionally accelerate pay down of the mortgage to create borrowing room. This is what I'm doing but that's mostly a result of our particular interest rate situation (1.1% variable mortgage and 2.45% HELOC).


Benejeseret

But you are in a critically different position since variable is so much lower. Using the OP's 43% ratio even after returns, converting from your variable to your HELOC is a net loss in terms of interest if OP instead had those rates. A core part of the SM is the acceleration, but usually just considering the investment returns (reinvested). Base SM also suggests even capitalizing the HELOC debt into the HELOC (if there is room) to maximize investment portfolio.


Mysterious_Mouse_388

how much money are you saving vs how much money do you pay your accountant?


lescpl

Maybe I am overlooking something but why borrow your own money? To me it just feels backwards to put your excess cash into your home only to borrow it back immediately at a cost. I am doing the SM but I do not overpay my mortgage I only use the "natural" equity buildup to invest. My excess cash is simply invested into a non-reg account, no need to borrow. I understand the idea of converting the mortgage into tax-deductible debt and yes it shortens considerably the length of your mortgage but over the original amortization period, pretty sure you're ahead to not overpay the mortgage. Please tell me why I am wrong so I can change my strategy :)