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Wednesday, July 27th, 2016

How to Take Advantage of Readvanceable Mortgages

How to Take Advantage of Readvanceable Mortgages

Back in the year 1999, Warner Bros. released a motion picture called, “The Matrix”. The film proceeded to meet critical acclaim for being innovative and forward thinking. It was a game changer as far as filming style was concerned.

If you’ll bear with me for a minute, there was a character in the movie named Mr. Smith. He  was one of the “agents” working to enforce the system (the computer program designed to keep humans under control), against the individuals trying to take it down.

Not a sci-fi fan? That’s quite alright. Another lesser-known “Smith” may just help you game the mortgage system. It won’t help you save the world, but it might put a little more cash in your pocket. And honestly, who doesn’t like cash in their pocket?

Welcome to the Smith Maneuver.

The Smith Maneuver allows an individual to pay off their mortgage more quickly than normal, by taking advantage of a legal, though not well utilized tax deduction.

The following is a brief explanation of the technique. Bear in mind, this is a primitive and boiled down explanation. The real technique is complex and potentially involves serious risk. We highly recommend discussing the technique with the Vancouver mortgage broker before getting started.

1. The first step is to obtain a readvanceable mortgage. This is a mortgage that lets you re-borrow credit against your home on the portion of the mortgage you’ve already paid off.

2. Next, sell any non-registered assets that you own. This includes financial investments that are not in an RRSP.

3. The proceeds from the sale should then be used to make a down payment on your home.

4. At this point, its business as usual; proceed to make your normal mortgage payments.

5. But as the principal is paid down, re-borrow what you’ve paid off with the readvanceable line of credit against your home.

6. These funds should then be reinvested in assets that earn a higher rate of return than the interest on your line of credit.

7. The interest on your investment loan (line of credit) can then (potentially) be deducted from your taxes to give you a refund.

8. Use this refund to pay off your mortgage more quickly.

9. Repeat.

Consult a Vancouver mortgage broker for more information on exactly how this technique plays out. Please don’t jump into something like this without all the necessary information.

The Smith Maneuver was invented by an individual named Fraser Smith. He claims that an individual or family can pay off their mortgage in 50% of the normally required time. Taking into account how interest expenses and the length of a mortgage substantially increase the cost of purchasing a home, this maneuver could save someone a great deal of money.

While very powerful if used correctly, not everyone should utilize the strategy. It involves both significant tax and investment risks; a number of things could go wrong. The CRA could disallow you from using this strategy, returns from your investments could be insufficient or your home value could fall, leaving you in a negative amortization position.

Due to the risks involved, you should always consult your Vancouver mortgage broker as well as a specialist who is well-versed in taxes.

More is involved in this procedure than simply refinancing your home and choosing a few mutual funds. There is no exact science to executing this strategy, and no standard software exists to manage the process in an efficient manner. The best advice… is to get some good advice, before beginning.

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