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Borrow against Gic 100-120% of value and deduct interest for investment
August 12, 2022
12:46 pm
AllanB
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Borrow against Gic 100-120% of value and deduct interest for investment.
Sounds like a good idea? For example, invest in a Gic at say 5% and mortgage at 4-4.5% with leftover accumulated interest. Then deduct mortgage interest for investment property.

August 12, 2022
2:31 pm
AltaRed
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Known as the Smith Maneuver, it is virtually impossible to make this work with mortgages and GICs as the investment target. FIs do just the opposite. They use the margin between GICs as deposits (liabilities) to make profit (NIM) loaning those funds as mortgages.

You really have to term match your liabilities and assets to avoid naked exposure with interest rate risk.

August 12, 2022
5:56 pm
Loonie
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Something similar can be profitably done by borrowing against certain paid-up life insurance policies. This worked well when interest rates were sky high but I doubt it would be much use right now. Need bigger margins.

August 12, 2022
7:18 pm
AllanB
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There's flexibility there to pull equity out of locked in Gics collecting interest, and invest. It may even be a better way than skipping the interest income and depolying cash direct. Also, if rates shot up higher or in a greater inflationary crisis one could pull money out and at least invest in something that has value, and pay back the loan when the Gics mature with devalued dollars.

August 13, 2022
9:14 am
RetirEd
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The Smith is beneficial when dealing with high income tax rates, where the tax-free status overpowers the losing rate spread.
RetirEd

August 20, 2022
11:53 am
HermanH
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I'm trying to get my head around what this Smith Manoeuvre is.

YNCU has a 5-yr fixed mortgage at 4.59% while offering a 5-yr GIC at 5.25%

Are you suggesting that someone can take a mortgage on their house at 4.59% and simply re-invest the entire amount in a 5.25% GIC and thus make a net 0.66% guaranteed return on their investment with absolutely no risk whatsoever?

Someone with a $1M house could conceivably make $6,600 / year for a total $33,000 after five years.

August 20, 2022
12:19 pm
Norman1
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The special 4.69% five-year mortgage rate from YNCU is one of those "insured mortgages only" rates. sf-frown One needs to factor in the cost of insuring the mortgage.

As well, CMHC will refuse mortgage insurance on homes that are not below $1 million.

August 20, 2022
12:28 pm
Bill
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My understanding is your rate spread example is not the Smith, it's about taking out a mortgage and using the proceeds to buy investment instruments thus making the mortgage interest you're paying tax deductible as it's used for investment purposes. Is my (stand to be corrected) understanding.

That's simplified, lots of "fine print", google it & you'll find tons of info re how it works, how to do it, etc.

August 20, 2022
12:42 pm
Dean
Valhalla Mountains, British Columbia
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HermanH said

I'm trying to get my head around what this Smith Maneuver is.

. . .
  

So was I ❗

This is what I found, via Google . . .

Hope that helps ... it helped me. sf-smile

    Dean

.
P.S.
There's also a website and book about the Smith Maneuver.
Go here https://smithmanoeuvre.com/

sf-cool " Live Long And Prosper " sf-cool

August 20, 2022
1:01 pm
HermanH
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That was very helpful. Thanks.

August 21, 2022
6:28 pm
AllanB
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"If you only rent it out for a portion of the year, then only that period (e.g. 4 months) of mortgage interest payments is tax deductible."

https://www.nesto.ca/mortgage-basics/is-mortgage-interest-tax-deductible-in-canada/

So you can't deduct mortgage interest unless you rent out the property.

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