Let’s take a look at an example. The Smith Manoeuvre calculator shows that a homeowner with a $750,000 home, a $500,000 mortgage at 2.5 per cent amortized over 25 years with a readvanceable portion at three per cent should expect to see a gain in their net worth by the amounts listed in the accompanying table.
Here’s how the strategy works. You will need a home where you make a minimum 20-per-cent down payment, a readvanceable mortgage and two bank accounts. The readvanceable mortgage lets you borrow against your home equity as you pay down your mortgage. The two bank accounts provide a clear separation of transactions for accounting/tax purposes.
Picture in your mind two elevators: One is a traditional mortgage elevator that is coming down as the readvanceable elevator is going up. Once the traditional mortgage elevator hits the ground floor, the traditional mortgage is paid off.
This is a smart tax strategy that the SM takes advantage of: interest on interest that is tax deductible is also tax deductible. In other words, when you borrow money to invest, the interest on the loan is tax deductible. If you borrow money to make the interest payment on the loan, then that interest is also tax deductible.