Quick disclosure: I’ve been running the Smith Manoeuvre myself for over five years, and I built this calculator:
https://www.deductibleinteresttracker.ca/smith-manoeuvre-projection
It’s free and doesn’t require signup. Mods, I’m happy to remove the link if this isn’t allowed.
Most SM calculators boil the strategy down to a few assumptions and one large number at the end. I wanted to model what actually changes over time: the mortgage balance, the readvanceable limit and 65% ceiling, capitalized interest, taxes on distributions, and what happens to the refund. It also lets you compare up to three strategies side by side.
One difference is that it tracks total wealth rather than stopping at net worth. That becomes important when comparing different ways of using dividends and tax refunds.
Here are three results I found interesting. The baseline is an $800,000 home, a $400,000 mortgage and a 6% HELOC.
1. The tax deduction helps less than the usual back-of-the-envelope calculation suggests.
In this scenario, the break-even total return is just under the HELOC rate: roughly 5.5% against a 6% line.
So the deduction provides about half a percentage point of cushion, not the two-plus points implied by saying that a 6% loan “really costs” only 3.4% after tax. The missing part of that calculation is that the investment return is also taxable.
Small changes to the return assumption can therefore change the outcome quite a bit.
2. A net-worth chart can make faster mortgage repayment look worse than it is.
Suppose you send dividends and tax refunds to the mortgage, then reborrow the available amount to invest. The mortgage is paid off sooner, but a basic net-worth chart may show that strategy falling behind.
The problem is that the chart ignores the mortgage payments you no longer need to make after the mortgage is gone.
When those freed payments are included, the faster-paydown strategy comes out ahead by the tax savings generated along the way. That’s why the calculator tracks total wealth: net worth, plus freed mortgage payments, plus any other cash contributed or withdrawn.
Looking only at net worth can lead to the wrong comparison.
3. Capitalizing interest improves cash flow, not wealth.
Borrowing to cover the HELOC interest keeps the cost out of pocket for a while, but it doesn’t make the interest disappear.
It also works only while there is enough room under the 65% limit. Once that room is exhausted, the HELOC interest has to be paid in cash and may be roughly comparable to the old mortgage payment.
The model still has limitations: returns are constant, there is no sequence-of-returns risk, final-sale taxes are excluded, and it assumes you don’t spend the freed cash on a boat.
I’d be interested to hear about any incorrect assumptions, missing scenarios or ways to break the model.
