# The 37% Federal Bracket Changes Which BC Mortgage Debt You Should Pay Down First
A homeowner in Vancouver earning $625,000 a year refinanced in early 2024 and pulled $150,000 from her home equity at 5.8%. She used half to pay down a line of credit at 7.9%, invested the rest through her corporation, and thought she had built a clean debt consolidation with good monthly savings.
Then the top federal rate moved. The same homeowner now sits in the 37% bracket instead of 33%, and the after-tax cost of every dollar she pays in interest just dropped. The line of credit she paid off first may no longer be the most expensive debt she carries once you adjust for the deduction, and the mortgage debt she added may now work harder in her favor than it did six months ago.
The federal top marginal rate increase to 37% for income above $626,350, effective for the 2026 tax year, changes the real cost of carrying debt for BC earners at or near that threshold. It does not change the nominal rate lenders charge. It changes what that rate costs you after the government reduces your taxable The actual cost of the 7.9% line of credit, for someone in the old 33% federal bracket combined with BC's 20.5% provincial rate, was 3.67% after tax. The nominal rate was 7.9%, but when the interest is deductible and you sit in a 53.5% combined bracket, the government effectively covers more than half of every interest dollar you pay.
At 37% federal, combined with the same provincial rate, the bracket becomes 57.5%. That same 7.9% line of credit now costs 3.36% after tax if the interest remains deductible. The homeowner who consolidated it into mortgage debt at 5.8% moved from expensive borrowing to cheap borrowing in nominal terms, but mortgage interest on a primary residence is not deductible. The 5.8% mortgage costs the full 5.8%, while the line of credit, had she kept it and used the funds for income-earning purposes, would have cost her 3.36% out of pocket.
What the bracket does to deductible debt
Interest deductibility creates a subsidy. The higher the bracket, the larger the subsidy. A business owner in Richmond carrying a $200,000 HELOC at 6.5% to fund working capital pays $13,000 in annual interest. At the old 53.5% combined rate, that interest saved $6,955 in taxes, bringing the true cost to $6,045. At 57.5%, the same interest saves $7,475, and the true cost drops to $5,525. The nominal rate did not change. The after-tax rate fell from 3.02% to 2.76% because the bracket rose.
This matters most when comparing deductible debt to non-deductible debt. A mortgage on your home at 4.8% costs you 4.8%. A HELOC at 6.2% used to buy dividend-paying investments costs you 2.64% after tax at the new bracket. The HELOC is now the cheaper debt, and paying it down first would be paying down the wrong thing.
The Smith Manoeuvre™ becomes more efficient at 57.5% than it was at 53.5%. Converting non-deductible mortgage debt into deductible investment debt always created a tax benefit, but the benefit was smaller when the top bracket was four points lower. For every $100,000 converted, the annual tax shield at a 6% borrowing rate moves from $3,210 to $3,450. That is $240 a year in additional after-tax savings purely from the bracket shift, compounded over the life of the strategy.
When paying off the mortgage stops making sense
Most high earners default to mortgage prepayment because mortgages feel large and intimidating. The impulse is understandable but mathematically backwards once deductibility enters the picture. A North Vancouver business owner earning $680,000 in 2026 who carries a $900,000 mortgage at 5.1% and a $120,000 HELOC at 6.8% will typically target the HELOC first because the rate is higher. If that HELOC is funding the business and the interest is fully deductible, the after-tax cost is 2.89%. The mortgage, which is not deductible, costs the full 5.1%. Paying down the mortgage first would eliminate debt costing 5.1% while keeping debt costing 2.89%.
The psychology cuts the other way. Eliminating the mortgage feels like freedom. Eliminating the HELOC feels like maintenance. But the HELOC, in this case, is the cheaper loan by a margin of more than two percentage points after tax. Choosing the mortgage because it is larger or because it represents "the family home" is choosing based on emotional weight rather than cost.
Refinancing as tax arbitrage
The 37% bracket opens a refinancing strategy that did not pencil out at 33%. A Burnaby homeowner with $400,000 in home equity and $180,000 in business debt at 8.2% can now refinance, pull equity at 5.5%, and use it to pay off the business debt. The new mortgage debt costs 5.5% and is not deductible. But the business debt it replaced was costing 3.49% after tax at the new bracket. The refinance would move the homeowner from cheaper to more expensive debt.
The play that does work: refinance to pull $180,000 at 5.5%, invest it in income-earning assets, and use the cash flow that would have gone to the business debt to service the new mortgage instead. The mortgage interest is not deductible, and now the homeowner has freed up cash flow, gained an investment position, and the interest on the HELOC funding the investment costs 2.34% after tax at 57.5%. The nominal refinancing rate is higher than the after-tax cost of the debt it creates when used correctly.
The bracket does not make every high earner a candidate for leveraged investing. It does mean that the decision to pay down debt versus carry it now has a four-point wider margin in favor of carrying deductible debt than it did before June 2024.
A homeowner in Vancouver earning $625,000 a year refinanced in early 2024 and pulled $150,000 from her home equity at 5.8%. She used half to pay down a line of credit at 7.9%, invested the rest through her corporation, and thought she had built a clean debt consolidation with good monthly savings.
Then the top federal rate moved. The same homeowner now sits in the 37% bracket instead of 33%, and the after-tax cost of every dollar she pays in interest just dropped. The line of credit she paid off first may no longer be the most expensive debt she carries once you adjust for the deduction, and the mortgage debt she added may now work harder in her favor than it did six months ago.
The federal top marginal rate increase to 37% for income above $626,350, effective for the 2026 tax year, changes the real cost of carrying debt for BC earners at or near that threshold. It does not change the nominal rate lenders charge. It changes what that rate costs you after the government reduces your taxable The actual cost of the 7.9% line of credit, for someone in the old 33% federal bracket combined with BC's 20.5% provincial rate, was 3.67% after tax. The nominal rate was 7.9%, but when the interest is deductible and you sit in a 53.5% combined bracket, the government effectively covers more than half of every interest dollar you pay.
At 37% federal, combined with the same provincial rate, the bracket becomes 57.5%. That same 7.9% line of credit now costs 3.36% after tax if the interest remains deductible. The homeowner who consolidated it into mortgage debt at 5.8% moved from expensive borrowing to cheap borrowing in nominal terms, but mortgage interest on a primary residence is not deductible. The 5.8% mortgage costs the full 5.8%, while the line of credit, had she kept it and used the funds for income-earning purposes, would have cost her 3.36% out of pocket.
What the bracket does to deductible debt
Interest deductibility creates a subsidy. The higher the bracket, the larger the subsidy. A business owner in Richmond carrying a $200,000 HELOC at 6.5% to fund working capital pays $13,000 in annual interest. At the old 53.5% combined rate, that interest saved $6,955 in taxes, bringing the true cost to $6,045. At 57.5%, the same interest saves $7,475, and the true cost drops to $5,525. The nominal rate did not change. The after-tax rate fell from 3.02% to 2.76% because the bracket rose.
This matters most when comparing deductible debt to non-deductible debt. A mortgage on your home at 4.8% costs you 4.8%. A HELOC at 6.2% used to buy dividend-paying investments costs you 2.64% after tax at the new bracket. The HELOC is now the cheaper debt, and paying it down first would be paying down the wrong thing.
The Smith Manoeuvre™ becomes more efficient at 57.5% than it was at 53.5%. Converting non-deductible mortgage debt into deductible investment debt always created a tax benefit, but the benefit was smaller when the top bracket was four points lower. For every $100,000 converted, the annual tax shield at a 6% borrowing rate moves from $3,210 to $3,450. That is $240 a year in additional after-tax savings purely from the bracket shift, compounded over the life of the strategy.
When paying off the mortgage stops making sense
Most high earners default to mortgage prepayment because mortgages feel large and intimidating. The impulse is understandable but mathematically backwards once deductibility enters the picture. A North Vancouver business owner earning $680,000 in 2026 who carries a $900,000 mortgage at 5.1% and a $120,000 HELOC at 6.8% will typically target the HELOC first because the rate is higher. If that HELOC is funding the business and the interest is fully deductible, the after-tax cost is 2.89%. The mortgage, which is not deductible, costs the full 5.1%. Paying down the mortgage first would eliminate debt costing 5.1% while keeping debt costing 2.89%.
The psychology cuts the other way. Eliminating the mortgage feels like freedom. Eliminating the HELOC feels like maintenance. But the HELOC, in this case, is the cheaper loan by a margin of more than two percentage points after tax. Choosing the mortgage because it is larger or because it represents "the family home" is choosing based on emotional weight rather than cost.
Refinancing as tax arbitrage
The 37% bracket opens a refinancing strategy that did not pencil out at 33%. A Burnaby homeowner with $400,000 in home equity and $180,000 in business debt at 8.2% can now refinance, pull equity at 5.5%, and use it to pay off the business debt. The new mortgage debt costs 5.5% and is not deductible. But the business debt it replaced was costing 3.49% after tax at the new bracket. The refinance would move the homeowner from cheaper to more expensive debt.
The play that does work: refinance to pull $180,000 at 5.5%, invest it in income-earning assets, and use the cash flow that would have gone to the business debt to service the new mortgage instead. The mortgage interest is not deductible, and now the homeowner has freed up cash flow, gained an investment position, and the interest on the HELOC funding the investment costs 2.34% after tax at 57.5%. The nominal refinancing rate is higher than the after-tax cost of the debt it creates when used correctly.
The bracket does not make every high earner a candidate for leveraged investing. It does mean that the decision to pay down debt versus carry it now has a four-point wider margin in favor of carrying deductible debt than it did before June 2024.
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