What is the Smith Manoeuvre?

What’s the Smith Maneuver? It’s a wealth-building strategy to create a tax-deductible mortgage. You may have heard, and envied, that mortgage holders in the US can claim their mortgage interest as a tax deduction. Well, you may be able to use that strategy in Canada with the Smith Maneuver. Here’s how it works.

In Canada, if you borrow money to invest in a product that produces an income such as an investment property or a dividend paying stock, the interest on the borrowed money may become tax deductible. 

If you borrow against the equity in your home, invest it in income-producing products, then you can use the tax refund to further pay down the mortgage. By repeating that a number of times, you can pay off your mortgage.

The man behind it all was Fraser Smith, a financial strategist based in Victoria, British Columbia. He pioneered The Smith Maneuver, a ground-breaking, legal strategy that lets ordinary Canadian homeowners make their mortgages tax deductible. In his work, he saw that too many Canadians were waiting until their mortgages were paid off before they started to build an investment portfolio, missing out on years of compounding interest, and putting themselves in the position of being house rich and cash poor in retirement, unlike his wealthier investors who used tax strategies to grow wealth. So, he learned the rules of tax deductibility and penned the book The Smith Maneuver for all Canadians.

In a simplified way -- here’s how it works: It starts with a re-advanceable mortgage, which is a mortgage linked with a line of credit. The credit limit for your mortgage plus the credit line is normally 80% of the appraised value of your home, but new rules have changed that to 65% of the value of your home. With each mortgage payment, you pay down some principal, which immediately becomes available credit in the credit line. You can now borrow this amount to invest directly from the credit line.  Your investment credit line interest is normally tax deductible and you should receive a refund, which will be small in the beginning. 

Use the line of credit portion to invest in incoming-producing products but never in an RRSP – you’ll lose the tax deduction. 

At tax season, you can deduct the annual amount of interest you paid on your line of credit against your income.  Then apply the tax return and investment income against your non-deductible mortgage and invest the new money that’s now in your line of credit. Repeat this until your nondeductible mortgage is paid off.

By doing this you get to build a large investment portfolio without waiting to pay off your mortgage first; you get to quickly pay down your non-deductible mortgage in a hurry; and your new investment loan is tax deductible.

To learn more about this strategy and to see if it can work in your situation, give me a call at 604-818-2840.

What affects your mortgage rate?

One of the most common questions I am asked as a mortgage broker is “What is your lowest rate?”. No one wants to pay more than they need to. Sometimes the lowest rate is not what you should be looking for. A good mortgage broker will ask you lots of questions about what your financing scenario looks like and find the best mortgage for your needs. I have detailed below a variety of situations that can affect the mortgage rate you can secure. Owner Occupied VS Rented Lenders prefer the borrower to live in the property being financed. There is a greater incentive to make the mortgage payments when your primary residence is at risk. When a borrower finances to buy a rental property the rate offered is often higher than if the borrower resides in the property. Personal Name VS Holding Company Similar to the item above, when a rental property is being purchased, the owner may wish to have the property in the name of a holding company and provide a personal guarantee. This is not looked at favourably by all lenders and many lenders will not allow this. When a lender that does allow a holding company scenario, they know they are in a small group of lenders that do, and when a situation like this exists, most lenders will charge a slightly higher rate to do business with them in this way. Credit Score The better your credit score the greater opportunity the borrower has to secure the lenders best rate. If you have a poor payment history showing on your credit report it is a strong indication that you will be late with your mortgage payments, and the best rates are reserved for borrowers that show they consistently pay their bills on time. Conventional VS High Ratio You would tend to think that the borrower with a down payment greater than 20% would get a lower mortgage rate than the borrower with a down payment of only, 5, 10 or even 15%, but that is not generally the case. The borrower with the smaller down payment will have to pay high ratio insurance through a provider like Canada Mortgage and Housing Corporation (CMHC) and that means the lender is guaranteed to get all their money back in the event the borrower defaults on the mortgage, regardless of a default at the same time, real estate prices drop. The lender can take all these high ratio insured mortgages, package them into a bundle of mortgage back securities and sell them off to institutional investors (the lender would still administer the mortgage). These insured mortgages can be sold off faster, and when the lender can do this, they can offer a lower mortgage rate and still make good money. Loan To Value on Conventional We have established that the lowest mortgage rates are offered to the borrower that has the smaller down payment when the mortgage is insured. If the borrower has more than 20% down payment but not quite a full 35% down payment, the lender might have “Risk Based Pricing”. For each increment between a mortgage that is equal to 65% of the property value up to 70% then 70% to 75% and 75% to 80% the lender might have an incrementally higher rate. When the borrower has more than a 35% down payment and the mortgage is less than 65% of the value, the lender will often offer a rate as low as the high ratio rate. Not all lenders will have rates that vary but an increasing number are now offering this style of rate pricing. Down payment Saved VS Borrowed When the borrower is borrowing some or all of their down payment, they don’t have as much true equity in the property and the lender will charge a slightly higher rate. For example there are programs that allow qualified borrowers to borrow against a line of credit, borrow from family or borrow against an existing asset to come up with the down payment. Borrowing for the down payment is not the same as getting a gift from family members. Quick Closing VS Long Closing Some lenders will offer a slightly lower rate if you approach them for your mortgage approval and have a closing date within 30 to 45 days later, they can move your paper from the underwriting stage to the funding stage within a short period of time, compared to having it sit around the office for up to 4 months before completion and they save money by not having to look at it several times. This savings can be passed on to the borrower with a lower rate when the completion is less than the typical 90 day period. Prepayment Penalties and Sales Clause The mortgage with the lowest rate is not always the best mortgage. Several mortgage lenders have products that do not allow you to pay off your mortgage in full before the end of your term. You could win the lottery and not be allowed to pay off your mortgage unless you are selling your home, and even then the penalty could be higher with comparable lenders that don’t have this clause. You may also want to refinance your mortgage and borrow against the equity for a variety of reasons and the lender will say no. When a clause like this exists the lender knows you are committed to them for the full term and they offer a lower rate. This type of clause won’t likely hurt the borrower with 5% down as they are unlikely to try and refinance so under some conditions this could be the ideal mortgage for the borrower. Pre Approval VS Live Deal Some, but not all lenders, reserve their best mortgage rates when you are approaching them with a live deal (you have an accepted offer and you need a full approval) compared to just asking for a 120 day pre approval. Lenders offering a pre approval may offer a slightly higher mortgage rate to hedge their cost of borrowing, when you have a live deal, and if rates have not changed you can request the lower rate. If the rates have gone up, then the slightly higher initial rate isn’t a bad thing. Summary There are a variety of reason that two people applying for mortgages would be offered different interest rates. Working with an experienced mortgage broker is a great way to understand what rates would be available to you, based on your circumstances and criteria as outlined above. Feel free to give me a call if you want to know your options, we make mortgage shopping easy by educating and motivating you to make intelligent mortgage choices.

Purchase Plus Improvements

I had a coffee recently with Doc Livingston a Tri City realtor with EXP Realty and we talked about a great program that can help people that find a home that pretty much meets their needs but needs some renovations and updating. Purchase Plus Improvements is a program that can help with the renovation program.

Vancouver Real Estate Market Update for July 2019 With John Charbonneau

Welcome to Your House Matters, I’m John Charbonneau with TMG The Mortgage Group and www.canadianmortgagefinders.com and this is your July Real Estate Market Update for activity in the Vancouver Real Estate Board. Sales statistics for June 2019 have just arrived and we saw 2077 homes sold consisting of single family, apartments and attached units. That represents a decrease of 14.4% from a year ago.
Sellers would appear to continue their efforts to capture last years home values. There were 4,751 newly listed properties come on to the market last month, that number is down by 10% compared to June 2018.
The total number of properties listed at the end of June was just shy of 15,000 and that big total represents an increase of 23% compared to this time a year ago.This is the highest level of inventory in the last 5 years.
We saw 13.9% of the inventory sold last month, and when you have a prolonged period of 12% or less inventory selling, month after month, you can expect continued softening of prices. The composite benchmark price for all properties has now fallen below $1,000,000.
Single family home prices were down 10.9% from June 2018, with apartment prices down 8.9% compared to the same month last year and attached homes saw a decrease of 8.6% from June 2018.
The area covered by the Vancouver Real Estate Board is quite vast and this area consists of a substantial number of smaller individual markets. If you would like to find out what is happening in your local neighbourhood, feel free to give me a call and I can refer you to one of our trusted local real estate advisors. That’s the Vancouver Real Estate market update for July 2019, I look forward to connecting with you next month.

Pro's and Con's Of Using Credit Cards and Helpful Tips

It’s almost impossible to avoid credit cards these days. We’re bombarded with credit card offers in the mail and online, and some businesses have stopped accepting paper money altogether. Seems like the reign of cash is over — credit is the new king. But, have you ever paused to think about how credit cards may be affecting your overall financial health? From rewards programs and bonus offers to late fees and interest rates, there’s a lot to consider when deciding to open your first (or second, or third) credit card. We’ve done the research so you don’t have to. Here are the pros and cons to having credit cards, and tips for using credit cards wisely. Pros: Why You Should Flash That Plastic There’s one very good reason many people now rely on credit cards to pay for everything: The convenience factor. You can make online purchases and pay for things at stores with a swipe, avoiding the hassle of cash. But, that’s just the tip of the iceberg when it comes to the benefits of credit cards. Credit cards can provide rewards like cash back or travel points, when you use a credit card that provides rewards, you get a little something extra for every dollar you were already going to spend. New credit cards may come with bonus offers (such as a $300 statement credit when you spend $5,000 in the first three months), which can be a nice boost to your budget. Some credit cards include a range of other non-financial perks that may ultimately save you money. For example, you can take advantage of an extended warranty policy from a credit card for a major purchase instead of paying the retailer for the same protection. Some credit cards have rental car insurance, so you don’t need the additional insurance [from rental car companies]. Many cards have travel insurance that will refund your flight and hotel expenses if you need to cancel your trip. Looking to pad your credit score? A credit card might be able to help. Payment history is the most significant factor in your credit, accounting for a whopping 35 percent of your score. By [putting] your normal monthly expenses on a card and paying the balance in full each month, you’ll demonstrate on-time payments a build a positive payment history over time. Cons: Proceed At Your Own Risk Despite many perks and benefits, credit cards can get people in some serious financial trouble when used irresponsibly. It’s all too easy to overspend without realizing it when all you have to do is insert your chip to make a purchase and worry about the bill later. A credit card is a revolving loan. If you carry a balance from month to month or only make the minimum payments, you’ll be charged interest on the balance. Making late payments on your credit card can be detrimental to your finances. Credit card companies can slam you with late fees (often $25-$35) if you don’t pay your bill on time. They may also alert the credit reporting agencies about missing payments, potentially dragging down your credit score and making it difficult to take out a loan or secure low interest rates in the future. While carrying cash could leave you vulnerable to pickpockets, credit cards come with their own big risk: Fraud. If a hacker gets hold of your credit card details, he or she may be able to do some serious damage. A credit card security breach could also make you a victim of identity theft. The threat of identity theft is real. Consumers should check accounts online regularly, and at the very least, verify every charge on every monthly bill. 7 Tips on How to Use Credit Wisely Want to reap the benefits of credit cards without letting them become an anchor on your financial growth? Here are the best practices for paying with plastic. Pay off your balance in full by the due date every month. If you’re prone to forgetting, set up automatic payments to avoid paying interest and late fees. Don’t fall into the habit of overspending. Only use your credit card for purchases you can afford that month. Use your credit card like you would a debit card. Don’t open more credit cards than you’re capable of managing and monitoring each month — even though bonus offers can tempt you to open new cards. Having 10 credit cards is fine for some people, while others may find one overwhelming. Read the fine print before you sign up. Don’t understand something? Give the credit card company a call for clarification. Only use your credit card at websites you know and trust when shopping online. A padlock symbol in the address bar and sites that begin with “https” are signs that the site has taken precautions to protect your information. Avoid closing old cards, even if you’re not using them. They contribute to the length of your credit history, which helps your credit score. Be diligent about fraud. Check your credit card activity online at least once a week, and read your monthly statements in full. This will help you catch potential fraud early. Credit cards can be your best friend if you use them responsibly, earning you perks, rewards and an improved credit score. But, they can also make it easy to accumulate high-interest debt. Understanding the pros and cons of paying with plastic can help you feel empowered to make the smart choices about credit cards—whether that’s embracing every offer you come across, or shunning them entirely.

Micro Condo's or Bachelor Suites

I saw a blog post recently, talking about micro condos' as being a new trend, smaller spaces, same selling price per sq foot but less expensive. It sounded like a new trend, then I thought about when I went to college in the 70's in Ottawa. I rented something called a bachelor suite, 200 to 300 sq feet, I can see this sort of thing working for many people. Have a look at these to examples, and tell me they aren't a nice way to get into the market for younger singles.

Update From CMHC on First Time Home Buyer Incentive

We had a brief update from CMHC this morning on their First Home Buyer Incentive plan. First Time Home Buyer Incentive Program Offered by CMHC This program is only available to borrowers whose household income is less than $120,000 The maximum purchase price can not exceed $560,000 If the borrower comes up with at least a 5% downpayment the government will provide an interest free loan of 5% on resale homes and up to 10% on new homes. In exchange for the equity CMHC is providing they take advantage of any increase in home value and they will also absorb any decrease in home value to the same percentage as they have in the home, ie either 5% or 10% The loan must be paid back within 25 years or if the buyers sells before that. Applications will be accepted as of September 2nd for home sales that do not close any earlier than November 1st The big advantage here is that you are getting an interest free loan equal to 5% (10% if a new home) of the purchase price for up to 25 years.

New information about CMHC's program to help First Time Home Buyers

A little bit of new news from Canada Mortgage and Housing Corporation regarding the Federal Government program to help First Time Home Buyers with a downpayment on their first purchase. The program allows for the government to provide 5% of the purchase price on existing homes and up to 10% of the purchase price on new homes. When you sell the home, this money has to be paid back. Let's say that the home goes up in value by 10% when you sell and they gave you 5% of the purchase price. The government will want the 5% back (of course) and they want you to also pay them back the percentage increase that their 5% earned. So, if you bought a home for $100,000 that went up 10% in value and they gave you $5,000 or 5% of the purchase as part of the program, you pay back $5,000 plus $500. This is the Federal Governments equity in your home. Don't worry, if home prices go the other way, and when you sell the home has gone down in value, you only have to pay back the net amount of the $5,000 after the percentage decrease in value. The program is not set to launch until September so trust that more details will follow as we pass through the summer.

How much can I take out of my RRSP for a Downpayment?

We were recently approached by a First Time Home Buyer who was told by his realtor that he could only take $20,000 our of his RRSP to use towards his downpayment and he wanted to know if this was correct. Well, at one time the information was correct but not today. The March 2019 Federal Budget increased the limit on RRSP withdrawls to $35,000 per applicant. You still have 15 years to pay the money back into your RRSP and you can pay it all back earlier if you wish. Some additional details that a lot of people don't know about is that not all the withdrawl has to go towards your downpayment, you could use the money to pay off debts, cover closing costs such as legal and tax adjustment, use the funds for renovations and technically, as long as you buy a home at the time of the withdrawl, you could use the money for a vacation to recover from the stress of buying a home.

What happens when you die without a will?

I recently had the opportunity to speak with Daniel Boisvert, President of the BC Association of Notaries and I asked him what happens when someone dies without a will. We had a good conversation including a discussion about whether or not it is safe to use a store bought will kit.