Did OSFI kill the Smith Manoeuvre? Tens of thousands of Canadians employ leveraged investing strategies like the Smith Manoeuvre. They rely on these techniques to magnify their investment gains and pay down their mortgages faster.
The Smith Manoeuvre entails:
- re-borrowing your regular mortgage principal payments
- investing that money in the market
- writing off the investment loan interest, and
- using the resulting tax refunds to prepay your mortgage
You need a readvanceable mortgage (aka HELOC) and at least 20% equity to employ the strategy.
The Smith Manoeuvre hit a roadbump this past June when Canada’s banking regulator, OSFI, officially announced lower HELOC borrowing limits.
As of October 31st, investors with bank-issued HELOCs will be able to borrow only 65% of their home value via a revolving credit line, as opposed to 80% before the changes. Most banks have already implemented this new guideline – impacting the Smith Manoeuvre in the process.
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A new poll suggests that most Canadians are quite comfortable with using debt as a financial strategy – at a time when debt loads have risen to alarming new highs.
The survey, done for bankruptcy trustees Hoyes, Michalos & Associates, finds nine out of 10 respondents would consider borrowing money to cover an unexpected cost.
The poll by Harris/Decima asked respondents how confident they were about being able to raise $2,000 within a month if an unexpected need arose.
While 55% said they were extremely or very confident they could raise the cash, 92% said they’d consider borrowing to come up with some of the cash.
A visit to the bank of mom and dad is often necessary when buying a home, but it always pays to use a lawyer when lending money between the generations. Having a legal document that clearly outlines the agreement can help protect the parents, the child, and any siblings, spouse or future spouse.
Vancouver lawyer Gail Davies has been doing real estate conveyancing for more than 25 years and she said most often she has clients who are “lending” their children 100% of a home’s purchase price. Usually, they are doing so as an advance on a future inheritance and the money is not expected to be paid back.
But even in that case, having a legal document and probably a mortgage is a good idea, Davies said. A formal mortgage on the property protects siblings, who also stand to inherit from their parents’ estate, and it can also secure the money in the event of a divorce.
“If the child is cohabiting with someone, the person they are cohabiting with could have a claim against the property,” Davies said. If you don’t have a mortgage on the property, you could end up as an unsecured creditor if things don’t work out, Davies said.