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Friday, 20 July 2012

OSFI guidelines hit Smith Manoeuvre

New OSFI guidelines offer less than good news for mortgage brokers who deal in the Smith Manoeuvre.

The tighter guidelines for federally regulated lenders will likely impact borrowers seeking to use the complex tax-saving strategy relying on a re-advanceable mortgage to make  mortgages tax-deductible.

“New rules cutting the LTV maximum from 80% to 65% will significantly reduce the benefits that borrowers expect to get through a Smith Manoeuvre,” said Brad Compton, a Toronto Invis agent.

For a Smith Manoeuvre to be really effective, borrowers must be able to draw upon as much of the value of their properties as possible, according to Compton, who spent more than a decade working as a financial analyst.

“People will still use the manoeuvre but they will not be able to get as much out of it under the new regulations,” he said.

The new rules from the Office of the Superintendent of Financial Institutions (OSFI) cut the maximum LTVs offered by banks on HELOCs from 80 per cent to 65 per cent

Last year, reported that there was concern in the broker community that funding limits would hamper Smith Manoeuvre transactions.

The tax-saving scheme, developed more than a decade ago by financial planner Fraser Smith, relies on Revenue Canada rules allowing Canadians to deduct interest paid on loans for investment purposes.

In the case of the Smith Manoeuvre, that “loan for investment purposes” is a collateral mortgage, or HELOC, for the full value of the home. In exclusively using that line of credit for investments – preferably dividend yielding ones – the interest paid on the loan is made tax-deductible.

As the client continues to pay down the principal, that frees up more of the line of credit for additional investments. Eventually, according to Smith, not only does the homeowner end up having paid no interest on the mortgage, but has also developed a substantial investment portfolio in addition to paying off the mortgage. For the loan to be tax deductible, however, clients must restrict themselves to non-registered investments.

The system does come with a fair amount of risks, according to Compton. “As with any investment, the value of the investment instruments chosen for the Smith Manoeuvre can go up and down, putting your borrowed equity at risk.”

The Smith Manoeuvre is ideal for people seeking a long-term, buy-and-hold vehicle, which will hopefully average out over the long run, he said.

Compton said mortgage brokers will likely work to get their clients the maximum 65% through the Smith Manoeuvre and get the remaining 15% through a normal mortgage.

By Nestor Arellano | 11/07/2012 10:00:00 AM | comments

Thursday, 19 July 2012

Falling consumer debt challenges mortgage rules


A new Equifax report suggests Canadians began making real strides in cutting household debt before the new mortgage rules came into effect, raising concerns the government was too quick off the mark.

Growth in consumer debt fell 30 per cent in the second quarter, compared to a year earlier, reflecting the single biggest drop since before the recession.

“For the last couple of years we have seen almost double digit growth in some cases, it slowed down a bit last year, but we have never seen it slow down as much as we have (now),” said Nadim Abdo, VP of analytical services for Equifax Canada.

In real terms, consumer indebtedness – not taking into account mortgage debt -- climbed 3.1 per cent year-over-year in the second quarter. That’s down from the 4.4 per cent increase logged a year earlier, according to the Equifax quarterly trend report.

Economists are calling that improved financial footing the most conclusive indication to date that Canadians are getting the message about the dangers of household debt levels, now averaging 152 per cent of income.

The numbers also draw attention to tighter mortgage rules taking effect last week and meant to bring about the kind of consumer restraint already in the works.

There's also concerns those rules have further cooled the housing market.

“Even before the new mortgage rules kicked in, all signs suggest that the Canadian housing market was already cooling," BMO economist Douglas Porter told reporters. "The new rules will simply pull hard on a closing door.”

June CREA numbers suggest that door has already been pulled tight.

In total, there were some 4.4 per cent fewer homes sold last month compared to the year-ago period, according to the Canadian Real Estate Association’s latest numbers.

In terms of prices, the average seller of a home in June 2012 received $369,339, down 0.8 per cent from the same month in 2011.

The double whammy marks an about-face for a national housing market that the federal government, among other key stakeholders, viewed as primed for a major correction if intervention wasn't initiated.

The June numbers do not reflect that intervention, and the slide raises questions about whether the changes were in fact necessary.

"Homebuyers didn’t rush their purchases before the most recently announced changes to mortgage regulations came into effect," CREA's chief economist Gregory Klump said.

By Vernon Clement Jones | 18/07/2012 7:00:00 PM | comments

Wednesday, 18 July 2012

Rate hikes will not help the economy

As expected the Bank of Canada is holding its benchmark, overnight rate at 1% for the 15th consecutive setting. In the accompanying policy statement the bank said the decision was made in light of the current global economic situation. It also downgraded this year’s economic growth projection from 2.4% to 2.1%. The bank releases its Monetary Policy Report tomorrow. Yields continue to drift down.

A growing number of analysts have been backing up the time line for an interest rate hike by the Bank of Canada. Through the last quarter of 2011 and the first quarter of this year the call was for a 25 to 50 basis point hike by late 2012 or early next year. Now that’s being rolled back to the middle of 2013.

Slowing economic growth in Canada, the U.S. and China, and the unrelenting economic problems in Europe have handcuffed our central bank. It has been looking to raise rates in an effort to slowdown the growth of household debt in Canada. But the BoC did get some relief with Ottawa’s imposition of new lending rules for high-ratio mortgages and new mortgage qualification limits. The regulatory moves amount to a de facto interest rate increase in the housing sector and, anecdotally at least, appear to be having the desired, cooling effect.

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Friday, 13 July 2012

HELOC to 80% still alive

Brokers are on the hunt and credit unions are already welcoming a wave interest as new federal guidelines limit HELOCs at the banks and make their own higher LTVs more enticing.
Good news from MortgagePRO!
The OSFI move to cut the maximum LTV to 65 per cent from 80 per cent for HELOCs offered by federally-regulated lenders is expected to result in a mini boom for provincially regulated CUs in Ontario and other provinces. There regulators are refusing to impose those new rules on credit unions.
Those cooperative institutions are already reporting a spike of broker queries.
“We’ve seen a bit of increase in calls from the broker channel asking about whether we are following the OSFI guideline or sticking with our current LTVs,” said Rita Epp, director of retail and special credit at Meridian Credit Union Ltd. “Our policy is business as usual.
“We review each application on a case-by-case basis. If we find it is best for the member and the credit union, we will provide our maximum 80 per cent LTV on the line of credit.”
While it may be “too early,” she said, to determine how much business that new interest will generate, “it could be a definite advantage over the banks for us.”
The altered HELOC guidelines came into effect Monday, coinciding with Finance Minister Jim Flaherty’s activation of rule changes for government-backed mortgages.
Brokers have largely panned the changes as unnecessary given the slowing market and the OSFI action.
“Taken together, the Minister’s announcement and the OSFI final guidelines may have an effect of precipitating the housing downturn that the government wants to avoid,” Jim Murphy, CAAMP CEO, told
Credit unions are not bound by federal regulations, although many are sticking with their current LTV caps, now lower than the old 80 per cent cut-off.
The OSFI ruling could be welcome news for credit unions, said Phil Fiuza, manager of mortgage services and broker organization centre, with IC Savings. It’s sticking with a maximum 75 per cent LTV on HELOCs.
“We believe our current practices as very prudent so we will continue to offer up to 75 per cent,” Fiuza said. “The ruling will most likely benefit credit union whose main product offering are line of credits. We focus more on fixed term loans.”
Not all credit unions are rejecting the OSFI ruling. Some have embraced them.
“We will be complying with the OSFI guideline,” said Andre Chapleau, media relations director of Desjardins Credit Union, “It’s a good move in the sense that homes are not supposed to be treated as an ATM (automated teller machine.”

By Nestor Arellano | 12/07/2012 8:00:00 PM | comments