The Smith Manoeuvre allows you to borrow against available equity in your home...
If you’ve mortgaged your home to invest in an income-produc-
ing asset, you may benefit from a tax-saving strategy called the Smith Manoeuvre. Coined in 2002 by financial planner Fraser Smith, the strategy allows you to borrow against available equity in your home to invest in property or other assets. Even though you will be paying interest on your home-equity line of credit, it is 100% deductible for tax purposes. Of course, your new invest- ment should provide a return that is higher than the interest rate on your loan.
Who can fund my mortgage? Finding a competitive interest rate is key for most borrowers, but flexibility and customer service are important considerations, too. “Most people think shopping for a mortgage is all about rates but it’s more important to focus on your long-term goals,” says Angela Calla, host of The Mortgage Report on Global TV and a mortgage expert with Dominion Lending Centres in Port Coquitlam, BC. “Investors have to keep in mind that gas prices, inflation, government, even weather patterns, will have an impact on the economy, which, in turn, will affect mortgage rates.” At Calla’s firm, brokers review inflation strategies with clients
once a year to see if it’s time to make a shiſt in assets. “One of the biggest mistakes I see the middle class making is spending on depreciating assets (such as vehicles or furniture) and that re- duces their ability to invest in real estate, if that’s one of their goals,” she says. Commercial banks Even with the greater variety of lending choices available these days, banks are still by far the biggest players in the mortgage market because they’re seen as stable and easy to access; they also benefit from brand recognition. However, they can be limited with their rates and wary about taking risks on any investors who don’t have an optimal credit rating or income. Online banks work much like other banks, although they might not offer as many options. Tangerine, for example, doesn’t provide second mortgages and will only finance properties zoned as residential with up to four units. Credit unions These lenders fill in some of the cracks leſt by the big banks. They are regulated by the province where they are located rather than the federal government and are operated autonomously by their members as a cooperative (no sharehold- ers involved). They are generally known for their good customer
30 | CPA MAGAZINE | NOVEMBER 2017
service and flexibility in tailoring mortgages to different custom- ers. However, they may be limited in their rates and unable to offer large mortgages simply because they have less money to lend. Moreover, they might not offer some of the advantages offered by bigger lenders, such as bundled services. Monoline lenders These financiers focus solely on mortgages, but will only deal with clients via a mortgage broker. They tend to be smaller outfits without a brick-and-mortar presence. Since they have lower overhead costs than big banks do, they can offer more competitive interest rates and be a little more flexible when it comes to penalties and prepayment options. “If you qualify to work with a monoline lender, you will always have the best exit strategy clause on a mortgage if there is a divorce or if you want to flip the property quickly,” says Calla. “So it’s important to be proactive in figuring out how to optimize your credit and income beforehand so you can qualify for this type of mortgage.” Private lenders If you’re a higher-risk borrower with a poor credit rating, have an unconventional property to mortgage or just can’t meet the lending requirements of traditional banks, the private route may be your best bet. These lenders offer short-term loans funded by individuals or groups of investors. The interest rates on these mortgages are higher than average but monthly payments are lower because the loans are interest only (the payments do not pay down the principal). The loans are designed for borrowers who plan to have more income and/or improve their credit by the end of the loan term, at which point they would get a traditional mortgage. They can be ideal for investors who plan to flip a prop- erty for profit within a short time frame or who need bridge financing. Because private mortgages aren’t eligible for mortgage insurance and private lenders are on the hook if the borrower defaults, investors can expect additional costs for property appraisal, as well as legal, lending and mortgage broker fees.
Is it better to invest in RRSPs or pay down my mortgage? According to a recent Manulife Bank of Canada survey, average mortgage debt among Canadians was up 11% in 2016 to $201,000 — and millennials just entering the housing market saw the biggest increase. Plus, more than three-quarters of homeowners surveyed said being debt-free is a key priority.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64
