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Tuesday, August 9th, 2016

Smith Maneuver on Death Row? – find out more from a Vancouver Mortgage Broker

Smith Maneuver on Death Row?

Many Canadians utilize leverage within their investing strategies; users of such strategies number into the tens of thousands. Among these techniques we find tactics like the Smith Maneuver.

Such leveraged techniques (sometimes involving home equity lines of credit) can magnify gains and allow intelligent investors to pay off their Vancouver home mortgages much more quickly.

In order to utilize the Smith Maneuver, one first requires a re-advanceable mortgage. Such a mortgage allows the borrower to re-borrow any principle they’ve already paid down on their mortgage.

Borrowers using the technique then sell their non-registered assets and use the proceeds to pay down their mortgage as much as possible. The funds are then re-borrowed and invested in other assets that earn a higher return than the rate of interest on the mortgage. The interest on the borrowed funds can then (potentially) be deducted on the individual’s income tax return, in order to obtain a refund. The refund is used to further pay down the mortgage. By repeating such a strategy, an intelligent borrower can potentially pay off their home in a substantially shorter period of time than what would otherwise be possible. Please consult a trusted mortgage broker in Vancouver before employing such a strategy, as there can also be serious downsides.

As noted above, a re-advanceable mortgage is required in order to use this strategy. A minimum of 20% equity is also necessary to make it work.

But last June, when banking regulations in Canada changed, home equity lines of credit (HELOC) borrowing limits were reduced, and this strategy took a turn down a dirt road.

As of the end of October this year, home equity lines of credit won’t be nearly as flexible. Home equity lines of credit issued by banks will only allow mortgage holders to borrow up to 65% of the value of their home; in contrast to 80% before the new regulations.

But thankfully for those utilizing the Smith maneuver, there’s more than one way to skin a mortgage. According to the son of Fraser Smith, inventor of the Smith Maneuver, “The Smith Maneuver is still a huge potential benefit to Canadians”, because, “the limit drop is occurring only on the non-amortizing facility.”

This means it still possible to borrow 80% against your home. The debt simply has to be divided between a 15% mortgage portion and a 65% line of credit portion.

Essentially, the rule changes force a decrease in the amount of principal that can be re-advanced. Qualified individuals will still be able to take advantage of such a strategy, though it will require additional work when it comes to tax and accounting. Your honest mortgage broker can refer you to the appropriate professionals if you are interested in employing such a strategy.

We would also like to note that most existing home equity lines of credit will not be affected by the new regulations, unless changes are made to the HELOC contract. Such changes will likely decrease the individual’s line of credit to the new 65% maximum.

It also might be advantageous to know that not all lenders have to follow the updated regulations regarding real estate financing. The new rules only apply to lending organizations that are regulated federally under OSFI. Credit unions regulated at the provincial level remain unaffected up until this point in time. Hence, they are still allowed to provide 80% loan-to-value home equity lines of credit to borrowers that qualify.

The Smith Maneuver also entails serious risk and is not suitable for most borrowers. We recommend a discussion with your Vancouver mortgage broker as well as a tax professional before attempting such a strategy.

 

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