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.

Click here for the more details from CanadianMortgageTrends.com.

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.

Click here for the full Globe and Mail article

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.

Click here to read more from the Vancouver Sun.

The new Apple iPhone 5 tells us a lot about why you can’t get your financial act together.

The iPhone is a brilliant device – a deluxe cellphone that has become a cultural icon. So important is the iPhone 5 that the announcement of its features and release date – it’s Sept. 21 – were treated globally as a major media event. Who doesn’t now know that the iPhone 5 is 18 per cent thinner and 20 per cent lighter than its predecessor?

A man talks on a mobile phone in front of an Apple logo outside an Apple store in downtown Shanghai in this September 3, 2012 file photo. Although Apple makes billions from new phones, a significant portion of its sales in recent years have come from dropping the price on older models once a new phone or tablet hits stores REUTERS

Apple could sell 33 million iPhone 5s globally this quarter, a tribute to the company’s gadget-building supremacy. But iPhones are also symbolic of a change in society’s attitude toward money. We now get our gratification through spending money rather than by saving it.

The savings rate in Canada has been falling for decades, more or less in line with the decline in interest rates. Today, savings accounts offer less than 1 per cent in many cases and barely 2 per cent at best. As a result, a lot of us have come to believe that saving is useless, even foolish. And so, we’ve moved on to spending.

The iPhone 5 will sell for a suggested retail price between $699 and $899 (depending on how much memory it offers), but in the past it has been possible to pay much less if you sign up for a multi-year wireless phone plan. If an iPhone sounds like an affordable luxury, ask yourself these questions:

However much the phone costs, have I contributed at least that much money, and preferably much more, to my retirement savings this year?

Have I contributed anything at all to my kids’ registered education savings plan?

Do I have any money saved that I can tap if the car’s “check engine” light comes on, if the basement floods, if the orthodontist says my kid really needs braces or if I lose my job?

If you’re covered on all of this, enjoy your new iPhone. Otherwise, you might want to reconsider that purchase because your spending and saving are out of balance.

The roughest rule of saving is that you should be putting away 10 per cent of your take-home pay for the future in a tax-free savings account or a registered retirement or education savings fund. If you’re getting a late start as a saver, your number is higher.

External factors like wage freezes and inflation can affect our ability to save, and today’s low interest rates offer no encouragement. But the biggest impediment is in our own heads. We see more value in spending than in saving.

In a way, spending by consumers is a good thing because it accounts for roughly two-thirds of our economy. But spending takes away from saving in today’s zero-sum economy, where wage growth isn’t strong enough to put us ahead of inflation. The only way to save more is to spend less.

The iPhone and similar devices make that a challenge because of the way they draw you into a web of higher spending. You could buy a cheap cellphone and your wireless phone company would probably give it to you for free if you signed up for a service plan. A basic cellphone would mean simple data needs, so you could probably get away with an inexpensive plan.

With an iPhone, you’ll pay extra to buy the phone and likely face higher monthly plan costs. And then there’s the temptation to upgrade. An iPhone 5 bought this fall could be superseded by something better within 12 months. By then, there will probably be a new iPad and, who knows, but maybe Research In Motion will have turned some heads with the new BlackBerry 10. Every new product is competition for money you could otherwise use to save or pay down debt.

You’re urged to buy things all the time via mass media, but there’s no lobby for saving. Apple had Steve Jobs on its side. Savers are stuck with Benjamin Franklin, who said that a penny saved is a penny earned.

How can we get people saving more, then? By making it automatic, not discretionary. Have money electronically diverted from your chequing account to your RRSP, TFSA, RESP or a savings account every time you get paid. Have some money left over after the bills are paid? Hello, iPhone.

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How the savings rate has tracked in the past 50 years

(data taken from first quarter from each year)

Source: Statistics Canada

The Toronto and Vancouver housing markets have cooled rapidly in the wake of Ottawa’s latest bid to stop a bubble, with many first-time buyers knocked out of the running.

Finance Minister Jim Flaherty put the July 9 changes into effect to curb growing mortgage debt levels and take some steam out of house prices. Among other things, the new rules cut the maximum length of insured mortgages to 25 years from 30.

The changes have sparked a debate in Canada. Some industry players and economists worry that the impact will be so widespread and long-lasting that they want Mr. Flaherty to consider rolling some of them back. But with prices that some still deem overvalued and new fears over consumer debt, others say the changes aren’t enough and must be followed by a hike in rates.

Among the latter is Toronto-Dominion Bank chief economist Craig Alexander, who estimates that national home prices are 10 to 15 per cent too high.

He released a report on Thursday predicting the July changes will shave three percentage points off of prices and five points off of sales by next year.

“Our models suggest that had the government not tightened lending mortgage rules between 2008 and 2011, the Canadian household debt-to-income ratio would have reached 160 per cent this year – the level that households in the U.S. and U.K reached before sending their economies and housing markets into a tailspin,” Mr. Alexander wrote.

While debt burdens are lower than they would have been, they’re still at troubling levels. Moody’s Analytics said in a separate report that economic headwinds will increasingly cause consumers to struggle with their debt loads over the next few years.

And although the mortgage insurance rule changes have curbed house sales and debt levels somewhat, the impact on prices has been relatively fleeting, Mr. Alexander said. Without rate increases, consumers still have a strong incentive to take out large mortgages, fuelling overvalued prices, he argues.

The impact of the changes is predominantly being felt by first-time home buyers because they are typically the ones who require mortgage insurance. Insurance is mandatory in Canada for borrowers who have a down payment of less than 20 per cent, which has traditionally been about 35 to 40 per cent of the market.

Brian Hurley, the CEO of Genworth Canada, the second-largest mortgage insurer, said business slowed in August as a result of the rule changes. He would like Ottawa to revisit the rules later this year, and consider reversing some of the changes.

“These are pretty dramatic changes, and I think they’re getting close to the tipping point,” he said in a recent interview. “We see really qualified first-time home buyers with very high credit scores now not meeting the bar because they can’t afford a 25-year amortization. These people should be getting a home.”

Eric Lascelles, chief economist at RBC Global Asset Management, approves of most of the rule changes, but said there is a risk that they are being overdone to compensate for ultra-low mortgage rates.

“I wonder if the drop from 30 to 25 years amortization might be regretted in a decade when interest rates have normalized and 25-year-olds are being told they cannot make mortgage payments past the age of 50, even though they expect to work until 65,” he said in an e-mail.

Traditionally, the banks have applied mortgage insurance rule changes to all mortgages – even those with large down payments that don’t require insurance. But that hasn’t been the case this time, Mr. Alexander said.

“The banks are basically not applying the 25-year limit to the non-high-ratio mortgages,” he said in an interview. “That’s one of the reasons why the mortgage insurance rule changes had a more muted impact on the market, because really the segment that’s being significantly hit is the first-time buyers.”

Jim Murphy, the CEO of the Canadian Association of Accredited Mortgage Professionals, said that while Mr. Alexander’s prediction that the changes will dent sales by five percentage points could be correct, the impact on the insured portion of the market appears to be more like 15 per cent. “It’s having a bigger impact on first-time buyers,” he said.

On Thursday, the Toronto Real Estate Board said sales of existing homes in the country’s most populous city fell almost 12.5 per cent in August from a year ago. But the average price rose by almost 6.5 per cent, to $479,095.

One day earlier, Vancouver’s real estate board said August sales were the second-lowest level for that month since 1998, while the average price of a home in the Greater Vancouver Area was down 0.5 per cent from a year ago.

http://www.theglobeandmail.com/report-on-business/economy/economy-lab/doors-shutting-on-first-time-home-buyers/article4523084/