Happy Valentine’s Day! I hope all you romantics had a wonderful day or at least plan to celebrate over the weekend.
A short communication this week.
Please note that I will be away from March 5th –March 12th. I will have full coverage while I’m away and will be communicating more details just before leaving.
This evening (February 14th) a great couple was featured on the HGTV series (episode #90), “Income Property”. I was able to help Jeff and Kirsti (they used their names on the show)
acquire their home last summer. They submitted an application to appear on the show and ultimately were selected. It was a great episode and very cool to see them transform their basement apartment.
In addition, I have been asked to provide any potential couples/buyers who are interested in potentially appearing in a new Sarah Richardson’s series. It would involve a major renovation/transformation. If any of my current buyer clients are interested please let me know.
In the Market
- Still a sellers’ market and no real signs of it changing in the short term.
- Many properties are still being market with “offer dates”. That is, sellers are not reviewing offers until a selected day and time in order to attract competing bid. Also, over the last 2 weeks I have personally experienced placing offers on 2 homes (separate clients) that were on the market for over 6 weeks and within ½ a day we had competing offers on both homes.
- Buyers don’t despair; there are still many good opportunities. One avenue of opportunities is to “scope out” overpriced properties. In many cases sellers who were unrealistic with their original expectations may become more reasonable overtime.
Smith Manoeuvre (Source: Canadian Mortgage Trends)
The Smith Manoeuvre is a technique that converts regular debt into tax-deductible debt. In the process, it affords the opportunity to pay off one’s mortgage significantly faster.
The Smith Manoeuvre works basically as follows:
- First find a re-advanceable mortgage
- Then sell your non-registered assets (like stocks held outside of an RRSP)
- Use the proceeds as a down payment on your mortgage
- Make your mortgage payments like normal
- As you pay off principal, re-borrow that principal into a line of credit (LOC)
- Invest this re-borrowed money at a higher rate of return than the interest you pay on the line of credit
- Deduct your investment loan (LOC) interest and use the tax savings (refund) to pre-pay your mortgage
- Repeat steps 3-7 until your mortgage is fully paid off.
Fraser Smith, for whom the Smith Manoeuvre is named, stated that the strategy can cut your mortgage payoff time in 1/2, while helping you invest more, sooner.
The Smith Manoeuvre is indeed a powerful strategy, but it’s not for everyone. There are both investment risks and serious tax risks. Your returns could be insufficient, CRA could invalidate your application of the strategy, or you could wind up in a negative amortization scenario if your house value falls.
Therefore, always consult a licensed financial and tax advisor before considering it. Find an advisor that will work closely with your mortgage planner, offers free consultations, and charges no out-of-pocket ongoing fees.
Implementing the Smith Manoeuvre takes more than just refinancing your mortgage and picking some mutual funds. Moreover, there is no off-the-shelf financial or income tax software that efficiently manages the process. The best advice is to get proper advice…from the start.
Housing-crash prophets should check their numbers again
LARRY MACDONALD / Special to The Globe and Mail
Published Thursday, Feb. 14 2013, 4:00 AM EST
Some people are predicting a crash in the Canadian housing market because price-to-income and price-to-rent ratios have gone up a lot. But these ratios omit mortgage rates, a key determinant of prices. A better guide, in my view, is the housing affordability index published by Royal Bank of Canada (RBC).
RBC’s measures at the national, provincial, and city levels show the proportion of median household income required for mortgage payments, property taxes and utilities on various types of houses at going market prices. By including mortgage rates (and other costs), they offer “a much more realistic measure of the ability of households to afford housing than the crude price-to-income ratio ….,” says Wikipedia.
RBC’s affordability indicators currently show only modest overvaluation in Canadian housing at the national level. This does not jibe well with the world view of the housing-crash prophets. The latter either ignore the indexes, or reject them on two grounds (as far as I can see).
Their first complaint is that the measures, calculated since 1985, overestimate affordability by using 25-per-cent down payments when 5 per cent is the norm today (which comes with higher mortgage payments). While a 5-per-cent down payment may be true of first-time buyers needing mortgage insurance, it’s not true of the large group of homeowners who buy a house to relocate. They have a lot of home equity to bring to the purchase of a property, and this makes a down payment of 25 per cent a reasonable approximation of the market, says Robert Hogue, an economist with Royal Bank of Canada.
Their second complaint goes as follows: the affordability measures are inconsequential since they will soon be shooting up anyways when interest rates inevitably rise from their current lows. One problem with this view is that it assumes interest rates go up in isolation. If the past is a guide, they typically rise when the economy is in a cyclical upturn. This means income and employment will also be rising, which partially or wholly offsets the impact of rising rates.
Another problem is the assumption that policy rates will be going up soon. In fact, with year-over-year inflation in consumer prices decelerating to 0.8 per cent last month, the Bank of Canada pushed back the date for increasing its lending rate to 2014. But even this target could be pushed back further, if the economy is not growing strongly by then.
The RBC indexes aren’t perfect. Indeed, a case could be made that they actually underestimate affordability. Of note is the use of posted, fixed mortgage rates. “Our use of posted mortgage rates, as opposed to market rates leads to a significant underestimation of affordability,” Mr. Hogue reports. The underestimation has increased as rate discounting has deepened.
The price-to-income and price-to-rent ratios are performing a useful function of signalling heightened risk and alerting policymakers to consider such preventive moves as mortgage-lending restrictions. But it seems to me the affordability measures are more useful gauges of current stresses in the housing market – and hence, likely to be more timely indicators of major changes in trend.
Have a fantastic weekend, Anthony