Mortgage Rates & Mortgage Broker News in Canada

More on the Smith Manoeuvre & Lipson

Analysts have had a few days now to dissect the Lipson verdict.  All the commentary thus far strongly indicates that the regular old Smith Manoeuvre is still a viable strategy.

Here’s more from various experts:

• The Supreme Court said the case “has not established that, in view of their purpose, (the interest deductibility) provisions have been misused and abused.” (Advisor.ca)
• Hence, "you can still borrow money against the equity in your home and use the proceeds to invest in the stock market and interest will be deductible,” says lawyer Evy Moskowitz of Moskowitz and Meredith (FP)
• CPA and CIBC Wealth Management director, Jamie Golombek, agrees.  “Plain-vanilla debt-swap refinancing seems to be alive and well in Canada,” he says. (Bloomberg)
• "The focus of the court [was] really on the purpose of the attribution rules and whether they were misused, and the finding of the majority was they were." says lawyer, Elizabeth Johnson, of Wilson and Partners (FP)
• The key problem with the transaction occurred when Mr. Lipson applied Mrs. Lipson’s interest deduction to his income. This was not an arms-length transaction and was hence considered abusive by the court. (Investment Executive)  This is a very different area than that of the regular Smith Manoeuvre.

Thus far, we have not seen anyone claim that the Smith Manoeuvre has been harmed by this verdict.  That doesn’t mean you don’t need professional advice, however.  As always, talk to a licensed tax and investment advisor before implementing this strategy because there are still risks.

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Note: This story is for general interest only and not advice! As always, seek professional tax counsel before jumping into any tax-related strategy.

Mortgage Specialists

Every now and then we find little articles in the news and like to talk about them. Here’s a story, for example, on bank mortgage specialists (an RBC specialist in particular) from the New Brunswick Business Journal.  Story Link 

Like mortgage planners, mortgage specialists get paid by commission.  The best ones earn good money.  We know specialists at RBC for example, making over $200,000 a year. 

And, it seems banks are always hiring.  You can see dozens of mortgage specialist positions available on CMT’s mortgage jobs page.

Naturally, the main difference between bank mortgage specialists and mortgage planners is that bank reps sell just bank products.  Mortgage planners sell and research multiple lender’s products.

There’s also differences in licensing. Most provinces require brokers to be licensed and meet minimum educational requirements.  Not so much with mortgage specialists.  (Although that may change)

In any event, it would be great to hear from any bank mortgage specialists out there on the pro’s and con’s of working for the bank versus being independent. 

What do you love about working at a bank?  Do you find it problematic selling just one line of mortgages?  How often does bank bureaucracy get in the way?  How much do you keep up on competitors’ products?  What do you suggest to bank clients when you know another lender has clearly better rates/terms than you can offer?

This is meant to be a constructive dialog and we welcome your comments.

Rate Cuts Coming January 20, Say Economists

Bad news for the economy is usually good news for interest rates.  That's what they say.

Well, if that's true then get ready for some low rates.  Here's a dose of doomageddon to back it up:

• Consumer confidence is at levels not seen since the 81-82 recession.
• Canada's jobless rate is at a 3-year high (CTV)
• "We regrettably are going to have to expect continuing job losses in Canada. We are going to have substantial job losses." - Finance Minister Jim Flaherty
• December was the worst month of U.S. job losses since World War II
• The U.S. "will see the first negative reading on the U.S. consumer price index since 1955..." -- CIBC World Markets economist Avery Shenfeld.
• Barack Obama:  "If nothing is done, this recession could linger for years. The unemployment rate could reach double digits. Our economy could fall $1 trillion short of its full capacity. . . . In short, a bad situation could become dramatically worse."

Bank of Canada Deputy Governor Pierre Duguay says the BoC is considering another interest-rate cut to counteract this negativism.  Economists concur.

• According to CTV, analysts say the unexpectedly high jobless figures "will almost certainly mean that the Bank of Canada will cut interest rates on Jan. 20."
• Rates may fall 1% by later this year according to economists from CIBC World Markets and Bank of Nova Scotia. (Bloomberg) 
• TD economist Charmaine Buskas expects a potential 1/2% cut January 20
• Royal Bank’s chief economist Craig Wright sees a 1/2% cut as well, but also a “bottom” at that level. (Bloomberg) 

The Bank of Canada's next interest rate meeting is now ten days away.  Its key lending rate is currently at 1.5%, a 50-year low. 

Supreme Court Shoots Down Lipson - Effect on Smith Manoeuvre?

The Supreme Court of Canada has ruled against a complex strategy to make mortgage interest tax deductible. 

The court said the defendants, Earl and Jordanna Lipson, effectively abused tax laws.

According to the Calgary Herald:  "The scheme involved paying down their mortgage immediately after obtaining it, then using the repaid principal as collateral for an investment loan, which is tax deductible under the Income Tax Act."

There's no clear indication yet on if/how this may affect the popular Smith Manoeuvre.  The Smith Manoeuvre is different in many key respects but there is at least some overlap in principal. 

The Globe's Rob Carrick, for one, suggests it might not impact the Smith Manouevre.  He quotes a tax lawyer that says the ruling has no effect on borrowing against one's home to invest and making the interest tax deductible.

We'll take some time to research and get opinions on the verdict and then report back.

Here is the Supreme Court's decision:  Lipson v. Canada

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Note: This story is for general interest only and not advice! As always, seek professional tax counsel before jumping into any tax-related strategy.

Renewing Into an Open at Maturity

Each year hundreds of thousand of Canadians renew their mortgage by signing the renewal form their lender mails out.  They don’t shop around. They just trust their lender.

Obviously, this can be a terrible waste of money.  CAAMP says people seek just 1.85 quotes on average before renewing.  How are you ever supposed to get the best deal that way?

A big reason people resort to signing their renewal forms is procrastination.  They do no homework, or don’t use a mortgage planner, and then find themselves 1-2 weeks from renewal in a panic.  The easiest fix they figure is to stay with their current lender.

What a lot of people don’t know, is that you can often ask your lender to renew you into an open mortgage temporarily.  The rate may be higher than your permanent rate (e.g.  7-8%) , but you only need it for a few weeks while you arrange alternate financing. 

It’s a move that costs very little but it buys you more time to find the best terms in the market.

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Update:  As one of our readers correctly pointed out, some lenders don't have open mortgages for you to renew into. So you have to be careful.

PC Financial for example will roll you into a 6-month convertible automatically if you don't renew on time.  ING will automatically renew you into a mortgage of the same term.  If that happens and you want to break these mortgages to go elsewhere, a penalty will usually apply.

The moral, try to renew well in advance, and if you can't, make sure your lender has an open mortgage that you can renew into in the meantime.  Most of the big banks have them.

Handy Links for Finding Yields

Here’s a few helpful resources for those who like to follow mortgage-related yields…

• 5-year bond yields:  TSX Money
• 30-day bankers acceptance (BA) rates:  Financial Post
• Credit market “stress” indicators:  TD Bank
• Canada Mortgage Bond yields:  CanadianFixedIncome.ca

The Cost of Money

The credit market has been stabilizing and benchmark yields are ultra-low.  Yet mortgage rates don't want to go much lower.  It's somewhat frustrating for mortgage planners, and definitely frustrating for borrowers.

Earlier today we heard the following from a capital markets consultant and wanted to pass it along.  The numbers below are very approximate but it gives you a sense for why things are where they are.

As many of you know, mortgage rates have remained elevated because risk premiums are still high.  For example, we're hearing that lenders are still currently paying the Canada Mortgage Bond yield plus 0.80-0.90% for fixed-rate mortgage funds.  That's well above normal and it puts base 5-year fixed funding costs in the mid-3% range.  On top of this, lenders need to gross at least 1% or so.  That's why deep-discount fixed rates are presently in the mid-to-high 4% range.

On the variable side, cost of funds is currently equal to bankers' acceptance rates plus 1%--roughly speaking.  Add the mandatory 1%+ gross margin and that requires most lenders to keep variable rates slightly above prime.

On the face of it, it seems some lenders could lower rates if they wanted to.  Not surprisingly though, lenders are pricing based on the competition and no one wants to rock the boat.

The small non-bank lenders have it the worst in terms of funding costs.  Banks can get capital from deposits, GICs, CMBs, issuing notes, etc.  Non-deposit-taking lenders, however, need to rely on the Canada Mortgage Bond program for virtually all their mortgage funds.

5 Top Mortgage Trends of 2008

2008 kept the mortgage industry on edge. Subprime mortgages unraveled the U.S. economy, stock markets caved in, commodities boomed and busted, and Canadian real estate began deflating.

On the mortgage front, things disappeared as a result, including:  lenders, products, variable-rate discounts, generous appraisals, and underwriting exceptions.

These things all played a part in the five developments below, which comprise CMT’s top mortgage trends of 2008…

Trend #1 - Fear of losses. The U.S. subprime fiasco made lenders and mortgage investors run for cover. Canada lost some good lenders, including:  GE Money, CitiFinancial, MoneyConnect, and Accredited. In addition we saw three U.S. mortgage insurers retreat back south:  PMI, MGIC, and Triad Guaranty. Then, of course, there were countless product cuts and new lending restrictions. We lost: MCAP’s FlexStar, First National Excalibur, Merix’s HELOC (temporarily at least), ResMor variables, Xceed subprime, and Street Capital subprime, among others.

Trend #2 - Rate Premiums.  Bond yields and the Bank of Canada’s key interest rate fell substantially in 2008.  Yet, heightened credit risk forced lenders to pay more for the money they lent out.  That led to record-high mortgage spreads, abnormally high fixed rates, and for the first time in memory, prime+ variables.

Trend #3 - Borrower Limits.  2008 saw the government eliminate hugely popular 40-year amortizations on insured mortgages. They also imposed a 5% minimum down payment—forcing most of those wanting 100% financing to borrow that 5% at disadvantageous terms.

Trend #4 – Ottawa’s Support of the Market.  Where would we be without the government’s Canada Mortgage Bond program? Answer: In a bad place. When other capital sources dried up CMB’s were the main source (and often the only source) of capital for most non-bank lenders.  Then, in October, the Finance Department came to the rescue yet again with its mortgage buyback initiative.

Trend #5 - Prime Competition. With less opportunity in the subprime market, lenders like Xceed, Abode, Home Trust, and Street Capital all flocked into “A” lending.  As the year progressed, banks went on their own offensive, leveraging capital from their huge deposit bases to offer unprecedented discounts off posted rates.  Competition in 2008 was therefore as fierce as it’s ever been…and lending profit margins as low as they’ve ever been.

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All in all, 2008 was far from typical.  And while no one knows exactly what 2009 will bring, if economists are right, things may return a little closer to “normal” late this year.  Whatever the case, Canada’s highly adaptive mortgage industry will find a way to forge ahead.

National Bank All-in-One - Mortgage of the Year

Thanks to the credit crisis, lenders cut more products in 2008 than they launched.  But one lender stood out, unveiling what would become the year’s best new mortgage. 

In April 2008, National Bank re-launched its All-in-One mortgage/HELOC.  The new version fixed some nagging problems with the old All-in-One and made it the product to beat.

The All-in-One is now the only mortgage/HELOC in Canada with each of the following:

• A line of credit that is linked to your mortgage
• Interest cancellation (Positive chequing/savings balances offset your line of credit balance to save interest)
• An immediate and automatic increase in your available credit line as you pay down your mortgage
• The ability to choose multiple terms and rates for interest rate diversification (e.g.  a 5-year variable, a 5-year fixed, and an open HELOC—all in the same mortgage.)
• Optional interest-only payments
• Up to 99 line of credit sub-accounts (for segregating borrowing to track interest and balances separately)
• Chequing privileges in each sub-account
• A consolidated monthly banking/mortgage statement with online access and free online banking

In sum, we wish to congratulate National Bank for an excellent overall product—and the 2nd annual CMT Mortgage of the Year. 

Hopefully more lenders will be inspired to offer innovative products of their own in 2009.

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For more information…

• Here is a link that compares the All-in-One to other readvanceable mortgages.
• Here is CMT’s coverage of the new All-in-One from last April:  All-in-One Redone