For years Americans have enjoyed the benefits of being able to deduct the interest paid on their residential mortgages and save on income tax. Some people may say that this benefit is partly why Americans have encountered so much housing trouble as this concept encourages you to keep a high mortgage balance…after all the interest is tax deductible, why not? Luckily or not, in Canada, we are more conservative. While we don’t have all the same benefits in Canada, there is a way to build your net worth and benefit from some legal tax deductions. Fraser Smith popularized this strategy with the release of his book entitled “The Smith Manoeuvre”. He’s not reinventing the wheel with this book; however he does bring forth a lot of common sense and good advice. His book takes up many pages and to offer a summary in this space would not be doing anyone justice, therefore I will offer up the basic idea behind it and give you some recommendations as to whether or not it’s right for you.
The book explains in detail the concept of borrowing money against the equity in your home and then investing that equity in order to make that portion of the interest paid tax deductible. As you build your equity, your investment portfolio builds and so does your tax deduction. It’s in my view a very sensible approach for Canadians and our sensible approach to fiscal matters is perhaps something that has contributed to enabling our real estate market to remain quite stable despite the economic doom and gloom down South.
This strategy is for you if you have at least 25% equity in your home and are not adverse to some risk associated with investments. This strategy is not for you otherwise. It’s a bit complicated to manage and few lenders offer the right type of mortgage product to enable the reallocation of debt from one account to another. Currently I’m aware of 3 lenders who do offer the types of mortgages to keep your accountant and Canada Revenue Agency happy. Merix Financial, FirstLine Mortgages and National Bank offer these types of “all-in-one” sort of mortgages that can automatically reallocate the equity to a readvancable credit line.
For more info or to find out if it’s right for you feel free to call me anytime at 604-790-7253 or send me an email to firstname.lastname@example.org.
It always surprises me when I hear people say they simply renewed with their existing bank or mortgage lender. With today’s historically low rates compared to just a few years ago, it’s important not to be too quick to renew or refinance your mortgage with your existing lender until you check out all your options. Yet approximately 70% of Canadian mortgage holders will do just that, and the usual result is a typically higher interest rate and a mortgage product that might not be best suited to specific needs. Lenders are counting on the fact that most homeowners are too busy to ask all the right questions or to even inquire about getting a better rate. Don’t let this happen to you!
You should recognize that you are now negotiating from a position of strength as your mortgage principal has dropped and in most cases your home value has increased. Lenders will most likely see you as a lower risk borrower and consequently you should be getting the best rates and terms available. That won’t happen if you simply sign the renewal document provided by your existing mortgage holder. We make the lenders compete for your business to be sure you do in fact get the best mortgage possible. We’ll review your current situation and ensure you get the best rate and terms suited to your needs. We can even sometimes hold the best interest rates up to 120 days before your renewal date! It’s definitely worth a quick call to ensure you’re making the right decision.
Find all your tax info for the last 2 years (just in case we need to use overtime income, part time income etc or if you’re self employed.
Ensure your cheques (used for the pre-authorized withdrawals and account ownership confirmations) are pre printed and not blank without your name on top. Handwritten name and addresses are not acceptable by many lenders. Request printed cheques if you do not already have them.
Make sure you have a full 90 day history of the account or accounts where you’re holding your downpayment. If your downpayment is coming from multiple accounts, we will need all account histories, or if it’s being transferred from an RRSP etc make sure you have an older statement to prove the funds are over 90 days old. This is to satisfy Canada’s anti-money laundering laws.
Gifted downpayments are allowed if from an immediate family member (parents or siblings only). If it’s not from immediate family, the bank considers this downpayment to be borrowed and we must factor in the cost of this loan into your overall debt servicing which can affect how much you can borrow.
Ask your employer for a job letter now. The job letter should state how long you’ve been at your job, your annual income if you are salaried or your hourly rate and how many hours you are PAID for each week.
Child tax benefit income is allowed by most lenders, but not all. Have birth certificates ready so that we may prove your child’s age and the continued receipt of this money.
Spousal alimony may only be used if its court ordered and we must show a 3 month history, have the separation agreement ready.
Keep all your pay stubs, all bank statements, all Gv’t cheque stubs etc from now until you’re formally approved.
If you’re self-employed, it’s always a good idea to sign up with Revenue Canada’s online service in order to access all your tax info online. Please phone Revenue Canada and ask for an “E-Pass” and password to be sent.
Ask your Realtor for 7 BUSINESS DAYS for “subject removals” this will ensure we have time to formally get you approved BEFORE you pay for an inspection or any other out of pocket expenses.