For nearly four decades, Canadians have turned to an investment strategy of writing off the interest from mortgage payments as tax-deductible.

Known as the Smith Manoeuvre—after its creator, financial planner Fraser Smith—the strategy involves getting a readvanceable mortgage, which includes a line of credit.

After paying the mortgage every month, a homeowner then borrows the exact same amount of money under the line of credit, invests it, and reaps a refund after filing their income taxes.

The Smith Manoeuvre effectively takes advantage of a Canadian law that allows the debt from paying for a home to be invested in a source with the reasonable expectation of generating income, something that can then be written off an income tax statement.

Amid today’s 5% overnight interest rate, ever-rising real estate costs, and stubborn inflation, such a strategy sounds appealing.

This goes double for mortgage brokers. Ryan La Haye, mortgage broker at Group RLH – Planiprêt Mortgage Cabinet, says brokers need to think as strategically as possible about how to engage with clients. In an age when generative AI is catching up to humans, he says, helping clients with complex investment strategies like the Smith Manoeuvre can make brokers more relevant.

“If we don’t gravitate towards something that’s completely outside of simply helping you get your mortgage, finding you an approval, or giving you a great service,” La Haye says, “I don’t think that’s going to be enough.”

However, mortgage brokers looking to incorporate complex strategies like the Smith Manoeuvre into their offering to clients shouldn’t just go in guns blazing. There are a number of considerations brokers should make first.

Get accredited

The Smith Manoeuvre is actually trademarked by Fraser Smith, and mortgage brokers cannot simply say they know how to use it without taking an accreditation program.

La Haye, who is accredited, says brokers who use the term could face legal penalties for violating the trademark, although they haven’t gone after anyone just yet.

Ultimately, the Smith Manoeuvre is complicated. Clients need to understand how debt conversion works, how to pick the best mortgage lender to properly do the Smith Manoeuvre, and understand all of the ways to speed up tax rebates — known as ‘accelerators.’ It also means understanding the sorts of investments the Smith Manoeuvre cannot take advantage of, like RRSPs or TFSAs.

Having a broker who understands this process is critical, even if they aren’t following the exact methodology laid down by Fraser Smith. In fact, La Haye says, it is possible for brokers to offer their own version of the Smith Manoeuvre, so long as they don’t violate Smith Consulting Group’s trademark.

He compares it to the way fast-food chains continue to thrive despite the dominance of McDonald’s. “You can do hamburgers,” he says, “you just can’t call it a Big Mac.”

Understand—and prepare—your client

Not everyone will benefit from the Smith Manoeuvre.

La Haye describes it as a strategy that works best for potential homeowners who need additional cash and cannot generate more. This could mean someone who is paying for their family’s expenses, a car, a home, and isn’t able to leverage their salary or other income accordingly.

Perhaps most importantly, La Haye says, the Smith Manoeuvre isn’t a short-term bet. At minimum, he says, clients should be willing to look about 15 years out.

“Anyone who looks to implement this as a short-term strategy is very bad,” he says. “This is why we have an accreditation program to teach people, but it’s mis-implemented and mis-advised many, many times.”

For brokers, the Smith Manoeuvre isn’t just a financial service. La Haye says it acts as a conversation starter, even with non-ideal clients. It lets them know that you can provide them valuable help with strategies to reduce their mortgage payments, or otherwise generate income, in a way that an automated mortgage approval system or low-cost brokerage simply couldn’t.

“It’s not necessarily about implementing it,” La Haye says. “It’s more about showing that this is the sort of a service I offer.”

Work with other financial professionals

The Smith Manoeuvre and other complex financial strategies aren’t entirely within a mortgage broker’s purview. La Haye suggests mortgage brokers ensure any clients attempting the Smith Manoeuvre have an accountant, and ask to speak with them to ensure what’s going on.

He also says a financial planner to manage investments is essential, especially if they are independent rather than tied to a specific bank.

Ideally, any financial professionals who work on Smith Manoeuvre cases should be accredited. This doesn’t just apply to brokers.

La Haye says the accreditation program is also meant for financial planners, accountants, and realtors. If everyone works together, he says, it doesn’t just create a more valuable experience for a mortgage broker’s clients, it also raises revenue for everyone involved in the process.

“When people want to implement this manoeuvre, I suggest that they create their own team that’s all accredited,” La Haye says. “That way, the client’s not going to run into any problems and, at the same time, you’re creating a nice loop of partners that are going to be able to share clients and drive clients to each other.”

This article was written for Canadian Mortgage Trends by:

Despite anticipated Bank of Canada interest rate cuts later this year, mortgage borrowers will continue to face higher debt-servicing costs for several years.

That’s according to a research report released by the Bank of Canada that did a deep-dive on mortgage debt and payments, taking into account some of the intricacies of the mortgage market, including the distribution of fixed vs. variable rates.

“Under a range of hypothetical policy rate scenarios, our model predicts that, even if rates begin to fall, the required payment rate on mortgage debt will continue to climb in the coming years,” the report’s authors, Fares Bounajm and Austin McWhirter, wrote.

“The impact of the tightening that began in early 2022 will continue to gradually materialize over the next few years,” they added. “Therefore, barring a sudden drop in the policy rate…debt-servicing costs will likely continue to climb for many households, exerting a drag on discretionary spending.”

The report delved into the complexities of understanding the full impacts monetary policy changes have on the mortgage market. The authors noted that most structural macroeconomic models “do not account for some of the intricacies of the mortgage market’s structure.”

While that’s generally not a problem when monetary policy changes are slow or infrequent, it results in “shortcomings” in situations where interest rate changes are very rapid and occur over an extended period, such as the current rate-hike cycle.

In these cases, researchers need to rely on “microsimulations initialized using detailed microdata on individual mortgages” to fully understand the timing of monetary policy pass-through, the authors say.

“For example, if the proportion of households holding variable payment mortgages increases, then monetary tightening will pass through to household finances more quickly,” they wrote. “And if long-term fixed contracts grow as a share of outstanding mortgage debt, rate increases may take longer to have their full impact on consumer spending.”

Monetary policy tightening reduces household debt in the long run

As part of the research, the report noted that, despite higher interest costs for borrowers in the short term, monetary policy tightening results in lower household debt over the long run.

Using the scenario of a temporary interest rate shock of 100 basis points to the policy rate, the result is first a drop in homebuying and demand for new loans.

“As a result, household debt also declines gradually,” the report reads. “The household debt-to-income ratio initially rises as income falls. However, the ratio falls below the model’s steady state after about eight quarters due to household deleveraging.”

“This suggests that monetary policy tightening reduces household indebtedness in the long run,” it concludes.

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Two key guide posts for the Canadian economy are pointing in the same direction.  Both the third quarter GDP numbers and November jobs figures suggest the Bank of Canada is unlikely to make any changes to its trendsetting interest rate in the coming days.

Canada’s economy shrank at an annualized rate of 1.1% through July, August and September.  That was a bigger decline than expected.  Market watchers had been looking for a modest 0.2% increase.  The Bank of Canada had forecast a 0.8% gain.  The country avoided falling into a technical recession though, because the Q2 reading was revised upwards to a 1.4% gain.  It had initially been posted as a 0.2% decline.  Nonetheless the economy has been on a slowing trend for several months.

The economy added more jobs than expected in November, but the unemployment rate went up.  There were nearly 25,000 jobs added, beating the forecast of 15,000.  However, that did not keep up with the country’s population growth.  Unemployment rose to 5.8%, from 5.7% in October, because there are more people looking for work.

These are the last two major economic data points before the Bank of Canada makes its December rate announcement this week.  When combined with the latest inflation numbers (up 3.1% y/y in October) the Bank appears to have all the reasons it needs to hold its policy rate at 5.0%.  That rate has not moved since July and the market focus has now shifted away from further increases and toward when there could be cuts.

This article was written by the First National Financial LP Marketing Team, click here for the original post.

Like most other financial institutions, BMO said the bulk of its mortgage portfolio will be up for renewal in the coming three years, with the payment increases averaging up to 40%.

In its fourth-quarter earnings call, the bank said just 11% of its portfolio—or $16.2 billion worth—will renew in the next 12 months. The majority is then set to renew in 2025 ($27.6 billion) and 2026 ($55.8 billion).

Of its clients who have already renewed their mortgages, BMO said the average increase to their regular payments has been 21% for fixed-rate borrowers and 22% for those with variable-rate mortgages. Given that those are averages, some borrowers have seen smaller increases while others have seen their payments rise by more.

And as those who secured rock-bottom rates during the pandemic start to see their rates reset in the coming years, BMO says the payment increases will grow larger.

“We do see people having to face a 30% increase this year,” said Ernie Johannson, Head of BMO North American Personal and Business Banking. “That will get higher as we move into ’26 because—if you assume no rate decrease—there would be customers who would potentially be facing 35% or 40%, at that tail end.”

Despite the increases, BMO says borrowers have so far been able to handle the higher rates.

“We’ve seen an ability for consumers to adjust and be able to afford the increased payment,” Johannson added, noting that they were stress tested at a higher rate at origination and that many are also seeing an increase in income that is helping to offset the higher payments. “We feel pretty confident that there is an…ability to be able to handle that increase.”

Rate cuts could also lessen the payment shock for renewals taking place in 2026, added Chief Risk Officer Piyush Agrawal.

“A larger portion of our portfolio renews in 2026, by which time we expect interest rates will have moderated and customers will have had time to prepare,” he said.

Delinquency rate remains low, and clients still have payment buffers

BMO reported that its 90+ day mortgage delinquency rate remains low at just 0.14% of its portfolio, unchanged from the previous quarter and up from 0.11% a year ago.

Of its variable-rate mortgage portfolio, the bank said about 62%, or $29.8 billion worth, are currently negatively amortizing, meaning the monthly payments aren’t enough to cover the total interest cost, which is being added to the principal balance.

This is a situation unique to fixed-payment variable rate mortgage products, which are offered by BMO, CIBC and TD. While RBC also offers fixed-payment variable rate mortgages, it does not allow its mortgages to amortize negatively.

“We are proactively reaching out to customers, particularly our variable-rate customers,” said Agrawal. “We’ve had a positive customer response to the outreach, resulting in a reduction in mortgages in negative amortization from the prior quarter.”

Agrawal also said the bank’s analytical insights show clients are changing their behaviour and are “adjusting to the new reality” of higher interest rates. That includes a decline in credit card spending, particularly for discretionary items.

He also pointed to a still strong savings rate of 5%, with increased amounts going into investments. “So, there are buffer mechanisms,” he noted.

The bank has also seen the percentage of its mortgages with amortizations above 30 years ease back to 27%. That’s down from nearly a third of its portfolio in late 2022.

Remaining amortizations for BMO residential mortgages

BMO earnings highlights

Q4 net income (adjusted): $2.15 billion (+0.1% Y/Y)
Earnings per share (adjusted): $2.81

Conference Call

• BMO reported that its capital position continued to strengthen with a common equity ratio of 12.5%, up 20 basis points from the prior quarter.
• “Given our current outlook for higher for longer rates and the lagged impact from these interest rate increases, we expect impaired loss rates to trend somewhat higher from Q4 levels in the range of low-30 basis points, still below our long-term average and then improve as the rate start to come down and the economy begins to strengthen further,” said Chief Risk Officer Piyush Agrawal.
• “Given our strong risk management capabilities, the quality of our portfolio and prudent allowance coverage, we remain well-positioned to manage current and emerging risks,” Agrawal added.

Source: BMO Q4 conference call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

This article was written for Canadian Mortgage Trends by:

There was growing talk of the “R-word” (recession) leading up to today’s GDP data release, given the third quarter could have marked the second straight month of negative growth.

Instead, markets received another R-word…revision.

While Statistics Canada revealed that real gross domestic product (GDP) fell 0.3% quarter-over-quarter in Q3, it also revised up its previous negative reading for Q2 to positive growth of 0.3%.

This avoided two straight quarters of declining GDP, which many consider the technical definition of a recession.

“Whatever label you slap on this economy, it’s basically not growing, despite the artificial sweetener of rapid population growth,” noted BMO Chief Economist Douglas Porter.

“But reinforcing the point that it doesn’t quite sink to the level of recession, the initial read on monthly GDP for October was a surprisingly perky +0.2%, confounding expectations that activity would shrink in Q4,” he added.

“It’s not a technical recession, but it’s not good either,” wrote TD’s James Orlando.

Economy is weak no matter how you slice it

On an annualized basis, GDP fell less than expected by 1.1% in Q3. That followed an upward revision in Q2 to +1.4% from -0.2% previously.

Housing investment was a positive contributor to growth in the quarter, rising +8% quarter-over-quarter following five straight quarterly declines.

“Still, the details of the Q3 data were soft—GDP would have declined a larger 3% in the quarter without a 7.3% jump in government spending,” noted RBC’s Nathan Janzen.

Meanwhile, international trade was a net negative for growth, with exports of goods and services down 5.1% from the previous quarter, led by a 25.4% drop in refined petroleum energy products.

Imports were also down by 0.6%, led by “declines in clothing, footwear and textile products, transportation services, and electronic and electrical equipment and parts.” Household spending was flat in the quarter, following a similar flat reading in Q2.

GDP figures reinforce a BoC rate hold, but too soon for cuts

Today’s results are expected to keep the Bank of Canada on the sidelines at its net monetary policy meeting next week, and into the new year.

Economists say continued weak growth in the coming quarters should help bring inflation back to (or near) the central bank’s target of 2%.

“Overall, today’s mixed report reinforces the point that the Bank is done hiking rates, but doesn’t really advance the cause for rate cuts, as the economy isn’t showing signs of further deterioration early in Q4,” said Porter.

Others believe continued weak growth will be enough to herald in the central bank’s first rate cuts as early as April of next year.

“We expect below trend economic growth to continue over the coming months, which will push inflation gradually closer to the 2% target,” noted Orlando. “This will give the BoC a few months before it starts to prepare markets for rate cuts, which we expect will start in April 2024.”

CIBC’s Andrew Grantham agreed, saying the “sluggish trend in economic activity and further decline in the job vacancy rate today keeps us on track for a first interest rate cut in Q2 next year.”

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A key factor in determining whether an individual is likely to become a homeowner is whether or not their parents were property owners, a new study shows.

The adult children of homeowners were more than twice as likely to own a home compared to the children of non-owners, according to findings released by Statistics Canada last week.

The report found that children of non-homeowners had an overall homeownership rate of 8.1% vs. 17.4% for the offspring of owners. The correlation increased in families that owned multiple properties, rising to a homeownership rate of 22% for those whose parents owned two properties and 27.8% for those whose parents owned three or more.

The study, which focused on those born in the 1990s and compared ownership rates as of 2021, found the positive association between the homeownership rate of adult children and their parents was greatest among adult children with individual incomes of $80,000 or less.

“The income of adult children may be correlated to the income and wealth (including property ownership) of their parents, in part because of patterns of childhood socialization, existing social networks and the amounts invested in education, the report notes.

However, even when accounting for the adult children’s age, income and province of residence, parents’ property ownership is “strongly associated with an increased likelihood of homeownership for their adult children,” it added.

MBRCC unveils principles for mortgage product suitability

Mortgage brokers across the country are being asked to follow a set of six principles to ensure they are making suitable product recommendations to their clients.

In an ongoing effort to strengthen mortgage consumer protections, the Mortgage Broker Regulators’ Council of Canada (MBRCC) last week unveiled its final Mortgage Product Suitability Assessment Principles.

“Given high interest rates, elevated inflation and reduced mortgage affordability, many consumers are looking to the mortgage brokering sector for sound advice,” said MBRCC chair Antoinette Leung. “The Principles developed by MBRCC will support the industry’s provision of suitable recommendations to clients, enhancing the protection of Canadian consumers during a period of challenging financial conditions.”

The draft principles were first released over the summer, and the MBRCC since made two amendments following public feedback.

The mortgage product suitability assessment principles include:

1. Know your client
2. Know your product
3. Assess options and make suitable recommendations
4. Clearly communicate and explain rationale of the recommended option
5. Ensure adequate oversight and accountability
6. Document suitability assessment and oversight

More details on the above principles are available at the MBRCC website.

FSRA releases guidance for mortgage administrators

Effective today, mortgage administrators in Ontario must comply with new rules that govern financial reporting.

The new guidance was released by the Financial Services Regulatory Authority of Ontario (FSRA), which regulates and licences all mortgage brokers, agents, brokerages and administrators in the province.

“Mortgage administrators play the crucial role of handling people’s funds and investments, and we want to ensure that borrower and investor funds are protected,” Huston Loke, Executive Vice President, Market Conduct at FSRA, said in a release. “The guidance we are releasing today aims to reduce the risk of funds and investments being misplaced, stolen, or otherwise treated improperly.”

The guidance will help ensure:

• administrators file the required statements and auditor’s reports on time
• the auditor’s report is certified by a licensed public accountant
• the auditor’s Reasonable Assurance report on compliance with legislation is in a form approved by the CEO and addresses all the required areas of compliance

The full text of FSRA’s new guidance is available here.

Pineapple Financial completes IPO on New York Stock Exchange

Pineapple Financial made history recently by becoming the first Canadian mortgage brokers to launch an Initial Public Offer (IPO) on the New York Stock Exchange (NYSE).

Founded in 2016, Pineapple is a tech-focused brokerage with a network of over 650 partner brokers and agents across the country. It said it will use the capital raised from the IPO to fund research and development and expansion into new product offerings and tech infrastructure.

That includes expanding to every province in the country, adding insurance as a new product offering, and developing digital innovation to “increase productivity and efficiency” across all of its channels.

“The decision to go public was driven by our vision to expand market reach, accelerate growth initiatives, and capitalize on new opportunities,” Pineapple CEO and co-founder Shubha Dasgupta said in a release. “With this successful IPO, Pineapple achieved a milestone that reflects its market potential, growth trajectory, and our commitment to excellence.”

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