New OSFI Mortgage Rules – How Do They Affect The Smith Manoeuvre?

You may have received a letter from your bank or heard people talk about the new OSFI mortgage rules.

We’ve had a lot of our clients contacting us about it as well, since the new rules start this year for mortgages.

These new rules will affect the Smith Manoeuvre in some ways, so it’s important to understand exactly what you should do.

Watch & listen to find out:

  • What is the Smith Manoeuvre?
  • What are the new OSFI mortgage rules?
  • How will they affect the Smith Manoeuvre?
  • What is the formula in the rules?
  • Examples of the effect.
  • Effect on your monthly investment.
  • Best & worst-case examples.
  • How do you manage the process?
  • How to minimize or eliminate the effect.
  • Effect on Smith Manoeuvre vs. TFSA decision.

What is the Smith Manoeuvre?

  • Efficient method to use your home equity to invest for your retirement without using your cash flow.
  • It converts your mortgage to tax-deductible over time.
  • Quirky name, but very effective in a Financial Plan.
  • Often bridges the gap to give you the retirement you want.

What are the new OSFI rules?

Readvanceable mortgage (CLP) will not readvance $1 for $1 if your total mortgage limit is more than 65% of your home value.

E.g., Your mortgage payment reduces mortgage $1,000/month.

Credit line gains credit less than $1,000/month.

Reduces your borrowing limit from 80% to 65% over time.

Effective when your mortgage comes due after October 31.

All major banks have a fiscal year-end of October 31.

“For most borrowers using CLPs, these changes will have no effect on the way that they use their products. For those who owe more than 65 percent LTV, there will be a gradual period where a portion of their principal payments will go towards reducing their overall mortgage amount until it is below 65 percent of its original loan to value and not be re-advanceable. This will typically happen the next time borrowers renew their CLP after the end of October or December 2023 depending on the lender’s fiscal year.” – OSFI

How will they affect the Smith Manoeuvre?

Bottom line:

Effect is moderate in most cases.

Modest change to the monthly cash flow.

If you maximize the Smith Manoeuvre:

New credit available after each mortgage payment about 20% less.

If your mortgage is small:

New credit available after each mortgage payment could be 80% less

If your total credit limit is 65% or less:

No effect at all. 

Effect is not large.

Effect of much higher interest rates this year is far greater.

What is the formula in the rules?

Total credit limit 80%.*

Variable credit limit 65%.*

Total credit limit reduced from 80% to 65% over time.

Based on mortgage amortization years. E.g., 25 years.

Loan-to-value (LTV) = Amount owing / value of your home (appraisal).

Credit readvance in your credit line:

Reduced credit = Principal payment x (80%-65%) / LTV of mortgage(s)% 

Credit readvance = Principal payment – Reduced credit

* Total credit limit is normally 80% and variable credit limit 65%, but that is not always the case. If they are different, use the actual percentage limits in the formula, instead of 80% and 65%.

Example 1: New Smith Manoeuvre

Home value $1 million – Last appraisal.

Mortgage: $800,000 @ 6.5%

Credit line balance: $0

Total owing: $800,000

Loan-to-value (LTV) of mortgage(s): 80%.

Payment $5,334/month: Interest $4,334/month.

Principal $1,000/month.

Reduced credit = Principal payment x (80%-65%) / LTV of mortgage(s)%

Reduced credit = $1,000/month x 15% / 80% = $188/month.

Credit readvance = Principal payment – Reduced credit

Credit readvance = $1,000/month – $188/month = $812/month.

Old rules: New credit $1,000/month

New rules: New credit $812/month Invest.

Example 2: After a few years

Home value $1 million – Last appraisal.

Mortgage: $700,000 @ 6.5%

Credit line balance: $80,000

Total owing (Reduced total limit 78%): $780,000

Loan-to-value (LTV) of mortgage(s) 70%.

Payment $5,334/month: Interest $3,792/month.

Principal $1,542/month.

Reduced credit = Principal payment x (78%-65%) / LTV of mortgage(s)%

Reduced credit = $1,542/month x 13% / 70% = $286/month.

Credit readvance = Principal payment – Reduced credit

Credit readvance = $1,542/month – $286/month = $1,256/month.

Old rules: New credit $1,542/month

New rules: New credit $1,256/month

Example 3: Mostly paid off

Home value $1 million – Last appraisal.

Mortgage: $150,000 @ 6.5%

Credit line balance: $530,000

Total owing (Reduced total limit 68%) $680,000

Loan-to-value (LTV) of mortgage(s) 15%.

Payment $5,334/month: Interest $812/month.

Principal $4,522/month.

Reduced credit = Principal payment x (68%-65%) / LTV of mortgage(s)%

Reduced credit = $4,522/month x 3% / 15% = $904/month.

Credit readvance = Principal payment – Reduced credit

Credit readvance = $4,522/month – $904/month = $3,618/month.

Old rules: New credit $4,522/month

New rules: New credit $3,618/month

Effect on Monthly Investment

Monthly Investment: New credit Capitalize Invest

New Smith Manoeuvre  $812           $0            $812

After a few years                $1,256           $480            $776

Mostly paid off                  $3,618        $3,180        $438

Old rules: Monthly investment essentially flat for 25 years.

New rules: Monthly investment declines over time:

Slowly in early years.

Fast in later years.

Best & Worst-Case Examples

Best case:

  • Mortgage 80% LTV.
  • Credit available to invest 20% less.

Worst case:

  • Mortgage 15% (minimum allowed).
  • Credit available to invest 45% less.

How do you manage the process?

Credit readvance has 2 uses:

  • Pay tax-deductible interest on your credit line(s) (“capitalize”).
  • Invest.

Options to adjust:

Invest 20% less each month.

Increase your mortgage payment about 4%.

Keep a bit extra credit for declining new credit available to invest.

How to minimize or eliminate the effect.

1.   Renew mortgage before October 31 for several years.

  • Today’s invest rates – 3-year probably better than 5-year term.
  • Rules don’t apply till mortgage due date after October 31, 2023.

2.   Reappraise home every few years. Don’t increase total limit.

  • With 23% increase in home value, effect is eliminated.
  • Need 23% increase in home value to bring total limit to 65% LTV.
  • 23% increase typically happens in 5 years. Recently less than 5.
  • Better to invest the increase for growth-focused investors.
  • If you invest the increase, the effect is slower, not eliminated.

3.   Create split mortgages.

  • Convert tax-deductible credit line to split mortgage.
  • Try to keep 2 mortgage portions close to 80% of home value.
  • Main non-deductible mortgage + tax-deductible split mortgage. 

Effect on Smith Manoeuvre vs. TFSA

You have extra cash. Contribute to RRSP, TFSA or Smith Manoeuvre?

Smith Manoeuvre means pay down mortgage & reborrow from tax-deductible credit line to invest.

All 3 options, you invest the same amount & can invest the same.

Differences are tax differences.

Smith Manoeuvre generally beats TFSA.

Tax-efficient investors get refunds in most years vs. TFSA no tax.

·General rule of thumb with existing rules:

Income in 20% bracket           Income in 30+% bracket

Less than $53,000 (2023)        Over $53,000 (2023)

Priority 1        Smith Manoeuvre                     RRSP

Priority 2        TFSA                                         Smith Manoeuvre

Priority 3        Non-registered (not RRSP)       TFSA

General rule of thumb with new rules:

TFSA generally beats Smith Manoeuvre.

You invest 100% of extra cash, instead of 80% or less. 

Income in 20% bracket             Income in 30+% bracket

Less than $53,000 (2023)        Over $53,000 (2023)

Priority 1        TFSA                                           RRSP

Priority 2        Smith Manoeuvre                     TFSA

Priority 3        Non-registered (not RRSP)       Smith Manoeuvre

Old Rules: No TFSA contributions unless mortgage will be paid off before retirement.

New Rules: No mortgage prepayments until TFSAs are maximized.

Ed

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6 Comments

  1. Ed Rempel on December 21, 2023 at 4:47 PM

    Hi InvestinSM,

    Good name! We got the official letters from TD & BMO and worked through their examples. They didn’t ahve the exact formula, but explained it with several examples.

    Which bank is your mortgage with? Do you mean the principal portion of each mortgage payment is but by 2/3rds or your total credit available?

    The best way to lose less credit is to have as much as you can in mortgages, instead of credit lines within your readvanceable mortgage. If your credit line is relatively large, you can ask your bank to make it a mortgage.

    This process makes the Smith Manoeuvre a bit more complicated, but it’s workable. You will end up with a non-deductible mortgage and a deductible mortgage, plus 1 or 2 deductible credit lines. You can readvance from both mortgages.

    Your bank people may not know the formula, but it is programmed into the bank’s system, which should work based on the formula I showed.

    Ed



  2. Ed Rempel on November 27, 2023 at 10:19 PM

    Hi Abid,

    Most of the readvanceable mortgages in Canada allow you to have many mortgages and credit lines, as long as the total credit is within the total approved credit limit. For example, the BMO Readiline lets you have up to 99 mortgages and 99 credit line. Way more than anyone could ever want!

    With the Smith Manoeuvre, Cash Dam and emergency uses for credit, it’s important to keep money borrowed for different purposes separate to track them properly on your tax return.

    For example, the Smith Manoeuvre interest (credit line or mortgage) is borrowed to invest and claimed as carrying charges. Cash Dam is claimed as rental expense. Emergency uses or personal uses (including buying your home) of a credit line or mortgage are not tax-deductible. These 3 should all be kept separate.

    When you have a larger amount owing, it is usually better to put it into a mortgage to get a lower interest rate. For example, when your Smith Manoeuvre credit line grows to $200K or $300K, then it may be worthwhile for you to make it a mortgage. It gets you about 1-1.5% lower interest rate on that amount, but it is more complex. You now have a mortgage and a credit line, instead of just a credit line, and you have to pay P+I.

    Different readvanceable mortgages work differently. If you have more than one mortgage and you pay P+I on them, RBC & TD give you additional credit in only 3 credit line. BMO works in pairs so that 2 mortgages are paired with 2 credit lines and each mortgage results in getting additional credit in the separate credit line paired with it.

    Credit line in total are limited to 65% of your home value, while total credit can be 80%, which means you always have to have at least 15% in one or more mortgages.

    There are all kinds or uses and reasons to split mortgages & credit to have multiple ones, mainly to track money borrowed for different purposes.

    Does that answer your question, Abid? That is an introduction to split mortgages & split credit lines.

    Ed



  3. InvestinSM on November 6, 2023 at 12:08 AM

    Ed, thanks for posting. Like CheckMath my Bank is applying a standard value over 25 years. So it hurts me in the early years because my principle is low. However, the equation you have used in Example 1, where can you find that? I brought this up with my bank and they said they have not been able to find such an equation. As such right now my available readvanceable portion is cut by 2/3rds.



  4. Abid on October 1, 2023 at 7:16 PM

    Can you talk more about split mortgages? You simply stated it as one option but it would be great to see it using your examples. If there are links to previous blogs about this, that would be great to. Thank you.



  5. Ed Rempel on August 29, 2023 at 10:03 PM

    Hi Checkmath,

    The reduction in your limit speeds up as the amortization shortens. It’s not straight line. When you have 25 years left, the reduction is small. In the last year, it is large. That is why keeping your amortization long helps with this process.

    Ed



  6. Checkmath on August 29, 2023 at 9:55 PM

    My mortgage is similar to Example 1 (new mortgage) but the bank has indicated a much larger “Reduced Credit” than what you’ve shown. Can you double check your math? The loan must reduce to 650K over 25 years. This is a reduction of 150K, which is $500/month for 25 years, not $188.



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