Just to set the record straight, yes, you have to have the funds in your RRSP in order to fund the mortgage. What you will also find out is that due to the “Non Arm’s Length” relationship between the Mortgagee (your RRSP) and the Mortgagor (yourself), the mortgage will have to be insured by Canada Mortgage & Housing Corporation in order to become a qualified asset for your RRSP to hold. The main focus of all the administrative rules and conditions that apply is to insure that both you and your RRSP are not gaining an advantage or being put at a disadvantage when compared to rates and terms available in the “open mortgage market”. In addition, your RRSP funds would have to be transferred to a self directed RRSP (SDRRSP) account administrated by a Trustee who is an approved National Housing Act lender and who is also willing to administrate this type of RRSP asset. You will quickly find that not every SDRRSP Trustee wants to undertake the task of administrating this type of asset.

When doing your research you will soon become very aware of the many costs and fees. There are one-time set up costs plus ongoing annual SDRRSP Trustee administrative fees. For some clients, once a careful review of the costs is done, lending RRSP funds to yourself can make sense. Prior to 1984, it was commonly thought that Canadians could not use their RRSP funds for such a transaction. In 1984, a tax lawyer based in Toronto obtained a tax ruling establishing that, provided a mortgage met the strict lending guidelines established for an RRSP “Non Arm’s Length” transaction, it could qualify as an asset held in a SDRRSP plan.

Based on my calculations and due to the many costs and fees involved, I found that it was important to have a minimum mortgage amount of at least $50,000.00 available in your RRSP plus a minimum of a 6 – 7 year time horizon before even considering any economic or emotional benefits that might be derived from lending yourself your own RRSP money. The first SDRRSP funded mortgage that I helped set up was in 1984 for a client who was an accountant. Years later, I had the opportunity to ask this client if, in his opinion, it had been worth all the effort and expense. After a long pause, his answer was simply, “It sure just felt good to be paying myself”.

Paul E. Croy

Firstly, the mortgage balance will be declining but the insurance premium will remain consistent, hence over time, the borrower will be receiving less. Secondly, if you decide to port (move) your mortgage to another lender when the term is up, the insurance will not be transferable.

I propose that if a borrower wishes to have the additional security offered by insurance (and I totally agree) then an insurance policy outside of the mortgage contract should be considered. This insurance can be a fixed term or whole life policy.

There are several advantages to this strategy:

Firstly, the policy is with the borrower and stays with the borrower no matter who holds the mortgage.

Secondly, the borrower can pick an amount that is appropriate to their situation. He or she does not have to purchase an amount to pay off the full mortgage.

Thirdly, the amount of payout from the “life” insurance remains consistent.

Finally, and probably most importantly, in the event of the demise (death) of the borrower, cash from the policy will go to the beneficiary. The beneficiary, who often is the spouse, will have money to make mortgage payments, pay utility bills, buy food, etc. for the family while they get their life adjusted to the new situation.

It makes no sense to have a debt free house if the hydro, water, gas and telephone are disconnected. This is a morbid subject, but it needs to be considered by all borrowers.

P.S. Be sure to obtain competitive quotes from a few life insurance agents before committing.

Jeffery Moses

In my opinion, being able to understand what you are invested in, and why, is very important when considering taking financial risks. A good test is to ask, “Could I explain to a 12 year old in less than a minute why I hold a particular asset in my investment portfolio?” It should be that simple.

Some years ago two researchers, Martin Leibowitz and Terence Langetieg of Salomon Brothers Inc., issued a report to the pension fund industry called, “Shortfall Risks and the Asset Allocation Decision”. In this report they used widely accepted historical return data compiled by the firm Ibotson Associates. The report found that there was a 36% chance that stocks would underperform bonds in any five year period. They also found that there was a 24% chance that stocks will underperform bonds in any 20 year period. Of course, that also means that there was a 76% chance that stocks would outperform bonds in any 20 year period.

As many Canadians are now starting to look at retirement, over the coming years it will become prudent to rebalance RRSP investment portfolios to decrease future investment risk. Using standard return and risk assumptions and a five year time horizon, Leibowitz and Langetieg concluded that an asset allocation of 30% stock and 70% bonds would result in a higher probability that an investor would meet their goals.

When constructing a fixed income bond portfolio the Money Manager will consider interest rates, maturities, redemption options and the credit rating of the bond issuer. The Managers would normally structure the portfolio with a mix of government, provincial, municipal and corporate bonds. In order for an Investor to reduce investment risk they might consider replacing the corporate bonds in the fixed income/bond portion of their investment portfolio with quality Canadian first mortgages. In addition to increasing the interest yield on your portfolio, an investment in first mortgages can offer substantially increased security when compared to corporate bonds as an asset class.

First Accredit Mortgage Corp., a Mortgage Investment Corporation (MIC) managed by Great Pacific Mortgage & Investment Ltd., invests exclusively in first mortgages. Since 2002, this MIC has offered both large and small investors easy access to investment in Canadian first mortgages while producing an annual historic yield in the range of 7.95% to 10.95%.

Paul E. Croy

Corporate North America has marketed to the anticipated wants and needs of Baby Boomers for decades. Why wouldn’t they? According to some statistics, Baby Boomers currently control over 80% of personal financial assets and represent about 50% of all discretionary spending. In general, this group loves to travel and enjoy life. However, it has been noted that many Baby Boomers have become complacent with regard to their personal debt levels. As retirement years approach, trying to balance current wants and needs against the debt servicing requirement for past financial excess might become a challenge for some Canadians.

These are the same challenges that our corporations and governments are currently facing. Today, both our federal and provincial governments are being forced to deal with past budgetary excess while simultaneously trying to find and fund policies that will lead to sustainable job creation. Meanwhile, corporate Canada is also dealing with their past years of over leverage and excess. In a recent luncheon speech, the Governor of the Bank of Canada pointed out that the “global recovery will not be smooth.” Retirement expectations for many have changed to include working longer, part-time retirement, or the addition of self-employed business income. During the years prior to your retirement it would be very prudent to take a hard look at your overall financial situation. For many clients this will involve seeking good independent financial council.

If you find that you are faced with the need to reduce excess personal debts, here are ten recommendations:

1. Always pay off your debt with the highest interest rate first.
2. Establish a realistic budget that allows for principal debt repayment.
3. Set both short and long term goals.
4. Review your progress regularly and reward your successes.
5. Make the application for debt restructure/consolidation while you are still employed not when you retire. The approval process will be much easier while you are working and have a higher income.
6. Consider refinance options. A refinance of your mortgage to consolidate high interest and/or unsecured debt can greatly lower your overall borrowing cost and improve your cash flow.
7. Give consideration to what your shelter needs truly are. Perhaps selling your current residence and buying a lesser valued property might place you in a much stronger financial position.
8. Do not consider selling your house or re-mortgaging to consolidate your debts until a careful cost benefit analysis is done.
9. Always remember that the payments you make on personal debt are being made with after-tax dollars. You have to first earn the money, pay taxes on it, and pay the interest due on your debt before you can see a principal reduction.
10. Most importantly, be truthful with yourself and your partner or spouse about your finances.

Paul E. Croy

This increase was probably the single most anticipated and talked about increase ever witnessed in Canadian history.  Many people originally anticipated a full half percentage increase, but recently almost every financial analyst expected the 0.25% increase that raised the prime rate at most Canadian banks to 2.5%.

Had Mark Carney, the Governor of the Bank of Canada, failed to raise rates this would have caused more of a concern as financial markets want certainty and predictability.  After months and months of dealing with mortgage client’s concerns, this increase simply became a non-event.  It was also very interesting to note that some mortgage lenders actually decreased their five-year mortgage rates shortly after the Bank of Canada rate announcement.  Financial Institutions need to have certainty established in the long term trend of market interest rates before they can become truly competitive in their mortgage rate pricing.

In contrast to Mr. Shakespeare’s play, Much Ado About Nothing, which is a comedy, the Bank of Canada’s decision on interest rates is very serious business that effects a great cross section of our society.  From small home based businesses to the construction industry and manufacturing firms, all feel the effects of the Bank’s Canadian Interest Rate Policy.  Along with the value of our Canadian dollar, our Canadian family standard of living is affected too.  The Bank of Canada is very aware of this fact as they attempt to balance the need to fight inflation while at the same time trying to grow our economy.

The bottom line looking forward is that we are going to see a slow and gradual increase in interest rates and this should not be a surprise to anyone.  For clients still on floating rate mortgages, this may be a good opportunity to consider increasing your mortgage payment thereby accelerating your repayment and decreasing the amortization on your mortgage.  This would also prepare you for slightly higher interest rates in the future while at the same time taking advantage of our still very low mortgage interest rates.  

Paul E. Croy

These are the benefits of using a mortgage broker:

1. DISCUSS – I will discuss your mortgages needs with you and prepare your application for presentation to lenders.
2. EXPLAIN – I will explain the mortgage approval process. I will obtain a mortgage commitment, lock-in the best rates and terms, and provide you with a pre-approval so you can confidently look for your new home.
3. INFORM – I will inform you about the costs associated with arranging a mortgage. These may include: appraisal and survey fees, property transfer taxes, municipal tax adjustments, and, if applicable, CMHC premiums.
4. RESEARCH – I will research the market for the best interest rates and terms available. This includes special discounts and rates, available only through mortgage brokers.
5. PRESENT – I will present your application to the lenders most likely to approve your deal. I will highlight the strengths of your application in a manner that will be favorably viewed by lenders.
6. NEGOTIATE – I will negotiate on your behalf. I work for you, not the lender.
7. ADVISE – I will advise you about the terms, rates and details of each mortgage lender’s offer, in order to help you make the most suitable financing choice.

Financial institutions will only offer you their own mortgage product. A mortgage broker is able to mix and match different products from a variety of institutions in order to meet your particular mortgage requirements.

Financial Institutions offer lower rates, special discounts and a wider variety of mortgage products through mortgage brokers. Mortgage Brokers are a better way for banks and other major lenders to deliver their products to new customers and lower retail banking costs. The savings are then passed along to you.

Mortgage brokers are motivated to get the job done for you. We get paid only when you’re satisfied and your mortgage is funded. Last but not least, in the case of most residential mortgages, the lender/bank pays our fee.

Chris Pahl

We deal with a variety of professions including realtors, lawyers, accountants, appraisers, contractors, trades, etc. Our staff and their families, friends and contacts choose to deal with those people that are competent and polite. How many people around the coffee table can you reach by simply respecting the people that you are dealing with and treating them the way that you would like to be treated?

Here are some politeness tips:

#1 – When going into a meeting, turn off your cell phone or ask permission to leave it on.

#2 – Let people exit an elevator before you go in.

#3 – Thank the person that has just served or assisted you.

#4 – Don’t lie (this is a big one).

#5 – Forgive people when they make a mistake.

#6 – Seek a solution to the problem instead finding someone to blame.

#7 – Have a second party look at your e-mail before you press send. (There are many rude/bad e-mails that are out there forever.)

#8 – Be fair and reasonable when dealing with stressful situations. Let others know why the situation is urgent and that they can be part of the solution and not part of the problem. Most of us want to be of help.

#9 – Make the coffee if you empty the pot.

#10 – Use spell check (I have missed this one too often).

Rory Campbell 

In the mortgage industry, a client who elects to directly invest in a mortgage is commonly referred to as a ‘Private Investor’. A direct investment in the Canadian mortgage market requires, in addition to your money, your ongoing investment of personal time to administrate and manage the mortgage. For Private Investors it can sometimes be very difficult to find quality lending opportunities. Perhaps even more importantly, it can be difficult to truly understand the risks involved when faced with mortgage underwriting decisions. Understanding investment risk and pricing the risk correctly is key to successful mortgage investment. Sometimes the best decision is the mortgage you don’t invest in.

Another risk facing a Private Mortgage Investor is the loss of interest income during the period when a mortgage is paid out and the funds are sitting in cash waiting to be reinvested. By investing in shares of a MIC, this reinvestment risk can be reduced because your funds are always working.

Great Pacific Mortgage & Investments Ltd. offers investors the choice of three professionally managed Mortgage Investment Corporations which can help to add investment diversification to both large and small portfolios.

Paul Croy

#1- Residence

Purchasing a home tends to be the largest capital investment most people make. It also tends to be the best investment most people make.

Rents go up but mortgage payments remain constant. So with time, the cost of mortgaging remains constant while rents rise with inflation. (There are interest rate fluctuations both up and down but I am assuming a constant interest rate for this example.)

It may seem a long way off at the beginning, but mortgages do get paid off and any capital appreciation from your own house is non-taxable. Equity in property also provides the ability to access funds for other investment opportunities.

#2- Investment Properties

There are several types of investment properties:

A – Revenue Investment (Residential, Commercial, Industrial revenue properties)
I do not have a pension other than CPP so I need to plan for my retirement by creating an income stream that is indexed so that inflation doesn’t erode my standard of living. Buying a rental property can be an effective method to satisfy this goal.

When looking for revenue property to meet this goal, you need to consider how soon the property’s income will cover all of its expenses including debt servicing, management, maintenance, repairs and of course, the various taxes. This may mean that you will need to cover a shortfall at the beginning, but when you have reached the breakeven level time becomes your ally and the property will start paying you an indexed cash flow.

B – Speculative Investment
This investment is to attract a capital gain by selling a property for a higher price than you paid. This investment is quite popular when the market is increasing or expanding. An example of speculative investment would be buying a piece of land that is not yet developed but is in an area where development is approaching. When development does reach your property then there will be an increase in its value. This type of investment is higher risk than rental property (time is not your ally) but it does not require as much ongoing work and can be very lucrative. This investment is more interested in the market and not in revenue.

There are several investments that are part revenue and part speculative. One example is an underdeveloped property that does not have cash flow to pay all costs but can offset some of the costs.

Housing is something that we all need. It has proven to be a stable and manageable investment that one can control or at least influence. Talk to your realtor, lawyer, accountant, mortgage broker, neighbour etc. Everyone has something to say about real estate and some of them can give you good advice, but remember that it is your choice. Be bold and you should be rewarded.

Rory Campbell

For most people, getting into a mortgage is much easier than getting out of it if they find that they have made the wrong choice. Making the wrong choice can be a source of stress with potentially large financial and emotional costs to be paid.  The mortgage you select should be comfortable and flexible, fitting with your lifestyle expectations.  It is very important that your mortgage leaves some financial room for you to still be able to enjoy the things in life that are important to you.  Feeling ‘mortgage poor’ can be somewhat like being forced to walk a long distance in the wrong pair of shoes.

It is important to spend time up front looking at the economic realities of your cash flow prior signing your mortgage documents.

What I would recommend for many clients is to try living within a budget based on the proposed mortgage payment prior to committing to it.

Paul Croy