Meaghan and Richard have a mortgage of $68,000 on their modest suburban home valued at $135,000. They are both approaching their mid '50s. Over the years they have struggled to accumulate RRSPs totalling $70,000, stocks, bonds, and mutual funds amounting to $50,000

Somebody told them to use their own RRSP to holder their mortgage. They thought that this had been one of the topics of my previous articles, which prompted them to call. Firstly, let me explain the statement "holding one's own mortgage in an RRSP." You have socked away money each RRSP season because you are trying to avoid the tax man. Of late your RRSP trustee (the bank) has convinced most of you to invest your RRSP money in mutual funds. Most consumers buy RRSPs for the tax savings, most don't know how their money is being invested. You may direct your own destiny by telling your RRSP trustee (the bank) to invest in stocks, GICs, mutual funds, and yes, even mortgages. So the system will allow Meaghan and Richard to invest in their mortgage, although I have revised against it. The reason for my negative decision is that their needs and their RRSP should be working at opposite poles. From a mortgage standpoint they should want the lowest rate they can get, and from an RRSP perspective, they should want the highest yield possible.

One by-product of holding your mortgage within your RRSP is that the mortgage must be CMHC insured. Normally CMHC only becomes necessary when the overall loan-to-value ratio is above 75 percent. In other words the amount of the loan versus the value of the property must not exceed 75 percent, if you were trying to avoid the CMHC surcharges. In this case, holding one's own mortgage is defined as a "non arms-length transaction" so no matter the loan-to-value ratio, the mortgagor (borrower) has no choice but to have the loan insured through CMHC and pay the insurance premium.

However, if you were to hold somebody else's mortgage within your RRSP, CMHC is not necessary. In other words, if your neighbor or friend needs a mortgage, your RRSP could accommodate their request. Now before your rush out to mortgage somebody else's house, you must be educated on the proper screening of the proposed mortgagor. For that you should seek to help of professionals. If you should wish to venture on your own, there are certain provisos to follow. First and foremost, a first mortgage is better than a second mortgage. Traditionally though, second mortgages are more lucrative. If you were to look at second mortgages, the loan-to-value ratio is of the utmost importance. One way of analyzing your perspective "deal" is to ask the question: "if I invest and something goes wrong, can I get out without losing money?" The analysis boils down to looking at each deal as if it will go wrong and can you recover your money by selling the property from its owner, in a default situation. On the surface, this may seem to be a lot of work and worry for little reward, but when you can get 14 or 15% on your (RRSP) money, all of a sudden, it may seem worthwhile.

So Meaghan & Richard will take a traditional mortgage for their residence, and source RRSP type investment mortgages through yours truly. While I was at it, I convinced them to sell all their stock portfolio, take the $70,000, pay off their mortgage completely, them re-borrow the $70,000 and buy back all the stock. Now their home mortgage interest is also tax-deductible. I would venture to say that their call to me was lucrative.