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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 17, 2018 | Rebel, Rebel

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Barry called yesterday. Out of the blue. “Blog reader,” he said. Of course those two words allow anyone into the magic Kingdom of Garthonian wisdom. So, I said, whatsup?

“My TD bank guy tells me I can’t set up a mortgage inside my RRSP. He says CMHC just changed the rules so only new houses apply.”

That’s BS, I replied, in depth. They just don’t wanna help you. Walk.

For those who don’t know, yes, you can put a mortgage on your house (or your cottage or rental property) inside your RRSP. That way you actually make payments to yourself, instead of the banking oligarchs. How cool and rebellious is that? (BTW, the banker Barry spoke to was simply ignorant – plus they didn’t want him to do it.)

Now that interest and mortgage rates are on the rise, there’s more appeal to doing it. Up to this point, with sub-3% home loans available everywhere, it made more sense to float your house with cheap bank cash and use your own retirement funds to achieve much higher returns inside a financial portfolio. However, with posted mortgage rates nudging the 4% mark, an RRSP mortgage may be a way to finance a property as well as invest money.

So how does it work?

Not simple, nor cheap, nor easy set up and maintain, but possibly worth the effort.

First, find a lender willing to host what’s officially called a non-arm’s length mortgage. The best bet will be one of those less-than-blue-chip guys like B2B Bank or Canadian Western Trust, because the last thing the Big Six want is for people to create their own borrowings. Second, you need money in your self-directed RRSP to use to finance the house. Duh.

Then there’s the set-up. That will involve having the property appraised for mortgage purposes, staying within established LTV (loan-to-value) parameters, paying your lawyer to draft the mortgage and funding the administrating bank. This will cost a few thou. The big expense comes with mortgage insurance which is required by law. The cost will be up to 4% of the face value of the mortgage, which is (obviously) a lot. But no getting around this.

It’s important to understand the mortgage you’re creating isn’t something you can diddle with, even though you’re both borrower and lender. For starters, it must be a reasonable amount – so no 0%-down. Also you can’t grant yourself a 1% mortgage rate. In fact, you can’t even use the rate your bank is offering everybody else – it must be the posted one, devoid of any discount. However, since the interest you pay is to yourself, this isn’t necessarily a bad thing.

You can’t miss, skip or ignore payments. If you do, your RRSP can actually foreclose on your house (as strange as that sounds) through the trustee which administers it. Payments can’t be late, not can you decide to pay yourself more or less in a single month. In fact, the mortgage can’t even be paid out early without incurring the same penalty as would be collected by an evil commercial lender.

On the plus side, all of these mortgage payments you make into your RRSP are not considered to be contributions and don’t affect your ability to generate more space through earned income. The cash paid into the retirement plan accumulates, of course, and can used to buy other assets, achieving greater diversification.

As mentioned, this strategy can finance a house, your ridiculous money-losing rental condo or a commercial property. In fact, a non-residential use is probably the best. That way not only do you pay mortgage interest into your own retirement plan, but you can deduct that same interest from taxable income. And since commercial loan rates are w-a-y higher than residential ones, this is a big win. Take that, Bill & Justin.

So, there you go, Barry. Not for people who want simple or easy. But sweet for those happy to make 4% on their money, or wanting to turn an RRSP into an endless tax deduction. Also ideal for anyone who hates their bank.

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July 17th, 2018

Posted In: The Greater Fool

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