RRSP Mortgages

Consider self-directed mortgages as a way to invest your RRSPs in down markets.

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One of the biggest decisions you have to make about your retirement savings is where you’ll invest that money. With markets in the crapper (was your last year’s return really -12%?) people are scratching their heads. Will you have to settle for 2% on a GIC to keep your money safe?

The last time the markets were in a gyration like we’ve seen recently my ex and I wrote our mortgage from our RRSPs, transferring the cash to pay off our bank-held mortgage, and creating an entirely new investment strategy for our retirement savings. It wasn’t a decision made overnight. We spent some time moving our portfolios to cash so we’d have the juice we needed to do the deed when our existing mortgage came up for renewal.

Since mortgages rates are typically 3% above GIC rates, our self-directed mortgage (SDM) would earn a decent return without the slightest bit more risk. After all, if you can’t trust yourself to repay the loan, whom can you trust?

You need to have a whack of cash in a self-directed RRSP for this to work. Some experts say you need at least $50,000 to offset the fees. I’d say no less than $100,000, ‘cos those fees ain’t chicken feed. Don’t have enough cash in your own RRSP? You can write a “shared mortgage” where each spouse kicks in money and the RRSPs split the fees accordingly.

The taxman has specific guidelines for how SDMs work: the interest you pay has to be comparable with current rates, the mortgage must be insured and you must qualify for the mortgage just as you would if you had gone to a financial institution. Payments must be made on-time or your RRSP will be forced to foreclose. If your SDM doesn’t meet the guidelines, there’s a big ouch! The mortgage would be a non-qualifying investment, its fair market value at the acquisition date would be included in your income and any interest earned by the RRSP would be taxable to the RRSP.

Since a large portion of your RRSP portfolio in an SDM might weight you too heavily on the fixed-income side, you’ll need to rebuild your diversification. You know those monthly mortgage payments you’re making to your RRSP? Time to dollar cost average those suckers into an aggressive mutual fund. Viola: security, diversification and the elimination of the market-timing question.

Arranging for an SDM is no small feat. You may have to meet with mortgage officers, your financial adviser and your lawyer to get it all accomplished. There’s no question that part of your success using this strategy will come from having an adviser who can run with the ball. This isn’t a horrendously complex investment strategy, but it does require you to step out of the box. It will require homework and careful planning.

8 comments on “RRSP Mortgages

  1. Can this work with a RSP that is locked in?

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  2. I looked into this several years ago. It's a great idea, but it is difficult to implement. The main reason it is difficult is because few people know about it, and even fewer are interested in helping you do it. Other than some fees to get it started, nobody makes money off of it in the long run except you, hence the lack of interest in SDM's. I asked a financial planner about it several years ago and he had no idea what I was talking about!

    The other problem is that you need, as Gail says, a whack of cash in your RRSP's. I have a whack of cash in mine, but, and here's the big BUT, if that whack of cash is part of an employer sponsored Defined Contribution "Pension" Plan/RRSP then you may not be able to use it. Or, you may be able to use only some of it. You would have to approach your employer, as well as the financial institution involved in administering the plan, and convince one or both that they should allow you to invest your money in your mortgage.

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  3. You can not borrow money from your own Locked-in plan, however you could lend the money to an unconnected person, ie not a relative.

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  4. Since the mortgage must be insured, the best place to look for an organization to help you setup such a self directed RRSP are private mortgage insurance companies. They make their money through the premium. This is opposed to a bank that only makes service fee cash, and doesn't really want to help you.

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  5. Hi Val

    You really need to write more about this strategy. This is an outstanding way for Canadian's with the means (more in their RRSP then they owe to the Bank) to solidify gains for retirement and ZERO out risk in their investments. You are quite correct not many money managers know about this strategy and the ones that do know are very resistant because they make nothing on this. All gains are yours. the detractors would have you believe that it is a silly strategy after all you can make 6, 7, 8% on your Diversified retirement portfolio and this will have you overweight in fixed income. I say so be it, fuzzy math aside the real return is double your interest rate plus the savings on fund management fees. For anyone tracking (and all of us should be) their real rate of return in their managed RRSP you will see in many cases the real rate of return is far less than the advertised rate of return this is the fund management fees hard at work eating away at your returns.

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    • In my opinion using a 3% mortgage as a basis your managed RRSP would have to produce at 8% just to match holding your own mortgage in your RRSP at 3%. let me explain, if you're a paying the bank 3% on your mortgage the first 3% in your managed RRSP offsets to zero gain the next 3% matches your return if you are holding your own RRSP mortgage. many people will say 6%….I'm getting that so why bother, wrong you now need to add 2% to compensate for the fees the money manager is charging you whether you are making positive returns or not, year in year out. So as you can see you need an 8% return guaranteed just to match holding your own self-directed mortgage. I don't know of anyone getting 6% over the last 5 years let alone 8%. My personal RRSP has produced a real return of around 4% (over the last 5 years) in a managed portfolio with Great West Life even though on paper we are supposedly getting an 8% return. We are on the losing end of the equation just like the banks and Mutual Fund Companies want it.

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      • My wife and I are in the process of setting up our non-arm’s length mortgage and are very much looking forward to saying good bye to the bank and fund manager sharks out there. We plan on charging ourselves 5% interest and plan to pay off the mortgage fully by our retirement date (not a day before) The aggregate monies and each months payment will be invested in mainly blue chip equities taking advantage of dollar cost averaging as we move forward. We will continue to max out our RRSP contributions each year. I believe this is a winning strategy please have a look and let me know your thoughts.

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  6. Yes and don't forget the Ratio's. CMHC does not bend. Get's better when the rates are high. Poor diversification for most. Excellent for interest free usury.

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