# SDRSP- Mortgage "Pays interest to you!"



## RudyPam (Apr 3, 2010)

Team,
I am new and wanted to jump right in with the groups feed back? I recently decided to stop trying to invest my own money to offset my mortgage interest and took a large portion of my SDRSP and purchased my mortgage. My reasoning was simple? I needed to have some safe place for much of my money and like many of us who pay a mortgage? Well, if you earn 7%-8%, honestly, you are good, better than me!. Now you pay 4% for your mortgage... Not bad, but when you minus the mortgage payout from the 7-8% growth you are now at 3-4% growth with risk. 
You got a 100K mortgage and a 100K RRSP! What do you do? - You can just buyout your mortgage and call it a day. "solid 4-5% return to your RRSP! Or, lets say you are 30-50 years old and you use the room in your house (Line of credit) to borrow or max your SDRSP? Your tax rebate is 30-35%. Now you borrow $100K for the RRSP and get a $35K return. So you made 35% on the 100K borrowed. Honestly;the best return you have had in years! Now lump it with the $200K in your RRSP for $235k. You got a $200K mortgage that you stretch to 25 years just to keep the payment low. You now pay the interest to yourself!... Your interest now gets deposited back in your RRSP for you to re-invest at your 7%-8%. "Remember: Good debt and bad debt are two very different things". 
At the end of the day? We are all different and have very different investment plans. By doing this SDRSP you dont fight the delta on interest out VS interest in? Owing money is not bad if you pay yourself the interest. 
Who has feedback? I have many friends who just cant get past the mortgage part? Am I crazy or did I not remove the biggest interest loss we all face with every mortgage payment? Remember, the weekly,bi-weekly or monthly interest just get deposited back in my SRRSP and the principal drops just like your every day mortgage... Geez, If I had a lower income in the future; I could actually spend the Interest return and pay the lower 18% tax. But this is a different topic! Or is it???


----------



## OptsyEagle (Nov 29, 2009)

It's a fine move, but the gain is simply the current rate of interest on your mortgage, minus the fees charged to facilitate the deal. 

Plus, everyone needs to understand, that you need to have enough money in your RRSP to pay the entire mortgage, since it has to be a first mortgage. If you default on the payments, you will be foreclosed on, even though you owe the money to yourself. 

Other than that, its a great plan, good luck to you.


----------



## Addy (Mar 12, 2010)

Thats a pretty odd first post.. and whats up with "Team"??


----------



## RudyPam (Apr 3, 2010)

The SDRSP Mortgage is just like any regular mortgage, only it has to be a fixed rate morgage. Its CMHC protected. 
TD-Canada Trust was the only bank I could find to do this, the fees are just like the first time you got a morgage? CMHC was about .75-1% plus Lawyer fees for this option. It was a one time hit about $1,500 to get this started. TD fees are $225 annually going forward. All the interest now returns to my RRSP account with every payment and I can invest just like normal. 
My posting was more because I could not find any of my friends doing this and dont know why? I guess you got it right with the need to have enough RRSP to equal your morgage amount. 
I used this system to eliminate the single largest interest payout we have and was thinking:

1)Why dont more people do this?
2)Do people know you can do this?
3)Whats the negative to this?


----------



## goertzen (Nov 18, 2009)

I would lean towards just holding bonds or a bond fund in my RRSP if I want that kind of risk/return. Exposure is similar, it is way less hassle, and is more liquid.


There's a good discussion about it here: 

http://www.milliondollarjourney.com/holding-a-mortgage-within-an-rrsp.htm


----------



## andrewf (Mar 1, 2010)

I suspect people don't do it because the returns are abysmal, the fees are high, the investment is illiquid, and higher returns are available in the market. I agree that you're better off investing in other fixed income.


----------



## cardhu (May 26, 2009)

RRSP self-mortgages are generally not a good idea, for a variety of reasons ... there can be exceptions, but in general, there is usually little or no economic benefit to doing it ... the common arguments in favour of using them are drawn mostly from the realm of illusion ... 

ie. 
•	_I used this system to eliminate the single largest interest payout we have ... 
•	Owing money is not bad if you pay yourself the interest._


----------



## Cal (Jun 17, 2009)

Well Team....

I don't think you will find too many people on this site who 'got a $200K mortgage that you stretch to 25 years just to keep the payment low.'

Yes holding your mortgage is good debt. I haven't done this, and don't have any friends who have either. I my opinion there is nothing wrong with doing this in theory, assuming the fees are acceptable and the numbers work.

What happens if you sell the property before it is paid off? How does that work?

I do know of people who have taken a HELOC, invested it, and used the profits to repay the HELOC.


----------



## cardhu (May 26, 2009)

Cal said:


> there is nothing wrong with doing this in theory, assuming ... the numbers work.


And therein lies the problem ... the numbers rarely work ... except in cases where the spreads (between mortgage rates and GIC rates) are extraordinarily wide for an extraordinarily long period of time, a simple GIC ladder would usually produce as much growth in the RRSP as a self-mortgage. 



> holding your mortgage is good debt


It is no more and no less “good” than any other mortgage owed to a third party ... it may offer emotional comfort, but it doesn’t usually offer financial benefit ... it doesn’t reduce the interest expense to carry the home, and it doesn’t grow the RRSP any faster than it otherwise could, with comparable risk.


----------



## Cal (Jun 17, 2009)

cardhu 'it doesn’t reduce the interest expense to carry the home'

If you were to hold your mortgage inside your RRSP, you would actually want to pay as much in interest as possible. Maximizing the amount you could place in your RRSP.

'It is no more and no less “good” than any other mortgage owed to a third party'

It would be better than simply paying your mortgage to a bank. You could utilize unused RRSP room by doing this.

Not saying this is for everyone. But it isn't a terrible idea.


----------



## cardhu (May 26, 2009)

Cal said:


> If you were to hold your mortgage inside your RRSP, you would actually want to pay as much in interest as possible. Maximizing the amount you could place in your RRSP.


Actually, paying a higher rate of interest is the worst thing you could do … any amount above and beyond the lowest rate you would otherwise pay to a third party is a voluntary overcontribution without the benefit of a tax deduction … you’d be setting yourself up for double-taxation on that amount.



> It would be better than simply paying your mortgage to a bank. You could utilize unused RRSP room by doing this.


It would be no better than paying your mortgage to a bank … money flowing out of your pocket is money flowing out of your pocket … the fact that it lands in your other pocket is of no consequence if you have to sacrifice an equal or greater return from that pocket, in order to do so. 

You cannot utilize unused RRSP room this way, because you don’t get a tax deduction for paying extra interest to yourself … it has no effect whatsoever on your unused RRSP room. 

An RRSP self-mortgage for a principal residence is generally not a good idea … they offer a certain emotional comfort, but circumstances in which they actually boost your wealth are few and far between … most of the time, the more profitable approach would be to pay the lowest rate you can to a third-party lender, and earn the highest rate you can from third-party investments, inside the RRSP.


----------



## Cal (Jun 17, 2009)

I hope this clears things up, you only need enough RRSP contribution room to hold the initial amount of the mortgage, and yes, the interest payments can also be held inside of the mortgage. True, you can't get additional RRSP deductions for it, but it can be held there, and grow tax free for many years. I guess if you still had questions, you could contact the author, he did provide his contact info.

I was able to find this fairly recent post online:


Garth Turner Dec, 23, 2009 blog post 

http://www.greaterfool.ca/2009/12/23/the-sexy-mortgage/

I first publicized the RRSP mortgage years ago as an example of how incredibly flexible this tax shelter can be. I mean, imagine the power of putting your home loan inside your own retirement plan, making mortgage payments to yourself instead of the bank and accruing wealth in a virtually risk-free way?

How does this happen? Simple. Here’s a simplified version of how I describe the process in my forthcoming book, ‘Money Road’:

* First, you need a self-directed RRSP (the kind you can put virtually any asset inside, with which you make the decisions, and which costs a few bucks a year to maintain.)

* Plus, cash or cashable investments within your RRSP equal to your mortgage, or a good chunk of it.

* And you need the willingness to set this up through a financial advisor, a third-party financial institution (like a trust company) and a few thousand in fees to get it ignited.

Your RRSP is allowed to hold a mortgage on any Canadian real estate – residential or commercial – including owned by you or by an immediate relative, such as a parent or daughter. This means existing cash can be withdrawn from an RRSP and then loaned out as a home loan, with the conditions that:

* Regular mortgage payments must be made back into your RRSP.

* Those payments must be at ‘market’ interest rates.

As you might imagine, a mortgage is an ideal investment for an RRSP to hold, simply because of the awesome way a home loan throws off money. In the early years, almost all of the monthly payments are interest due to the amortization of the loan, which means over the course of a typical 25-year payback period, roughly three times the original borrowed amount is taken from the mortgagee. When you are both the lender and the borrower, that’s a good deal. In addition, once an RRSP mortgage is set up, you’re obligated to make payments into your plan to service it – which does not affect your ability to make new annual contributions. In reality then, you have just found a way to seriously fast-track the journey to retirement independence, and to exceed legislated contribution limits.

Also be aware that unlike a traditional mortgage paid in after-tax dollars to a lender, this is one you’re paying to yourself. So, instead of a low rate and a short payback period, you want the opposite. Therefore:

* Set up the loan with a long amortization – 35 years – which means far more interest will be paid into your RRSP than with a conventional 25-year payback period.

* Since the RRSP mortgage rates must be comparable to market rates, shop around for the highest commercial rate and match it.

* Since interest rates look like they’ll be steadily rising then consider giving yourself a variable rate loan which can be jacked up every time the prime pops.

* Make the loan an open one, repayable at any time. While you have no intention of doing so, this gives you the highest possible interest rate, plus a convenient way to wrap things up if you sell your property.

* You can also make this a second mortgage on your property, which will allow you to establish a substantially higher interest rate. It will require more mortgage insurance, by the way, since all RRSP mortgages must be insured through CMHC – which forms the bulk of the set-up costs I referred to above).

* And construct your RRSP mortgage in a traditional way without any fast-pay techniques you’d normally use as a homeowner, like weekly payments, prepayments or shortened amortization. The idea is to shovel as much money as possible into your RRSP, so stick with a monthly payment.

An RRSP mortgage acts like a conventional one, so you can choose any term you’d like, or even have an interest-only payment. If you default, your RRSP gains ownership of your home – which will be a mess to sort out. While an RRSP can own a mortgage, it can’t own a house, meaning a forced sale would occur. However, if you do default, the mortgage insurance is there to reimburse your RRSP for the amount of the loan.

The most common complaint I hear from people is the trouble they have in finding help to set up an RRSP mortgage, since they typically start by talking to their bank about the scheme. Understandably, banks are in the business of making mortgage loans, not having you pay one off with your RRSP. So, the best first stop is an independent financial advisor who runs a fee-based practice who can get this all done for a modest cost and the least amount of hassle. If you don’t have one, email me ([email protected]).


----------



## cardhu (May 26, 2009)

Sorry to disillusion you but _“Garth Turner said so”_ doesn’t exactly carry a lot of weight as a supporting argument … Garth is widely regarded as a purveyor of half-baked schemes … I wasn’t aware he was pushing this particular half-baked scheme, but it fits his pattern.

Garth offers abysmally poor advice in this little article … paying yourself a higher rate of interest is the worst thing you can do with an RRSP self-mortgage … a terrible idea … Garth compounds that mistake with suggestions to extend the amortization as long as possible, and to avoid prepayments … in other words, to do the opposite of all the things that a prudent home-buyer would do ... those who follow his advice will not end up on the fast-track to retirement, as he claims, but will end up dragging a boat anchor and will find themselves falling further and further behind their neighbors who didn’t. 

Shoveling money into an RRSP in the manner suggested by Mr. Turner is extremely foolish. 

Hope that clears things up. I guess if you still have questions, you could post them in this thread.


----------



## Cal (Jun 17, 2009)

Yeah....I am just trying to illustrate for the OP that it can be done.

For the OP here are a few more links about it for you to read up on and figure out if it is the right thing for you and your family to do. It isn't for everyone. Hopefully you won't have a problem with these sources.

http://www.milliondollarjourney.com/holding-a-mortgage-within-an-rrsp.htm

http://www.canadiancapitalist.com/mortgages-in-a-rrsp/


----------



## cardhu (May 26, 2009)

Many things “can be done” but shouldn’t be ... jabbing a sharp pencil into your eye is one such example, and setting the interest rate as high as possible on an RRSP self-mortgage is another ... in both cases, there might be some rare circumstance in which some benefit occurs, but for the most part, they are actions that only cause harm. 

As supporting arguments go, _“MDJ said so”_ and _“CC said so”_ are no more compelling than any other “said-so” ... both “sources” offer a more balanced description than Turner’s sales pitch ... however, they both still incorrectly refer to the ability to set the interest rate high as a good thing, when it is not. 

OP asked _“why don’t more people do this?”_ ... it is probably true that most people aren’t aware of the possibility ... given the confusion that surrounds the subject, that's probably not such a bad thing ... among those who do know about it, the reason they don’t use it may be because they realize that it usually doesn’t make good economic sense, and in some cases (ie. when you set the interest rate high) is an almost certain wealth-destroyer.


----------



## BLUNOZ2 (Jan 13, 2012)

*? On Rare Cases*

What rare cases do you think of for SDRRSP with mortgage?


----------

