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Self Directed RSP mortgage with interest being tax deductible.

4K views 6 replies 6 participants last post by  TomB19 
#1 ·
Thinking about this and wondered if anyone might have implemented it, and how it went.

From my RSP or RIF redeem investments and set up a self directed first mortgage on principal residence. Use the proceeds to invest in an non registered investment, like a growth ETF or M Fund. It would then seem that the interest I pay on the mortgage to my RSP should be tax deductible against other forms of income such as employment, pension, dividend and even RIF income. So my question is do you see flaws in the approach. I know there are fees involved in setting up, CMHC insurance, and administration but the math seems to suggest it might be worthwhile. Removes any investment risk in the RSP (moving it to a taxable account) while getting to offset some of the unneeded minimum RIF payments . THx for any objective feedback.
 
#2 · (Edited)
Someone has implemented it. It went well.

It doesn't have to be as complicated as your approach, although I don't see any issue with your idea.

Here are a few points:

- It's expensive so you want to look at it as a long term investment. If you subtract the $1000, or so, of up front expense, you'll find that your break even, as compared to GICs or bonds, is a long way out.
- It's a guaranteed, fixed income, vehicle and it pays better than most others. There are corporate bonds which pay more than a mortgage but those bonds don't give you real estate if they default.
- You will have nice cashflow into your RRSP. Learn to invest that cashflow wisely. Continuous investment over a long period, such as mortgage payments, is a great way to do well but I recommend you start learning the ways of value investing so you can put the cashflow to best use.
- You can switch to a mortgage carried by the bank at any time but there is considerable overhead in making the switch. Don't take that switch lightly but you can make the switch in future, if you discover a better way to make financial gains.
- Don't jack up the interest rate, thinking you will build up your RRSP. You will pay tax when you withdraw from your RRSP/RRIF. Just take the rate you would take if you were negotiating a retail loan. In fact, I look at my RRSP as cheap money which creates cashflow and equity that comes outside the RRSP so it's a nice tax mitigation mechanism if you can put the money to use on a productive asset.
- While you can deduct the RRSP mortgage, and this is great, you can also deduct a 3rd party mortgage so this isn't an advantage.

The RRSP mortgage is a tool that has a very specific and quite narrow application. I'm certainly not interested in talking you out of it, nor am I interested in encouraging it. It has worked out extremely well for us in the past but is no longer financially interesting to us.

In the mid 2000s, I was discouraged with the markets and went entirely into mortgages and GIC ladders in our RRSPs. Suffice to say, we made out extremely well as we took zero impact in the crash of 2009 due to simple luck. I picked up a some extreme dividend REITs in 2009, when nobody seemed to want REITs, and heavily pumped up those positions until 2011. Those have been amazing positions that are still the core of our portfolio but we are still mostly real estate so, like all real estate investors, we didn't get rich quickly.

The lesson:

We have made out extremely well and I'm pleased with everything we've done, however, an objective value investor could have been 100% in the markets, navigated the crash, taken the hit, and still ended up pretty well off. At the time, I couldn't have navigated the crash so it was the correct choice for us. I really wanted the security.

To get back to value investing, think about how you're going to exit real estate investing. Not many consider this. At some point, you're going to stop buying property and the cashflow is probably going to build up quickly. Even worse, when you start the sell-down, you're going to have a lot of money to manage. Sooner or later, you're going to need to have a mechanism to competently manage the fruit of the years of troubleshooting rental problems.

In short, if an RRSP mortgage isn't the obvious best path forward, I'd pass on it. If it is the best path forward, consider Canadian Western Bank. They're no cheaper but CWB offers both arms length and non-arms length RRSP mortgages. The down side of CWB is, when I checked, they didn't have a mechanism that would allow cashflow to go directly into the markets. It's extremely likely they have connected those dots by now. Keep in mind, TD is extremely grumpy about RRSP mortgages. I don't know about the other banks. You'll have to do your own research, of course.
 
#3 ·
A few more notes.... I'll just type them in without organizing them.

- I strongly recommend you heavily analyze your choices before you go to a bank for an RRSP mortgage. They will do everything they can to not give you the mortgage. I was told all sorts of made up BS including, "there's no such thing as an RRSP mortgage". If you decide it's right for you, you will probably have to make them do it and you will have to make a lot of calls.
- Keep in mind, you can hold a mortgage in an RRSP, RRIF, TFSA, or unregistered account... or any combination thereof


Returns:

- As compared to an anuity, RRSP mortgage makes a lot of sense
- As compared to government bonds and/or GIC ladders, the RRSP mortgage is a slam dunk
- As compared to a couch potato portfolio, the RRSP mortgage does surprisingly well but probably loses out over a long period of time. Still, it starts making more sense as you approach retirement and your risk adversity increases.
- As compared to an objective, value investing approach, the RRSP mortgage is a wasted opportunity

I'm pretty sure that, if you were to lose your job and go on employment insurance, you can withdraw the payments from your TFSA each without declaring it. In this case, it would be a simple withdrawal of savings.

I believe that, if you lose your job and have to withdraw from your RRSP, it needs to be declared as income so will reduce your EI payment.

Someone more familiar with EI rules can confirm or correct these thoughts.
 
#4 ·
I did and RRSP mortgage, and used mortgage as a proxy for bonds when bond returns were going to crap in 2002 . It ran 2002-2007. I had about $190k to start, and through aggressive repayment had it down to $70k by 2007. Took about $2k to set up, and about 240/yr to the trust co. By the time it was down to 70K I had other funds I could use to pay the mortgage out. There were other better places to put my money to work then, like buying into a partnership that paid management bonuses for owning enough stock in the co. The mortgage was never worth more than about 40% of my rrsp.
 
#5 ·
I must be missing something ... to deduct the interest costs against other income, doesn't there need to a loan traceable to buying the taxable investments?

The mortgage interest for the mortgage in the RRSP is only traceable to the house, not taxable investments.

Now if there is the mortgage in the RRSP, where payments against the mortgage are rolled back out to buy investments on a HeLoc loan, I can see where the HeLoc interest is traceable to the investments so that the HeLoc interest would be tax deductible.

This link also talks about the HeLoc interest, not the mortgage interest being what is tax deductible against other income.
http://www.segalllp.com/2017/01/26/use-rrsp-lend-tax-deductible-mortgage/


Cheers
 
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