I was walking through the lobby of the Empress Hotel, in Victoria, one rainy afternoon last month when a well-dressed middle-aged couple approached. The guy took my hand and pumped it. “We just want to thank you,” he said. “Ten years ago we read your strategy for an RRSP mortgage, and it’s made our lives incredibly better – even if the bank hates us.” And off they went, heading to a restaurant where a cup of tea costs five bucks.

And he was right. 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 This means existing cash can be withdrawn from an RRSP and then loaned out as a home loan, with the conditions that: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 (garth@garth.ca).

Now, wouldn’t this be a deliciously, sexy thing to do in 2010?