A bank survey out Monday shows 58% of us are worried about our debt. And no wonder. We owe more than dumb American families. We’re screwed.
Another bank survey just found 90% of all money in tax-free accounts are in savings. Average yield: one third of one per cent. Time required to double your money: 696 years.
And a bank economist commenting on the real estate market says, “We are stealing or borrowing activity from the future,” (especially in the housing market where many consumers have felt that if they didn’t act now they’d miss the boat). “It means that borrowing and real estate activity will not be as strong in 2011, and that’s the price we pay for today’s activity.”
What draws these three things together should be clear. It’s advice. Knowledge. It’s all about where most people get the information on which they act – to borrow, to invest and finance houses. Sadly, that comes from bankers (who profit from selling products, like loans and GICs), or salesguys (who score with commissions on houses or assets).
That’s why I wrote Money Road. We desperately need an independent path. Strategies that work for you, not them.
But let me give you a small example of the knowledge sinkhole. Jacquie and Len live in BC and read here a few weeks ago about how it’s possible to put your own mortgage inside your own RRSP, thereby making payments into your retirement plan instead of a bank’s coffers. I laid out the process for making this happen, and the reasons it’s worth exploring.
Jacquie contacted her financial advisor, the guy who sold them the mutual funds their RRSP now holds. He works for a national firm you’ve all heard of. Bad idea, he said. Besides, we don’t do it so you’re out of luck.
To ‘prove’ his argument he attached an article written for Business in Vancouver before his recent death by a guy billed as a ‘vice president and investment advisor with CIBC Wood Gundy, a division of CIBC World Markets Inc.’ Impressive. But misleading.
The banker disses an RRSP mortgage because it takes some effort to set up (legals and appraisal). Fair enough, just like a regular mortgage. But then he claims if you were ever to stop making mortgage payments to your savings plan, “your RRSP must ultimately foreclose and sell the property to get its money back.”
Actually an RRSP mortgage requires CHMC insurance, which protects your RRSP if you don’t pay. Then the taxpayers pony up. But nice try.
The article also says an RRSP makes no sense because you have to charge yourself a rate no lower than the banks charge (so what’s the point?), and this…
“…moves us to the heart of why it doesn’t make sense to have your mortgage in your RRSP. The problem is that you and your RRSP have completely different goals. Your goal as a borrower is to pay the lowest possible interest rate. Your RRSP’s goal is to get the highest return possible. Those two goal sets simply cannot be reconciled if you are on both sides of the transaction as the payer of the mortgage and the owner of the RRSP.
“So what do you end up with if you hold your own mortgage in your RRSP? No flexibility, no rate breaks, no payment concessions. Just a mortgage that costs somewhat more to setup and maintain than a regular mortgage, and an RRSP investment that pays a very small return.”
If bankers understood an RRSP mortgage as I explain it in the book, they’d know it’s in your favour to have as high a mortgage rate as possible, so you shovel big payments into your RRSP – enough to exceed the annual contribution limits (the only way of doing so legally). They’d also understand (and likely do) if you gave yourself a 6% mortgage, you’d be earning 300% more than banks currently pay on the GICs they recommend for RRSPs.
They’d know holding a mortgage on your own home is a stable, secure, no-surprises way for your retirement plan to realize a pile of money, and also that you’re able to give yourself a fixed or variable rate, prepayment options, monthly or weekly payments and any other features currently available from the banks. But most important, they would know (and do) this is all about achieving financial security and independence, without incurring debt or lining someone’s pocket.
Now, this move ain’t for everybody. Far from it.
It costs money to set up. It’s unconventional and takes courage. And it requires the help of an advisor who cares more about his clients than his next Mercedes.
If yours is incapable or unwilling, it’s time to roll.
Watch Garth here.
