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.
93 comments ↓
We did it. Not hard to do and our bank picked up the tab.
My husband and I feel very secure about what we did.
No guts no glory.
For anyone who doubts that a housing crash will take years to reach a bottom:
http://seekingalpha.com/article/185660-property-values-projected-to-fall-12-in-2010
And, with Fannie and Freddie now over $100B in combined bailouts, they are forcing banks to buy back improper/illegal mortgages (where there were omissions/lies on the applications):
http://online.wsj.com/article/SB10001424052748704343104575033543886200942.html
Don’t worry, I’m sure CMHC will never be in this situation… all of our banks are extremely careful in filing the paperwork (like CIBC, and their “look the other way” mortgages for the self-employed)
This guy stems from an evil industry that colludes with so called competitors, regularly deceives its Customers and makes bizillions doing so. These so called advisors are heavily incented to ensure their interests are ALWAYS focused on their Mercedes and other personal gains. The mortgage contracts they write up are a one way street on their terms. Good on anyone pursuing an alternative path for financing.
Way to go Garth!
It’s about time someone exposed the various banks’ ‘financial advisors’ for what they really are… the ‘advice’ they have offered me in the past only made them wealthier, at my expense.
Garth,
I am very intrigued by the RRSP mortgage. I decided against moving up in the market last year and increased my RRSP payments and TFSAs instead in order to “wait it out.”
I will get your book but won’t have a chance to read it for another month or so – sorry.
How do Real Estate conditions impact the RRSP mortgage? In other words, is it better in a rising market or falling market – or is there a difference? Just wondering if there is a better time or not to look at this option.
I set myself up with an RRSP mortgage about a year and a half ago – just before “stuff” hit the fan. I’m happy to report that while the majority of people were losing their shirts on their investments, my RRSP was growing at a rate of 7%. Definitely no regrets.
So do Jacquie and Len still work for their advisor?
sales ticked up in Vancouver last week….
but listings continue to surge.
Makes sense to me. Most people pay 3 to 4 times as much interest on their mortgage as they originally borrowed by the time they pay it off (although I am sure that is lower at 2%). So if you put your mortgage in your RRSP you should realize an amount of money in the RRSP possibly 3 or 4 times greater than what you started with at the end of the term. What wouldn’t be good about that? Start owing your RRSP $250,000, end up with a million in there.
The big difference that the critics of this plan miss is that the interest payments go to you instead of the bank. Sure, you have to use after tax dollars to make the payment, but same with a bank loan. Sure, you have to pay tax again when you withdraw, but that is applies to mutual fund profits (if any) when you withdraw too. So over all it is net-net the same except you get to keep your own money, instead of handing it over to a bank.
The big worry with all RRSP accounts is that at some point down the road the government may restructure them and greatly restrict the types of investments people can hold to “reduce risk”. In the US, they are already floating the idea bubble that 401k plans should be made to invest in “annuities” (i.e. government debt). It’s dawned on the politicians that there is about $15 trillion in these plans, about what the deficit is going to add up to over the next 10 years or so. They need the money. Argentina did the same sort of thing at one point.
But even if that happens, it’s down the road, and it will happen to whatever funds are currently in the account either way. So if you need a mortgage, it still makes sense to be your own banker even if the account might be modified later. And if they do modify the accounts, it might make even more sense. Why not underwrite your own mortgage with the money rather than being forced into long dated government bonds?
Personally, I never understood putting large amounts of money into an RRSP while you have outstanding debt anyway, or especially “borrowing to invest in RRSP’s”. Here is the part that hurts my head: If you borrow to invest in an RRSP, you get the tax break sure. But you have to pay the interest on the loan with after tax money. That might make some sense if you can borrow at 2%, but not much at 5%. Plus, it’s a “leverage” play. You are essentially borrowing money to buy stocks and such, the performance of which is not guaranteed, while the debt repayment plan most certainly is. It is little different than using margin to buy stocks, only with a tax credit. But many of us have had to invest in RRSP’s to get the “match” from our employers, so the money is there.
Having $250,000 in RRSP’s while you have a $250,000 mortgage is essentially the same thing even if that wasn’t the intent. The $250,000 in the RRSP is at the whim of the market, while the mortgage is “till death do us part”. By underwriting your own mortgage you eliminate this risky leverage position and practically guarantee a known dollar figure will be in the RRSP on a known future date. Unless you default on your own mortgage to yourself of course. But Garth says it must be CMHC insured so maybe even that risk is gone.
What’s not to like? Guaranteed financial performance, drastically reduced leverage, and no market risk.
If you are in the fortunate position of having a sizable amount of money in RRSP’s, and you have a mortgage, this plan makes sense. When you make your monthly payments, you can rest assured you will see the money (tax adjusted) back again as income one day, rather than seeing it pay for your banker’s kid’s private school and his wife’s Gucci hand bag collection, while you hope to God whoever is running the mutual funds you bought doesn’t sink the ship.
There is a simple explanation for all this hubbub in the MSM.
The scum that infest the banks, brokerages and financial management companies of this country are slowly watching their commission based paycheques get eroded by the streetwise consumer who, simpy put……..DOES NOT TRUST THE SNAKE OIL SALESMAN ANYMORE.
Why do you think the MSM puts out articles saying we consumers have $1 trillion in savings accounts that shouldn’t be there, and that TFSA’s are going to take 696 years to earn a nominal return……they’re starving to get their greedy little paws on it.
Screw them all, confiscate all of their property, and throw them in jail without bail or lawyers “BEFORE” we start going thru their books. Seriously……it is where I would start…..and I am a free market capitalist right winger……..I’d hate to think what the left would want do to them.
Here’s a link from people that have successfuly set-up an RRSP mortgage (see the comments)
http://www.canadiancapitalist.com/mortgages-in-a-rrsp/
You may recall some bloggers (including me) have concerns about the “double taxation” created when you pay your RRSP back in after-tax income and then pay tax again when you withdraw. But if you are already paying a mortgage after-tax, its a washout.
Secondly, I dont necessarilly agree with the “highest” possible rate. It depends on other factors. Firstly, we have to remember your RRSP is not earning X.X% – you are paying it back at X.X%. You have to re-invest the
money you pay back in. Seem counter-intuitive?
Use a $150K RRSP mortgage over 25 yrs. I think
payments are about $1000/mo at 4.5% and $1200/mo
at 6%ish. At a 33% marg tax rate, you could pay
another $300/mo before tax with the lower payment.
Dont pay off the mortage with it, put it somewhere else.
Now the extra $300 comes off your contribution, so depending on how much contribution room you have, you could be further ahead this way. Check with your advisor.
Garth – thanks for the blog space.
Garth,
Let me make myself perfectly clear; Your quest to make yourself relevant or might I say profitable has taken a step that you should never recover. I am a personal friend of John Caspar and you should be made aware of the fact that he died of cancer in early October 2009. Despite his death I understand that your subject matter regarding his thoughts on this particular subject may differ from yours but it’s important to state that John worked as a fee based advisor that took no commisions with his clients and was a champion of investor rights by fighting for investors who had invested in fraudulent investment schemes and spent countless hours defending investor rights via his columns and television appearances.
While I take your comments towards John Caspar in a non-personal matter, it’s important to me and to others reading this blog that you are challenging a man who’s ideas, comments and perspective come from a Senior investment counsellor who not only knows his ’stuff” but who spent a considerable amount of time defending the rights of investors beyond his own circle of investors. I only hope that you should garner the same level of respect that John Caspar has over the years he’s worked for the common man. Unfortunately, you’re focus, is well founded but far too bent on selling your books. A lesson we must all learn no matter how young or old. There’s a buck to be make by all who espouse to the great unwashed.
I did not meet him nor realize he recently died. Upon learning that, the post was immediately altered since he can no longer defend himself. My disagreement with him (and I read many of his articles prior to making this post) was entirely professional. I regret any discomfort or grief this mention of Mr. Caspar may have caused his family. — Garth
“Average yield: one half of one per cent. Time required to double your money: 696 years.”
It doesn’t change the conclusion, but the doubling time for a 0.5% return compounded annually is 139 years.
Wouldn’t this be a bad strategy if one thinks the value of real estate is going down? Also, way to put all your eggs in one basket.
Hi Garth,
I received your book on Friday and I am very happy I purchased it. I really appreciate the information you provided about technical analysis of markets, which has made blogs like Zero Hedge much more meaningful. I intend to study it in more detail after I finish your book; are there any books or authors you would recommend on the subject?
Thanks!
The Desjardins Affordability Index (DAI): 2010
Affordability in Canada continues to deteriorate
Prices continue to rise in the fourth quarter
http://canadabubble.com/resources/resource-bubble-watch/the-desjardins-affordability-index-dai-2010.html
“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).” – Garth Turner
…or journalists writing finance books (who profit/score with book sales)?
Every day on this site I provide about 750 words of information and advice. Over one year, that equals 4.5 books. It’s all free. Every 12 months or so, I augment that with more indepth work in the form of a traditional book. That costs tens of thousands of dollars to produce, and sells for $20 a copy. I fail to see the point of your comment. As for ‘journalists writing finance books,’ I’m also a qualified financial counselor. And you? — Garth
Here is a copy of the details for a BMO Investorline RRSP mortgage that I received back in 2004 (some fees etc may have changed since then)… run the numbers and see if it works for you.
~~~~~~~~~~~
A mortgage may be held within a BMO InvestorLine RRSP account. Please note however that only Non-Arms Length Mortgages (NALM) are accepted. A non-arm’s length mortgage may be held in one plan, or split between a maximum of 3 self-directed plans. The planholder must be the registered holder, or spouse of the registered holder of the mortgage. Non-arm’s length mortgages must have a minimum principal amount of $100,000.00 owing at the time it is acquired by the plan.
Eligibility:
* Planholder
* Spouse
* Immediate family
1. Purchase of home or revenue property.
2. Refinancing to payout or pay down existing first and/or second mortgage(s). Term loan with principal and interest.
Qualifying Property:
New and existing residential property located in Canada.
Owner-occupied properties up to and including 4 units are eligible (one of the four must be owner occupied).
Vacant land or commercial properties do not qualify for SDRRSP.
Cottages are not permitted.
Mortgage Type:
Must be 1st
No 2nd mortgage or 3rd mortgages.
Set-up:
Mortgage terms, rates and documentation are coordinated with FirstBank Direct, the client, and the client’s lawyer. (Approximately 2-4 weeks)
Interest Rates:
Must be in accordance with current Bank Mortgage rates and terms.
Terms:
6 months to 10 years with a choice of amortization up to 25 years.
All RSP mortgages are open (for prepayment) regardless of term.
Note: We do not accept closed mortgages.
Default Insurance:
Insurance is required.
Insurance Premiums:
Premium is 0.50% – 4.50% of principal based on loan to value ratio.
The following lists the fees that apply to mortgages held within Registered Plans.
If you are a Quebec resident please add the QST, where noted with an asterisk (*).
Annual Mortgage Fee (Charged by the Trust Co.)
$225 + GST =$240.75 *
* First year is pro-rated and charged up front
* Refundable if the application is denied.
* The Annual Fee is NOT tax-deductible.
Full Service Set-Up Fee
$235 + GST = $251.45 *
* Including Appraisal
Basic Service
$75 + GST = $80.25 *
* Excluding Appraisal, if obtained within the last 60 days
Survey Costs
Approx. $300 and up + GST *
Ongoing Monthly Maintenance Fee
$50 /month + GST $53.50 *
Note:
In addition to the above fees, the client will be responsible for any associated legal fees, as determined by the client’s lawyer.
Mortgage Insurance:
The following premiums apply to owner-occupied first mortgages:
Loan to Value Ration Standard Premium as percentage of Principal
Up to 65% 0.50%
65 – 75% 0.75%
75 – 80% 1.25%
80 – 85% 2.00%
85 – 90% * 2.50%
Note:
* Purchases- may go up to 95% of the lending value. Maximum 85% for rental property.
* Refinances- payout existing mortgage(s) balance of the same property could go up 90% of the lending value.
Possible Additional Fees:
* For Quebec Residents please add the QST, where noted with an asterisk.
Revision Fee:
$50 + GST = $53.50*
If there are changes to the terms originally requested prior to the advance of the mortgage, a revision fee will apply.
Renewal Fee:
$85 + GST = $90.95 *
N.S.F. payment fee
$25 + GST = $26.75*
Discharge fee
$125 + GST =133.75
Rate and Terms Change
$85 + GST = $90.95*
Assignment Execution Fee
Approx. $85.00 & up + GST =$90.95 *
If you currently have a BMO InvestorLine RRSP account, you may request to have a NALM set up in your RRSP account by speaking to a BMO InvestorLine representative by calling 1-888-776-6886.
I trust that you will find the above information helpful. If you have any other questions regarding this or any other issue, please do not hesitate to contact us.
Yesterday’s “dump” is NOT in Riverdale!
Too far east. Blake/Jones
Love the before shot. (Google street view)
I wonder if they ran out of money….. or are they just trying to beat the upcoming flood of listings?
When I read the article I thought the 696 years was a bit simplistic, because if you used the return for 2008 from the stock market you would never double your money. If you used an interest rate of 13% you would double your money in less than 6 years. I know I had a RHOSP in the late 70’s.
Anybody seen that?
http://www.huffingtonpost.com/2010/02/01/pro-obama-group-goes-afte_n_443871.html
Right on…not to be missed.
Garth:
I heard about this from one guy I worked with. He set it up (his wife was a CA or something) and swore by it. I didn’t have enough in my RRSP, since I pulled it all (~ 10k) for the down payment on my Mattamy shack.
When I get back to work, and pay off my high interest credit card bills, etc. I will jump in with both feet. Can’t hardly wait to try it out. I do need to find this “mythical” advisor you talk about though. I bet he drives a Ford.
Mike
Garth is it possible to set up an RRSP mortgage and then rent out the property and have someone else make the payments? Seems like a good way to have someone else fund your retirement.
Indirectly, yes. Tenant pays rent. You pay mortgage. RRSP holds mortgage. — Garth
To all of you who accuse Garth of trying to sell books with his site……….duh! It’s his site and they are his books. I am pretty sure I would do the same. All he has done is take a lot of the info and ideas that have been freely available on this site and put them into one convenient package. It is only about $20 bucks…let me put it into perspective:
2 tickets to new release movie – $25
Popcorn and pop for 2 – $20
Garth Turner’s Money Road – $20
Not buying a home in Vancouver this year – Priceless
Mike the engineer:
I don’t see how you can borrow money from your RSP that is not there to start with.
I think very few young people will have enough in their RSP to use as a mortgage. Even after contributing all one’s life one often has no more than $700k in there. And by then, one will soon withdraw from it. Not the time to do the mortgage thing.
Funds need to be in an RRSP to accomplish this. And where did anyone say it was for young people? It works best for those who have hundreds of thousands in retirement plans and an equal mortgage obligation. — Garth
Does the new book have a detailed explanation about mortgage in RRSP.Perhaps a step by step guide.
lso correct me if Im wrong what I decipher from Comment 24 is that this would work for people who have enough in their RRSP to cover the full mortgage value.
Yes, the book does explain this process in detail. No, you don’t need the full mortgage equivalent in your RRSP to do this. A home can have a conventional and an RRSP mortgage on it at the same time, determined by its appraised value and traditional lending guidelines. — Garth
A 1/3rd of 1% return will double in 209 years, not 696.
Perhaps you were thinking of a 1/10th of 1% return? (this will double in 696 years)
Did you factor in inflation of 1.5%? — Garth
Hi Garth,
Just wanted to say a BIG thank you for the book. With the info I’ve learned here, I’ve managed to scare off 3 investment advisors in the last year, telling me I’ve learned far more about their tricks than they are comfortable with. In fact, the last one I met was rejected within 30 min because he couldn’t answer what I now consider basic questions. Thank you so much for all the help, since my money has to last a long time. My little old grandmother just died at the age of 106. And now, thanks to all I’ve learned, no so-called advisor can steal my money under the guise of “fees” and bad advice, I hope!
Anybody know which bank or financial institution can help you to set up RRSP mortgage? I live in Calgary.
Thanks in advance
Garth,
From what I have been reading it appears that the RRSP Mortgage will work better if the Mortgage amount is over 200K ahd much better the higher it is because of the fixed costs for setting it up and maintaining it.
Would that be your opinion as well?
That is reasonable. The greatest cost comes with insuring the mortgage. Other set-up costs are not that large. — Garth
Dear Mr. Turner: Re holding a rrsp mortgage: Can one hold a rrsp mtge past the age of 71 when one has to collapse their rrsp to a rrif.
Then it’s a RRIF mortgage. — Garth
On a slightly different topic, we have around $900-1000 a month to do one of 2 things with. We had planned to keep putting it on our 239,000 mortgage and use the benefit of low interest rates to get ahead on the principal. However, after reading parts of your book, we are reconsidering wheather it should go into equities in TFSAs. Any ideas anyone? BTW one of is 35, the other is 50 and we 85,000 in RRSP’s and more in pensions. Thanks.
Mr. Turner:
Thank you for trying to make Canadians more financially literate. Most Canadians are not able to take advantage of investment opportunities because their net worth is tied up in one asset (the house) and their mortgage. It scares me when I think of young people having mortgages of 400 k just to live in a box in the sky. When the interest rates increase, these young people will learn a valuable (and costly) lesson… Real estate is called a market because it is a market. Markets are subject to go up and down. People should only buy what they can reasonably afford, but they, being human, are enticed by granite, shiny appliances and ensuite bathrooms.
I have never bought the house I wanted, but instead focused on what I needed. As a result, I have never been overextended financially. I am a conservative investor but not frugal. I have always lived within my means.
Some others I know who by sheer luck are ditching properties they bought for a pittance for hundreds of thousands of dollars are turning around and buying even bigger places. I don’t understand that. Their kids are grown and they are buying a bigger place!!!! It’s ridiculous.
I shake my head in dismay but thats human nature. Put wants ahead of needs. Most of my friends are so envious of me now because I have a really nice place downtown which doesn’t cost me an arm and a leg to maintain. I can walk to work, stop by a supermarket on my way home and just enjoy life… I am not saddled with a big house and not attached at the hip to a huge debt.
Although I did this without Mr. Turner’s advice, believe me, it is good advice. Everyone should be listening!!!!
e-YO!
Garth?
Your site dropped my last post!
I have NEVER been so insulted!
NEVER!
{thinks}
Well, not this year, anyway!
And!
It was a FINE post, Garth, which I have now forgotten, so EXHAUSEDE was I at the end of composing the post, that my memory failed me!
I am UPSET, Garth!
It would be BETTER if you posted a “Garth” to this, my second comment of the day, to smooth things over!
The tension here is KILLING me!
Regards
Munch
{Michael Jackson-like moon walk, exiting stage left}
Oh and Garth?
I drive a BMW 6 series!
THEREFORE!
I need to be taken seriously!
I think!
Yes!
A 1/3rd of 1% return will double in 209 years, not 696.
Perhaps you were thinking of a 1/10th of 1% return? (this will double in 696 years)
**
Did you factor in inflation of 1.5%? — Garth
**
If inflation is greater than the return (1.5% vs .3333%) then surely the investment will never double?
>> Did you factor in inflation of 1.5%? — Garth
If you’re talking about doubling inflation adjusted dollars then 696 years makes even less sense, since obviously at 0.33% interest and 1.5% inflation your money is shrinking. So what the heck are you driving at?
Alan #12 Garth inadvertently targeted a person that cannot defend him self and withdrew . You however took this slight as an opportunity to insult us all with your tone and language . We are not the GREAT UNWASHED as you espouse us to be . More aptly we are the great brainwashed at the hands of the banksters ,msm and the politico’s . I would love to pigeon you as you have us . It’s wonderful to see the other side is watching the herd so closely . The herd is starting to smell your fear . Your peers will not be happy with you showing your hand .
Garth, I just bought your book (offline) today. Looking forward to it.
I’m not in a position to use it, but… is this RRSP mortgage scheme taking advantage of a loophole? Something they would be likely to shut down if too many started taking advantage of it…
No loophole. This is a legitimate asset for a plan to hold. — Garth
Here is more, remember a couple a days ago I read and posted here that some Vancouver RE people bought this place for less than half price IM now they want taxpayers to bail them out Hello prorogation ( non accountable working days) is paying off for just who?
The New York Post reported Monday that the parent of Intrawest ULC, the company which owns one of the venues for the Vancouver Winter Olympics, wants the Canadian government to put up $90 million US before the Games start or it will sue.
Read more: http://www.cbc.ca/money/story/2010/02/01/nypost-report-fortress-intrwest.html#ixzz0eJ4UdqAM
#32 Kevin
I was fortunate enough last year to be able to max out our RRSP’s (always do first IMHO) and TFSA last year. I bought shares in an income trust yielding about 18-25% at the time (mostly during March lows–currently about 12%). Can’t find anything from my bank even close to that. I see no reason not to leave it in equities for now, but the good thing about having it an trading account is you can pretty much put it into anything via index funds.
The rest of the money went in to some speculative junior oil & gas stocks….a tax free 10 bagger would be sweet (only do if you can afford to lose it).
So the RRSP mortgage can be used for yourself, your spouse, or your family? So would it be an option (if they are willing) to take out an RRSP mortgage with my parents? I would much rather them profit from me buying a house than a bank.
Lots of talk about good bad and ugly financial advisors… what 10-15 questions (and preferred answers) would you recommend be asked to help the common Joe weed out the less knowledgeable advisors?
It amazes me how easily influenced people are. I love the comment from “Lothar” bragging about his 7% return with his RRSP holding his own mortgage. Does he not nderstand that he is supplimenting his great performance by paying a mortgage rate that is almost 3.5 X higher than market. Why limit himself at 7%, why not go for 10% or 15%. If his mortgage is $200,000, he is paying $10,000 in higher mortgage interest/payments each year…. But look at his RRSP grow.
The only time holding a mortgage in RRSP make any sense, is if it is someone else paying the higher than market interest rate.
But like most other investments, the higher the rate usually means the higher the risk.
Unexperienced investors who have little or no knowedge about lending, to hold a mortgage for a client who does not qualify for a standard mortgage with traditional lenders maybe a difficult pill to swallow.
These are the clients who are still paying 12-16% for 2nd mortgages…. But how would you feel if the $30,000 2nd mortgage you are now holding in your RRSP, is now 4 payments in arrears, you now may have to take legal action on client, and if the equity in the home has gone down, a portion or all of your investment could be at risk….
I accept the fact that most people are not happy with their current situation and are looking to improve their rate of return on their investment. But I think Garth said it best….. ” 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.”
I will continue to pay 1.875% on my mortgage and keep my debt and investments separate.
Garth – how do I find a financial advisor who is not associated with a bank or lending firm? And one that may actually know about and be able to assess opportunities like the one you describe?
Thanks.
Contact me offline, garth@garth.ca, for a chat. — Garth
Ps – I am in Hamilton, Ontario
Garth,
Does this strategy apply to younger first time home buyers as well? When I do jump in (no time soon) I’ll be using my $25K sitting in RRSPs as part of my down payment. Is there a better strategy for my scenario?
You need money in a plan before you can use it to create a mortgage. Not for most first-timers. — Garth
My wife and I had an RRSP mortgage for about 15 years. The last renewal we took 8.75% for seven years. The idea is to get a high mortage rate. We could not have gotten 8.75% income in many other investments. Never did do the final math but I think we really increased our RRSP with this move. No regrets.
#40 David B – thanks for the article on Interwests default and its hedge fund owner threating to sue VANOC
hopefully VANOC will have the guts to just say no and let the hedge fund try to sue them
after all the Whistler ski resort does not disappear on Feb 19. it will go into recievership and continue to operate.
anyways with security concerns I doubt Interwest has much to do with the day to day operation of Whislter during the Olympics
Just received my copy of MONEY ROAD today, very excited to plough through it. I finished reading AFTER THE CRASH about a month ago.
I just wanted to make some (belated) comments about the “wolf boy” postings from last week.
- I believe that the purpose of these sites (or the reason why I read them and make comments from time to time) is to collect information and get other perspectives on things. My brother got me reading this blog last summer, I also read Jeffrey Rubin’s, The Market Oracle, The Automatic Earth and America Canada Blog Spot frequently.
- to me the key is for all of us to make our own informed decisions. Collect information, analyze it and apply it to our situation/benefit as best we can.
- I’m not “anti social” or out “to see people lose their shirt” in RE. Conversely, if you’ve made money flipping houses in the last 8 years or so, congratulations, you used the structure and rules that were in place to your benefit, none of us should begrudge that.
- Having said that, I know directly a few people in “boom” Calgary here who basically have the Sword of Damacles hanging over their head in terms of their mortgage and consumer debt. And it’s only a matter of time before it comes crashing down.
And it’s sad…no, tragic. It’s the typical story that gets belated on here all the time; little money down, overpaid for the house, use it as a credit card, huge consumer debt, laid off in the last year. And the common denominator of these people is that they didn’t do their research. They simply snorted the “Calgary cocaine” being distributed around here since 2002 and only focused on the social status of a $400K starter home, weekend retreat properties in Kimberely or Invermere, a winter home in Arizona. Now, their heads are spinning so fast they don’t know what him them.
And I know a few people in this situation, so lord knows how many more there are out there?
Anyways, thanks again Garth, I enjoy your blogs, your books and the reader comments.
Best Picture Yet!
The analogy of Dumb and Dumber to represent the Greater Fool Theory…..
re#44-a 7% guaranteed return, that you get for your retirement, is a great way to pay off your mortgage.
UK media’s view on the 2010 Vancouver winter olympics..
http://www.guardian.co.uk/commentisfree/cifamerica/2010/jan/31/vancouver-winter-olympics-police
Post#44 refi now. You must be a financial advisor. A $200,000 mortgage, 25 year amatorization with a 5 year term @1.875% will be $17,193 in interest payments.
The bank/lender thanks you.
The idea is to get as much in your rrsp as possible and not”give”the interest to the banksters.
#51 X
I would say America & Canada…
Started reading your blog a couple of months ago and have become addicted. Bought your book. Excellent!! Thank you.
Englands view on the 2010 games…and yes its a ghost town there at night I work there..
http://www.guardian.co.uk/commentisfree/cifamerica/2010/jan/31/vancouver-winter-olympics-police
Garth, like you said it is something to investigate. I did and am still trying to determine if it is a good idea now. I also discussed it with my advisor and he said he would run the numbers to see if it is advantageous now. At a quick glance it appears to be a fairly neutral deal for us. The question is, will we gain in the long term. What will our RRSP earn as it is invested now minus the costs for our mortgage, compared to what it will earn as a mortgage backed RRSP along with the additional costs like CMHC insurance.
We decided that since the interest rate on our mortgage is at 1.75% and our RRSPs seem to be doing well now we would wait until our morgage’s interest rate rises or needs to be renewed and consider it at that time.
I think the higher the interest rate you pay to the banks, and the lower the rate of return on your invested RRSP, the better it is to get an RRSP backed mortgage. There are conditions where it is better to keep the banks mortgage and your RRSP invested, and there are conditions where it is best to invest your RRSP into your mortgage.
Or am I wrong, is it always better to have your RRSP in your mortgage?
First let’s talk about your RRSPs. If they are in interest-bearing assets, you are erring. — Garth
Data thieves the new robin rogues
“There is a need for tighter tax laws,” Mr. Steinbrück said at the time. “Many Germans feel like fools by paying taxes regularly. The state has to guarantee justice within the tax system.”…
Swiss banking secrecy has taken other blows recently. An informant stole data on 3,000 French account holders from an HSBC branch in Switzerland and passed it to the French authorities last year.
Mr. Flaherty “codes of conduct” nor fines change behaviour
book cooking
drug marketing kickback schemes
The U.S. government has been pursuing alleged wrongdoing in drug marketing for well over a decade, attempting to punish the worst offenders in an industry that racks up sales of more than $300 billion a year in the U.S. But the recent stream of high-profile cases shows that sales tactics are still an area of concern.
“Combating health care fraud is a top priority of the Department of Justice,” said Tony West, Assistant Attorney General of the Justice Department’s Civil Division. “When it comes to marketing drugs that so many of us rely on, the government expects pharmaceutical companies to be honest in the claims they make about the drugs they sell.”
Authorities allege the drugmaker paid kickbacks in a variety of forms, including rebates, grants and educational funding
http://newsfeedresearcher.com/data/articles_b4/johnson-omnicare-drug.html#hdng0
==================
F.D.A. Aims at Doctors’ Drug Pitches
By NATASHA SINGER
Published: January 31, 2010
http://www.nytimes.com/2010/02/01/business/01wrinkle.html?pagewanted=2&ref=business
in one of those personal finance self help books, written decades ago by morton shulman, one point stayed with me. ‘if you don’t own a principal residence, go out and get into the biggest mortgage that you qualify for, and stay in it’
His argument was based 100% on investing in a high-inflation environment. There is no relevance now. — Garth
#44 refi now on 02.01.10 at 1:32 pm
—————————————-
The mortgage rate cannot be higher than rates posted by the banks (you obviously haven’t read Garth’s book/strategy). And the idea is to have a higher rate, because every dollar that you’re able to put into your RRSP is YOURS!!!
Thus, you want to take as long as possible to pay off the mortage. And you want the highest rate possible. It is a simple concept.
CIBC predicts bump in recovery:
http://www.dcnonl.com/article/id37146?search_term=CIBC
Norway is joining the bubble club:
http://blogs.ft.com/money-supply/2010/02/01/roubini-says-norway-risks-asset-price-bubble/
Interesting – Norway is concerned about 11.6% house price growth in Q4… Canada’s residential average price was $337,410 in December, up 19% year-over-year.
Maybe we’ll make a great lecture topic for Roubini’s NYU classes after our bubble pops.
Would the CMHC insurance be required for the RRSP mortgage with 20% or more down payment?
If so, I don`t understand the reason for this.
Rules, baby. — Garth
#35 Munch on 02.01.10 at 12:06 pm
Oh and Garth?
I drive a BMW 6 series!
THEREFORE!
I need to be taken seriously!
I think!
Yes!
<<<<<<<<< christ are you for real?….your certainly amusing
#62 Alex,
Wow. That CIBC report is pretty balanced. It is very much in line with what I believe is going to happen. The second half of the year is the time to watch for.
How long before the usual Economic Rah! Rah! Cheerleading squad does a release suggesting a full recovery with a strong finish to the year? I am sure a release is warmed up and ready to go!
OK, I admittedly do not know very much about investing but am trying to learn over time.
What is an interest bearing asset. I Googled it and had little luck.
My RRSPs are in balanced mutual funds.
I do not drive a BMW so I guess I do not need to be taken seriously.
Thanks.
An asset that pays income in the form of interest (GIC, bond etc. is considered interest-bearing. With rates at historic lows, this obviously is a poor place to put funds, especially those intended for long-term appreciation (like RRSPs). Balanced funds are fine, but equity gains will be weighed down by falling bond values as interest rates rise. They would not be my choice. — Garth
I remember reading about the RRSP mortgage at least 20-25 years ago in the Globe and Mail and maybe (?) in Gordon Pape’s book. Unfortunately, we did not have any RRSP’s, were newly married, hubby had just moved here and was taking English as a 2nd language, we were living on my salary and I bought my share of a townhouse that I had bought with my sister a few years earlier. After a few years hubbby and I bought our current home and paid it off in 7 years. We still, occasionally, eat KD. Reminds us of old times
I’m amazed the TSX and the DOW ended on high notes today. This certainly wasn’t because of the normal investor confidence; there must be large amount of money coming from the secret investors (i.e., hedge funds, gov’t) who are trying to instill confidence in the populace that things are moving forward and the recovery is just around the corner.
When will this nonsense stop?!?!?!
Lets say you have a bank mortgage of equal value to your RRSP. Also lets say you are self employed and dont take a salary, but instead earn only dividends.
Set up RRSP Mortgage, pay out the bank mortgage. Interest payments on the RRSP mortgage are now 100% deductible, tenant pays mortgage payment and in turn makes contribution to your RRSP which you would not be allowed to do because you have no employment income.
Sounds pretty interesting. Am I missing something?
Question: as most people move every 3-5 years, can the RRSP mortgage be set up to be transferable if you move?
#69 Just Wondering,
Don’t watch the market day to day for long term signs or you will go nuts. If you really want to drive yourself nuts put on BNN or better yet CNBC. There is far too much speculation in the markets because of the high volatility.
Nothing like adding complexity. No you Garth, the govt. How about a flat tax of 15%. No RRSPs or TFAs, or any other deductions just the 15%. Can’t help but think the govt is purposely making things as complicated as they can. Even my wife, a very well educated woman, is totally confused by this.
I ve heard Garth mention that he believes that oil will hit 200 dollars a barrel. If that were to happen, would’nt a province like Calgary who relies on oil boom and not have a RE crash like that is predicted. Or does the oil price have no affect on RE?
That will not happen for years, More importantly, how does $200 oil increase the wealth or income of teachers, nurses, factory owners or most everyone else in the province? They end up paying $4 a litre for gas like the rest of us. It’s the oil myth. — Garth
The space between my ears is full of emptiness, so I have no advice for anyone. Accordingly . . .
——
If a giant solar flare hits Earth on or before 2012 and wipes most of us out, along with nuke plants and WMD / the electrical / power / gasoline / oil grids, etc. it will render the following a pointless exercise in futility.
This is the US at present. A line from this (follows) says it clearer. Watch for the CPC and possible election call to wrangle a majority — Big Brother — “Mandatory IRAs just proposed by Obama Administration on 1/25/10 is the 1st step in stealth nationalization and forced investment of our retirement benefits to support the treasury debt market . . .”
Depopulation? Invite someone to come into the country and do it for you! I understand (not completely sure) there are Chinese troops in the US as well.
Speaking of Obama / Obama 2
——
Economic stuff 1 / stuff 2
Fiat money may be shutting up shop / Today, it’s China and Oz that are headed toward financial barfspewupchuck. / Higher interest rates? Could be.
——
Climategate was exposed for what it was, a complete fraud. Climate and change are two of many constants, but here is the kickback as the UN and NATO were not able to get their one-world govt. through.
Heard today form co worker that open house at Islington/Queensway on the weekend saw a massive bidding war. Small, 2 bedroom bungalow in bad shape.Asking 434K, bought for 484K in a frenzy…what a joke. I guarantee most of these people are planning to go BK if/when shit hits the fan..i have seen several people make comments to this effect over the last few months. Anyone else hear the same ?
JO
Amazing how economists and bankers come up with “the obvious” after so many people are heading into a sea of debt.
These guys were singing a different song six months ago.
Australia likely to raise rate again according to Bloomberg to 4%. Targeting 4.5% by June.
If you have to take out a mortgage you shouldn’t be buying a house in the first place as the fees are far too exorbitant. I’ve bought and sold hundreds of houses without ever taking out a mortgage. If you can’t pay cash, rent.
Yes, sire. — Garth
Garth,
Why on earth would one hold their own mortgage when we are paying 1.75% on the mortgage and have seen approximately 18% on our investments. The key to building wealth has and always will be to live within your means #1, be on the right side of timing the various markets #2 (this is the hard one). It never hurts to ” marry up” either, but make sure it’s for love or the divorce will crush you any way.
Least and Most Affordable Housing in the World, By Nation and City; Vancouver Canada is Least Affordable City, Australia the Least Affordable Country
Congratulations To Canada And Australia
Congratulations go to Vancouver, Canada for being the least affordable city in the survey. Vancouver thus wins the gold medal in the individual competition.
Sydney Australia proudly wins the Silver medal and the Sunshine Coast Australia wins the bronze. It was close but no cigar for Australia’s Gold Coast. Honolulu Hawaii came in a respectable fifth place
some good graphs–
http://globaleconomicanalysis.blogspot.com/2010/02/least-and-most-affordable-housing-in.html
That will not happen for years, More importantly, how does $200 oil increase the wealth or income of teachers, nurses, factory owners or most everyone else in the province? They end up paying $4 a litre for gas like the rest of us. It’s the oil myth. — Garth
Exactly, years ago I was talking with a Scotsman and I mentioned a oil boom in Canada, he said tell them lad to leave it in the ground, here in Scotland a few made a fortune but most have lost more than they had because it drove the prices up and not everyone’s wages.
I drove through an area here where new homes appeard to sping up daily last spring, they are still there with signs on them and only a very few have sold and building is all but stopped.
70 Albertaguy.
Also keep in mind that a dividend from small business is paid for in after-tax corporate dollars. The sum of the
taxes paid on the corp income + on the dividend basically equals that of the equivalent wage. So alternately claim the salary and acquire contribution room for your RRSP. And deduct for CPP as well.
72 Hagbard. Maybe Garth can tell us if that was ever considered when he was Min of Nat Rev. I think New
Zealand did something similar back in the 80s. Generally,
its not politically popular, one complaint being that the
rich/high earners arent paying enough. Also puts a lot of tax lawyers, accountants and CRA employees out of work.
#78 Oakville Owner on 02.01.10 at 8:26 pm
————————————————–
I’ll take a stab….
most people do not earn 18% on their investments, so a guaranteed 7 or 8% surely beats losing money (just curious, is your 18% return risk-free?)
79 jr – get with the program. Old news, posted days ago, and you contributed to the blog!
And its not a world survey. English speaking countries only.
#82 Bottoms up,
Nothing in life is risk free. If it was none of us would be on this site. Even at 7% to 8% I would be way better off holding my mortgage with the bank and collecting my 7% to 8%.
#83 Taxpayer like everyone else on 02.01.10 at 9:26 pm
79 jr – get with the program. Old news, posted days ago, and you contributed to the blog!
And its not a world survey. English speaking countries only.
*********************************************
ummm–
maybe i wasn’t on this blog “days ago”
And maybe some other people reading today-weren’t on this blog days ago–
So maybe? “someone” benefited by the copy/paste -
Also the analyst who put out the report “today”
(Mish) is someone who’s calls,have been deadly and he should not to be taken lightly–
He also does a summary with his opinions–
So maybe ? just that part of the paste is worth someones time-
Check the date–the report just came out “today”–so “today” is the first time “obviously” that he said those words–not– “days ago”–
And–is this all you can find–to bitch about?
Jo,
I can believe that a shitbox near Islington and Queensway could have a bidding war.
Here is another example a few kms away.
http://www.realtor.ca/propertyDetails.aspx?propertyId=9065031
If you read the brochure, they give a date for “bidding.” The going in strange.
So what if Garth’s focus is selling his books among other things that’s the point to this website and his blog. The information provided here is valuable regardless of intentions. People here are not naieve and see the purpose of this blog….he seems to operate ethically and that’s what counts.
“More importantly, how does $200 oil increase the wealth or income of teachers, nurses, factory owners or most everyone else in the province? They end up paying $4 a litre for gas like the rest of us. It’s the oil myth.”
I can confirm this goes for everyone. I work in the industry in Calgary with a producer in a very good position, when oil prices are high, it hurts my wallet just like everyone else. The only winners during any cycle are upper management.
82 bottoms – I’m not in the GTA, but I’ve read more than once that RE prices have increased 19% YOY in that area. “Oakville Owner” may simply be just that.
#52 Peter “UK media’s view on the 2010 Vancouver winter olympics”
The Vancouver 2010 Bailout Games.
Wow, great story. Vancouver has sure dug themselves a huge debt hole in the middle of Canada’s debt hole in the middle of the worlds debt hole.
But what a magnificent hole it is!
Mike
85 jr
1) Mishes “report” is a regurgitation. Nothing original
except his clarification of un-weighted averages. The study was days old, or do you have to wait for Mishes
“report” to form an opinion?
2) Mishes headline says “World”. Incorrect. Anglophone countries only. Is such a glaring error typical of the Mish?
Or do you just accept what he says without checking the reference?
3) You posted 5 times to the blog where garth originally cited the demogaphia study – including a direct response to my enquiry regarding “world” affordability. Yet you
deny being there. The link you gave was not the info I
requested. Thanks anyways.
You’re on the zero credibility list. “Bitchin’ ” over.
Garth writes:
“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 year”
in a way that not one man in a thousand can understand this shows you how valuable cash is right not. CASH IS KING
Garth (and Blog Dogs):
Almost finished reading “Money Road”. There is certainly a lot to chew on. I have a question on your opinion on index investing – specifically the Canadian Index. Both from your blog and your book you’ve told index investors to be cautious. Given the fact the Canadian index (TSX 60) is comprised largely of :
- Large, stable, government imposed, bank oligarchy (>30%)
- Energy companies sitting on one of the largest energy fields left in the world (in one of the most stable countries in the world) – 25-30%
- Large gold companies (10 – 15% of the index)
- Mining companies supplying important minerals the world needs (metals to potash, etc.) – 20%ish
…isn’t the Canadian Index a little different than other indexes as an investment vehicle? Just about every sector in the TSX60 seems to be poised for growth over the medium and long term. Throw in a good health care stock from the US and it looks like all of the growth sectors are covered.
Any thoughts?
You do not want to buy the index in a tepid economy with potential stagflation. Active management is the future. — Garth