Rebel, rebel

Barry called yesterday. Out of the blue. “Blog reader,” he said. Of course those two words allow anyone into the magic Kingdom of Garthonian wisdom. So, I said, whatsup?

“My TD bank guy tells me I can’t set up a mortgage inside my RRSP. He says CMHC just changed the rules so only new houses apply.”

That’s BS, I replied, in depth. They just don’t wanna help you. Walk.

For those who don’t know, yes, you can put a mortgage on your house (or your cottage or rental property) inside your RRSP. That way you actually make payments to yourself, instead of the banking oligarchs. How cool and rebellious is that? (BTW, the banker Barry spoke to was simply ignorant – plus they didn’t want him to do it.)

Now that interest and mortgage rates are on the rise, there’s more appeal to doing it. Up to this point, with sub-3% home loans available everywhere, it made more sense to float your house with cheap bank cash and use your own retirement funds to achieve much higher returns inside a financial portfolio. However, with posted mortgage rates nudging the 4% mark, an RRSP mortgage may be a way to finance a property as well as invest money.

So how does it work?

Not simple, nor cheap, nor easy set up and maintain, but possibly worth the effort.

First, find a lender willing to host what’s officially called a non-arm’s length mortgage. The best bet will be one of those less-than-blue-chip guys like B2B Bank or Canadian Western Trust, because the last thing the Big Six want is for people to create their own borrowings. Second, you need money in your self-directed RRSP to use to finance the house. Duh.

Then there’s the set-up. That will involve having the property appraised for mortgage purposes, staying within established LTV (loan-to-value) parameters, paying your lawyer to draft the mortgage and funding the administrating bank. This will cost a few thou. The big expense comes with mortgage insurance which is required by law. The cost will be up to 4% of the face value of the mortgage, which is (obviously) a lot. But no getting around this.

It’s important to understand the mortgage you’re creating isn’t something you can diddle with, even though you’re both borrower and lender. For starters, it must be a reasonable amount – so no 0%-down. Also you can’t grant yourself a 1% mortgage rate. In fact, you can’t even use the rate your bank is offering everybody else – it must be the posted one, devoid of any discount. However, since the interest you pay is to yourself, this isn’t necessarily a bad thing.

You can’t miss, skip or ignore payments. If you do, your RRSP can actually foreclose on your house (as strange as that sounds) through the trustee which administers it. Payments can’t be late, not can you decide to pay yourself more or less in a single month. In fact, the mortgage can’t even be paid out early without incurring the same penalty as would be collected by an evil commercial lender.

On the plus side, all of these mortgage payments you make into your RRSP are not considered to be contributions and don’t affect your ability to generate more space through earned income. The cash paid into the retirement plan accumulates, of course, and can used to buy other assets, achieving greater diversification.

As mentioned, this strategy can finance a house, your ridiculous money-losing rental condo or a commercial property. In fact, a non-residential use is probably the best. That way not only do you pay mortgage interest into your own retirement plan, but you can deduct that same interest from taxable income. And since commercial loan rates are w-a-y higher than residential ones, this is a big win. Take that, Bill & Justin.

So, there you go, Barry. Not for people who want simple or easy. But sweet for those happy to make 4% on their money, or wanting to turn an RRSP into an endless tax deduction. Also ideal for anyone who hates their bank.

The bloodbath

Toronto Jeff follows this blog and, as you can see below, has a small history with me. But we’ve never met. Good thing. I’ll tell you why after you read the following.

Long-time reader, big fan. Curiously, I used to be an intern at the PMO during your rebellion (which I agreed with BTW), and that’s how I initially came to follow your blog.

Now, as a 31 year old working class Torontonian, I pretty much just check in to get my daily dose of sanity. Thought you might find my situation interesting since it’s recently led to a blow up at our most recent family BBQ.

My fiancée and I have been engaged for over 2 years now. We’re both busy professionals and planning a wedding is way more complicated than it needs to be, so we gave ourselves tons of time. We’re about 4 weeks out and very excited. That said, we’re feeling the pressure to buy a house from all angles, and it’s really starting to irk me.

I thought this whole hormonal thing was done in my teenage years. No-one warned me your early 30s would be much much worse. Especially when your in-laws just cashed out on a 1.6m dollar home in January, moved out of town for pennies, and constantly proclaim the market only goes up and that we need to “get in when we can”. I’ve had conversations 1 on 1 with my future father in law explaining the detachment from economic fundamentals that are stretching people thin in an over-blown market. He follows the logic (to an extent).

Recently, however, I had a family BBQ at home (the land of million dollar McMansions) where my uncle owns multiple properties. My family and future in-laws came to join us and the problem came when housing was brought up, and again (led this time by my own father) the question arises about when we were planning to buy a house. I was outnumbered. My uncle, my father, and my future father in law are all old-school money makers who slaved away at their 9-5s and stuck it all in their houses, which they have all by now cashed out on (in one way or another). To them it is the safest way to build wealth, it comes tax-free, and you’re throwing your money away by renting.

It was a total bloodbath done in front of my fiancée, my cousins, my aunts, my mother, and about a dozen other family members. None of whom chimed in once during the entire exchange, and turned red when I asked their opinion. I’m happy I stood my ground, but I feel I’ve set up some tension between my future in laws.

I can detail to you my arguments, but to best understand where I’m coming from I have to break down my situation.

Currently, my fiancée and I are living in a tiny 1-bedroom in Distillery. It’s cute and fun, and we’re very happy renting here. We eventually want to have kids so we know it’s a matter of time before we have to move.. we just don’t know when that will be.

In 4 years we’ve never met the landlord once. We were shown the place by a property manager, put in a low-ball rent offer, had it accepted, and have never seen anyone since. I’m serious; we literally have 0 human connection to anyone who owns or manages this property. The rent? $1650. We get parking too. Locally that goes for $250 extra. It’s a steal for what it is.

When I look at the “buy” option my family so desperately wants me to go for, the EXACT condo unit in my building would cost 2900 a month, plus 120k down payment!! In what world does this make sense??

I can literally rent this place for 6 years for just the down payment alone. The classic “we could help you with the down payment” was thrown out there during this exchange. I asked them if they’d be willing to pay my rent for 6 years instead (I knew the numbers since I had recently looked this up). This was met with bewilderment. My point was that in paying my rent instead of the down payment, you’d allow me to save much more a month, wait for a market correction, and then time a buy for a more suitable family home down the line.

The answer, of course, was no.

So then, why does it make sense to offer up a lump sum loan to saddle me up with a debt burden for 25 years that basically doubles what I’m paying in rent. Because I’m missing out, and the principle value of the unit is only going to go up was the consistent answer. And if I didn’t like the condo market.. why didn’t I just move back home (to the boonies) and get a house? It’s what all my friends did, it’s what all my cousins are doing, and it’s what will give me room to build a family.

Short answer: it feels like giving up.

Not only that, but I’m married to my current employer. My company is an early stage start-up and we recently raised big bucks to take our product to market aggressively. At current valuation from our Series A that makes my shares worth 1M USD. Problem is, they won;’;t be vested for a few years. So giving up and moving out of Toronto means I have to get a new job.. and that means I give up my shares.. and at this point that’s walking away from a life changing amount of money.

So here I am, stuck in Toronto, married both to my employer and a house-horny family. The ying and the yang. The heaven and earth. The eternal struggle.

It doesn’t help that a few of my friends who moved away from Toronto and back to the distant burbs are now amateur landlords with multiple properties in the area. They are flashy and like to brag about their “investments”. My parents constantly ask about them and use them as an example of making smart decisions with your money. It’s really soul sucking to hear this shit all the time.

Apologies for the rant, but god, this is worse than puberty.  I just needed to vent.

My turn: Quit moaning.

You’ll never win this argument. Give up trying. The old people believe in what worked for them and too blinkered to see beyond their own closed lives. Of course no asset goes up forever. Of course, 2018 is not 1998. This world brings a unique set of problems and circumstances which has turned real estate ownership into a mania, then an obsession, then a trap. Their swaggering, bravado, hectoring and belittling has one purpose only – to make you become them.

By trashing your choices and deflowering you in front of your fiancée, family members put their own ignorance and narrow-mindedness on display. What a bunch of losers. More interested in forcing you to validate their choices than in supporting yours. This is not what parents, especially, should do to any adult child – let alone one in a stable relationship, soaring at work, with accomplishments (dotards don’t get into the PMO) and substantial wealth lying ahead. They’re selfish and wrong. The inlaws are idiots. Your amateur landlord cousins have leapt into a bottomless cauldron of debt. The whole familial house of cards is built on manipulation, paleo thinking and house lust.

But mostly, this is your fault.

If you two are happy, live in a cheap and fun place, enjoy work success and are excited about your years ahead, then focus on that. Brush the fossils aside. Don’t allow a bloodbath to take place. Laugh it off. Tell the dinos what they want to hear. Then follow your hearts, together.

Stop being a child.