RRSP are a bad place to put money if you know how to make money. I repeat, if you know how to make money.
If you take $10,000 and make 10%, on XYZ investment, in your RRSP you have $11000 that is tax deferred and you keep it all for now. You will pay the tax when you take it out.
If you take $10000 and use leverage in a regular trading account giving you 2/1, and make 10%, in XYZ investment, you have $12000 but you must pay capital gains tax on the $2000 that you made. If you paid 50% in tax, higher than the highest bracket in Canada, you would still be left with $11500. A 5% increase on your money and the tax is paid.

And for those who say leverage is bad…just do not understand investing. A property is often leveraged in the range of 5/1 to 20/1. And you have to be foolish to say investing in real estate which has made more millionaires than any investment since the beginning of time, is bad. For those who think leverage in investing in the market is bad, again they do not understand investing. If you believe that the majority of RRSP via Mutual Funds are not in the market, you are mistaken. And if you believe that you can make money over time in Mutual Funds in your RRSP, then you must believe that the ability to leverage it would be that much better…if you know how to make money investing, then leverage is always good. If you do not then do not use leverage or invest period.

Capital gains tax is one the best taxes to pay. It is a fallacy that people have been told not to sell stock or houses because of this…hog wash, our marginal tax rate is far worse.

The money in RRSP is sheltered but does not give you good investment options or the ability to leverage. The fees in a Directed RRSP are in Mutual Funds, a product that has a failing record over the last 80yrs. Over 80% of Mutual Funds fail to beat the market every year. THE MAIN REASON ARE THE FEES…Canada has the highest Mutual Fund fees in the world. If you want to make money in Mutual Funds then sell them, because that is where the money is.

If you want to make money investing, then get off your @#$ and learn some basic ways to make good investments. Self Direct you RRSP because you need to self direct your own money and stop paying stupid amounts to the Banks and Mutual Funds advisors. In the end…if you have an RRSP, then use it to invest in real estate, not your own home, and starting making money. If you are going to invest in the market then sell direct it and if you like what those Mutual Funds you had were investing in then you can invest in them your self via ETF’s or directly into the stocks, and pay your self to manage your account instead of the Mutual Fund Advisors.

And those comments about returns…the Stock Market has yielded an 8% return since inception and no average investor has ever made 10% return year over year…more @#$ that banks and advisors have told us we can make…Furthermore less than 20 Mutual Funds, that have existed for at least a 20 yr period, have yielded 10% or more. Good luck finding them as we have over 16,000 available to Canadians today.

The message is…get any money you have in your RRSP out with out taking the tax hit. Real-estate investing and holding mortgages are a great way to do this. Get help doing it and start managing your money.

I want to repeat again…this direction is only for those you are willing to learn and get help managing their own money….you will reap the rewards and you can do it.

If you do not or will not learn how to manage your money, then continue on the conventional path of RRSP contributions and the hopes of a pension. Just be warned that the majority of Canadians retiring are doing so with not enough in their RRSP to get them through. Most are forced to live lower than they were and/or get assistance from the Government, Family/Friends and or a Part Time Job….good luck.

As an example, is it equivalent to 7.36% in stocks etc.? Therefore in 10 years it would effectively double…this seems to not be logical to me, because wouldn’t that mean I would have paid $100k in interest on a $100k mortgage to myself the same way my $100k investment in the market returning 7.36% would become $200k in investments?

My thoughts are that if it was somewhat similar in the end it would be far less expensive than the $2000 in fees Scotia McCleod is charging me today for low returns and a guaranteed return (therefore no stock market return worries).

“The mortgage must be at a market rate, so the highest you could go would be something like today’s 5-year fixed posted rate at a bit over 5%” – Ed

Sorry Ed, your thinking is someone misguided, despite your investment credentials. While you’re right that the mortgage interest must be at market rate, there is nothing stopping an individual from setting that rate at the highest commercial rate possible and resetting it every 3 or 6 months. Currently, the highest commercial rate I could find is 7.36%.

While currently we have ultra low rates, Jamie is right – they are artificially low. The average interest rate over the last 40 years is over 8%, so how would someone lose by redirecting mortgage interest to their own RRSP as opposed to the banks coffers?

Also, while the RRSP mortgage is open, it also means that your RRSP contribution limits are not restrained by annual contribution limits as imposed by the CRA.

You also fail to recognize that by putting your mortgage inside your RRSP, you are bypassing the banks biggest scam – amortization. As opposed to paying down a small percentage of the principle and having the majority of my money go to interest (aka: bank profits), that money is going into my account.

Those who have raised DOUBLE TAXATION as the reason for not putting your mortgage into your RRSP have also missed the point by a wide margain. The point of the RRSP is to allow your money to grow tax free. When you deposit $10K into an RRSP, the government returns the taxes you would have paid on that amount ($3600 for AB) with the expectation that you will pay taxes on that $3600 that has grown tax free for the number of years it has been inside the RRSP. You aren’t being double taxed.

I renewed our mortgage on a 5yr locked in rate of 3.5% with the expectation that interest rates are going to rise well beyond that, making it a great insurance policy. At the end of those 5yrs, I will have enough inside my RRSP to transfer my mortgage into it, allowing me to put money into my own pocket instead of the banks. Doing this while continuing to contribute to my TFSA ensures that my net worth grows while reducing my debt and controlling my finances.

Here’s a great, albeit dated, article on the costs and logistics of setting one up.

It’s also a bit disingenuous to view the spread between current mortgage rates and investment returns on an immediate term only. Mortgage rates are low right now but climbing. In fact, rates are artificially low and pretty much have no place to go but up. And I don’t think anyone expects 10% long term returns on a balanced stock market portfolio (which would include bonds and cash anyway). Stock market returns of late have been goosed by stimulus dollars which (hopefully) won’t continue forever. In some aspects, this might be the perfect time to do an RRSP mortgage as inflation starts to rear it’s head. Mortgage rates will rise and so I could charge myself more and there’s potential for the stock markets to fall or stagnate.

@ Ed A mortgage whether in an RRSP or with a bank is a longer term venture. Long term means different things to different people. Yes, you can get a mortgage at 2.5% today. The odds of that remaining true for 25 years, say, is slight. What are long term mortgage rates likely to be, that is the number to compare to long term stock market performance. Timing and personal risk comfort and even interpretation of global economics all come into play.

@ Barry. Double taxation is a downer, but if you were paying that $750 directly to the bank you would not have it for investment purposes for 30 before being taxed on it again. Hopefully the growth potential of those dollars in your RRSP outweighs the additional tax it will encounter in the future.

If I want to make a $750 monthly payment – I have to earn $1,000 and pay income tax of 25% (example only). The $750 goes into my rrsp and 30 years later when I want to withdraw that $750 from my rrsp I will have to pay income tax on it again.

Barry

The mortgage must be at a market rate, so the highest you could go would be something like today’s 5-year fixed posted rate at a bit over 5%.

Also, if you add a second mortgage against your rental property, it will NOT be tax deductible. Interest is deductible based on the use for the money. Rental property mortgages are deductible if you use the money to buy the rental, but if you increase a rental mortgage, it is not tax deductible.

Even if you could do a mortgage 8-10%, why would you want to? That would be the single worst mortgage in Canada! We are getting 2.5% today.

I will add here that I think the RRSP mortgage is about the worst idea I can think of. It combines a very expensive mortgage with a very low RRSP return, and charges high fees for it. Stock market returns long term are over 10% and we can get a mortgage today at 2.5%. There is a huge benefit of 7.5%/year by handling each one separately.

If your RRSP has never made much money, I would suggest you consider different investment options – and stick to regular bank mortgages (we are recommending 1-year fixed today). With a sound investment strategy, you should be able to make a decent return.

Ed

I have a Primary residence that has $180k owing on it, with a value of $850k. I have at least $275k available through a secured line of credit. I have about $200k of funds available in my RRSP.
I have a Rental Property that is worth $850k with an interest only line of credit on it at 3% for $575k. My tenant pays me $3400/mth on the property and my expenses are only about $1600/mth. The extra money I am making goes directly to my principal on my primary mortgage.

Problem – generally speaking I have never made any real money in my rrsps and would like to pay myself through my rental property to lower my taxes on the additional money I am making.

My plan was to lower the bank line of credit on my rental property to $375k and register a second mortgage at 8-10% for $200k and hold it within my RRSP.

This would hopefully provide some predictability to my RRSPs and reduce the taxes I pay on the rental income. That being said it wouldn’t help me reduce my primary mortgage?

Thoughts?

I have about 50K in my RRSP and I was wondering if I could get a loan against it.

Any advise or opinion.
Thanks,

That said I entered the stock market in October of 2008. I have made a killing. This won’t last.

The thing that must be remebered is that each mortgage payment can be invested. Last time I checked Dollar cost averaging is the only long term strategy that is almost garaunteed to work. oh….. there is one other. Wait till you here of stock guys committing suicide then buy buy buy. When you start hearing get in before its to late or this time is different……. watch and watch and be ready willing and able to sell.

The benefits of an RRSP mortgage are perceived – but not real. You are still losing the money you put into your mortgage because you have to make the same payments that you would have to make with a regular mortgage.

A better way to look at it is that it is almost exactly like you getting a regular mortgage, while you buy a GIC in your RRSP that happens to pay the same rate. Let’s say you pick 5% as a rate. There is no difference between an RRSP mortgage at 5% and the normal situation where you making payments on a 5% mortgage to a bank while investing your RRSP in a 5% GIC – other than the thousands of dollars in setup and annual fees.

You are not really paying yourself. A bank or trust company administers the mortgage for a hefty fee. If you don’t make your mortgage payment to your RRSP, your RRSP will foreclose on you and kick you out of your house just like the bank would.

RRSP mortgages might be okay for people that have a large mortgage and would otherwise invest 100% of their RRSP in a GIC. This will give them a bit higher return that could justify the high fees.

For anyone with any investing savvy or working with an advisor, the RRSP mortgage is a ridiculous idea. It is the most expensive mortgage in Canada combined with a horribly low rate of return in your RRSP and very high fees.

Today, we are getting mortgages at 2.59% and investing in equities that should average 10% or more long term. That is a difference of more than 8%. If you choose your mortgage well (usually 1-year or variable) and invest your RRSP well, your RRSP return should be far higher than your mortgage rate.

With an RRSP mortgage, you give up this 8+%/year difference and you have to pay thousands in fees.

You asked whether this would help people who don’t have the money to put into RRSP. If they don’t have the money to put into an RRSP, they can’t do the RRSP mortgage.

Remember, if you think of the RRSP investment and the mortgage as separate transaction that coincidentally have the same interest rate, then you have a clearer picture of why the benefits are perceived – but not real.

Ed

The interest rate you charge has to be “reasonable”, since it is not an arm’s length transaction. “Reasonable” usually means that independent parties might choose that rate, so it would probably include rates from the lowest to the highest that you see in the mortgage market.

The :highest allowable at the time” would probably be something like today’s posted 5-year fixed rate.

These strategies are usually marketed as thought they work better with higher interest rates. I don’t see it, since you are putting money into your RRSP without getting a deduction, and then you will have to pay tax to withdraw it later.

Ed

What do you mean by “highest allowable at the time”. Is there both a floor and ceiling on what I am allowed to charge? Meaning if the going rate on the big 5 banks is ranging 4%-5% I am not allowed to charge 18% to myself?

Thanks!