RRSP Mortgages

One of the biggest decisions you have to make about your retirement savings is where you’ll invest that money. With markets in the crapper (was your last year’s return really -12%?) people are scratching their heads. Will you have to settle for 2% on a GIC to keep your money safe?

The last time the markets were in a gyration like we’ve seen recently my ex and I wrote our mortgage from our RRSPs, transferring the cash to pay off our bank-held mortgage, and creating an entirely new investment strategy for our retirement savings. It wasn’t a decision made overnight. We spent some time moving our portfolios to cash so we’d have the juice we needed to do the deed when our existing mortgage came up for renewal.

Since mortgages rates are typically 3% above GIC rates, our self-directed mortgage (SDM) would earn a decent return without the slightest bit more risk. After all, if you can’t trust yourself to repay the loan, whom can you trust?

You need to have a whack of cash in a self-directed RRSP for this to work. Some experts say you need at least $50,000 to offset the fees. I’d say no less than $100,000, ‘cos those fees ain’t chicken feed. Don’t have enough cash in your own RRSP? You can write a “shared mortgage” where each spouse kicks in money and the RRSPs split the fees accordingly.

The taxman has specific guidelines for how SDMs work: the interest you pay has to be comparable with current rates, the mortgage must be insured and you must qualify for the mortgage just as you would if you had gone to a financial institution. Payments must be made on-time or your RRSP will be forced to foreclose. If your SDM doesn’t meet the guidelines, there’s a big ouch! The mortgage would be a non-qualifying investment, its fair market value at the acquisition date would be included in your income and any interest earned by the RRSP would be taxable to the RRSP.

Since a large portion of your RRSP portfolio in an SDM might weight you too heavily on the fixed-income side, you’ll need to rebuild your diversification. You know those monthly mortgage payments you’re making to your RRSP? Time to dollar cost average those suckers into an aggressive mutual fund. Viola: security, diversification and the elimination of the market-timing question.

Arranging for an SDM is no small feat. You may have to meet with mortgage officers, your financial adviser and your lawyer to get it all accomplished. There’s no question that part of your success using this strategy will come from having an adviser who can run with the ball. This isn’t a horrendously complex investment strategy, but it does require you to step out of the box. It will require homework and careful planning.