September 5, 2017

The idea was proposed in a hotter real-estate market than we are experiencing London, Ontario, but the effect will be the same.

The federal government’s latest scheme to enrich the wealthy at the expense of the poor is to encourage and facilitate the liquidation of RSP savings, in larger amounts than is currently permitted, to enable people to obtain mortgages on properties they probably can’t afford.

Let’s break this down and see if there is any perceived benefit for a lowly consumer/debtor.

1. To start with if a borrower has an RSP that person already has an asset – a RSP – that has value.  It is saved money that is “creditor proof”, which means if the debtor goes bankrupt s/he can keep it, her/his RSP (in the simplest terms) is exempt from seizure by a trustee or his/her creditors.  Well that is before the proposed government intervention that is graciously facilitating self-liquidation.

2. Cashing in an asset (RSP) to acquire something that costs more than it’s worth (real estate) means that the borrower has self-liquidated, or cashed out, the asset.  The asset is gone, it isn’t coming back!

3. It is important to be mindful that when cashing out an RSP a liability is created – the taxes are either paid when it is cashed out or if the funds are put into a home ownership plan then the tax repayment is either deferred or forgiven the funds are recontributed back into an RSP.

**Under the current CRA rules the RSP must be repaid, out of ongoing wages – a liability, over a term not to exceed 15 years.

4. If the borrower fails to repay the RSP in any year the amount withdrawn will be added to his/her income and s/he will be required to pay taxes on it for each year s/he does not contribute to an RSP.  This tax scheme effectively creates a receivable for the CRA.

6. The bank/lender similarly gets to count the house (with the purchaser’s name on it) as a securitized asset on its balance sheet.  After adding in the projected interest that will be paid during the life of the mortgage the banks can add a receivable asset worth a massive amount of money to their balance sheet.

7. By putting a larger down payment than the purchaser is capable of otherwise saving and by trying to buy a property that is probably more than they can realistically afford they are at risk of losing not only the RSP but also the house and everything else that isn’t nailed down.   Meanwhile the bank’s risk is mitigated by having mortgage insurance typically thorough CMHC or Genworth.

When Premier Harper was speaking about his proposed plan it was in a city where the average detached house price is selling for $1,400,000.00 – where even at 5% down the purchaser would need $70,000.00.  The proposed new rules would mean that the purchaser would still have scrape up another $35,000.00 probably from RSP loans from a bank, by liquidating other savings or borrowing money from friends and family.

Don’t lose sight of the fact that to buy such a home the sticker price will basically double after adding interest at 6% (the average mortgage interest rate over the last 100 years).   Should markets correct and property values come down, as many economists predict, the purchaser is still on the hook for a massive differential between the cost of the purchase and the diminished value of the property.  The purchaser would still have to repay the CRA.

Still think Harper’s federal government are good financial stewards? Think again – unless you own a large corporation or make massive amounts of money they are doing little for you.