Holding a Mortgage within an RRSP
A reader wrote me last week very excited about the prospects of holding your own mortgage within an RRSP. Yes, that’s right, under the right conditions, you can use your own RRSP to fund the mortgage owing on your house and pay yourself back on a monthly basis.
As this sounds great on paper, after some further research into the topic, I’m not too sure that this type of investment strategy is meant for everyone.
How does it work?
This strategy only works if the investor has enough assets within his/her RRSP to cover the mortgage on a primary or commercial residence.
Once it’s arranged with the banks, the RRSP holder simply has to make mortgage payments, at a prearranged interest rate, back to his/her RRSP.
The Benefits
There are a few benefits of this strategy:
- Keep the Interest – Instead of paying a lender mortgage interest over the years, the investor gets keep it all to himself/herself.
- The Rates – The investor has the option of setting the interest rate to the highest allowable at the time.
- Predictable – For those who are risk adverse, the predictable growth of the RRSP may be suitable for their risk profile.
The Drawbacks
In my opinion, there are many drawbacks to holding a large mortgage within an RRSP:
- Lack of Diversification – If the mortgage is big enough, then the mortgage within the RRSP can represent a large portion of your retirement savings. There is a huge lack of diversification here as it’s invested in one asset class, fixed income. Where’s the growth? Of course, this would be different if the mortgage was in proportion to the fixed income allocation of the RRSP portfolio.
- Fees are High – The high fees involved with this strategy will ultimately reduce the return. The fees include CMHC (minimum 0.50% regardless of equity), appraisal/legal fees, self directed RRSP annual fee along with annual mortgage admin fee. Here is a site that details some of these fees.
- Default – Like with any mortgage, if you start missing payments and default on your mortgage, the bank will foreclose on the house to try to repay your RRSP account. So don’t think that you can forego the mortgage obligation even though you technically own the mortgage. (I guess this could be considered a benefit as well?)
Final thoughts
Even though it appears like a great idea to hold your mortgage in your retirement accounts, the high fees and potential lack of diversification makes this strategy only appropriate to a small number of homeowners/investors. Namely, those with large RRSP’s and mortgages that are proportional to what their fixed income allocation would be.
What are your thoughts on holding a mortgage inside an RRSP?
42 Comments, Comment or Ping
1. Philip in North York
Hello FT,
As far as I understand, this strategy says pay your mortgage interest to yourself rather than banks.
Do I make RRSP contribution from my mortgage payment if the mortgage is in my RRSP? If annual mortgage payment is greater than one’s annual contribution room, it does not sound good.
I’m not interested in this strategy for now – I’m in early 20s, and will open my RRSP in next year.
Feb 23rd, 2009 @ 10:12 am
2. FrugalTrader
Philip, my understanding is that the mortgage repayments do not count as “rrsp contributions”. As well, it only works when the investor has an large existing RRSP balance/portfolio.
Feb 23rd, 2009 @ 10:34 am
3. TheFatLossAuthority
WOW… never thought this was possible. You would have to be older I imagine to have enough contribution room to do this, correct?
Feb 23rd, 2009 @ 10:37 am
4. FrugalTrader
TheFatLossAuthority: As I mentioned above, it’s a matter of having portfolio/rrsp account size. That could mean years of saving, or perhaps a lucky investment that has appreciated significantly.
Feb 23rd, 2009 @ 11:26 am
5. DAvid
The strategy allows you to increase the value your RRSP at a rate clearly known to you. The idea is to charge yourself the highest possible interest rate to maximize growth of your RRSP, while still making regular contributions based on income.
It strikes me you would need a sizable income stream to make it work, as you still want to make regular contributions, as well as “overpay” your mortgage.
DAvid
Feb 23rd, 2009 @ 11:42 am
6. Dividend Growth Investor
Hmm first you own your mortgage in a RRSP. Can you then pay yourself from the retirement account if you decide to do a reverse mortgage?
Anyways I don’t like the idea of paying myself.. I somehow think I would screw it up..
Feb 23rd, 2009 @ 11:48 am
7. Nicolas
Would it be possible to mix this in with the SM?
Feb 23rd, 2009 @ 11:50 am
8. Dave
A better idea for this, is to use it for a investment property. All interest costs are deductible from the rental income and you can arrange the payments as Interest only. You could also include the CMHC fees and the SD yearly fees into the costs of the loan for the rental property.
Feb 23rd, 2009 @ 12:20 pm
9. FocusLiberty
One thing not mentioned is holding the RRSP mortgage as a private mortgage as well. For example, the owner of a rental investment could seek to pull some equity out to do whatever they wish.
They do this by providing a RRSP 1st or 2nd mortgage not greater than 85% load-to-value against the property. The terms and payments are negotiated between the two parties. Typically the mortgagee pays for all of the fees associated because it’s a part of doing business.
You can expect to negotiate between 5%-8% on a first position and 6%-18% on a second with terms lengths from 1 year up but are usually around 2-5 years. As long as the LTV does not exceed 85%, the investment could be any amount however I wouldn’t expect to do this with less than $10k.
Feb 23rd, 2009 @ 12:31 pm
10. Jay Calafiore
There are definately some intersting benefits to doing this but the drawbacks are also compelling.
Interesting post though!
Feb 23rd, 2009 @ 2:14 pm
11. CanadianFinance
I like Dave’s idea. You could charge yourself a high interest to build up your rrsp while at the same time benefiting from the tax deductions on this high interest since it’s an investment property.
Feb 23rd, 2009 @ 2:17 pm
12. mfd
I’m a little unclear on this. I’m assuming that the bank will take the funds out of your RRSP to pay the mortgage and the only growth your RRSP will get is the interest that you pay yourself as you pay down the mortgage?
If thats the case then you would have too look at what market interest rates are and your expected returns on investments are. Why do this if your mortgage rate is 4% and your expect investment return is 6%.
Feb 23rd, 2009 @ 3:05 pm
13. Dave
For investment purposes, it is a great way to use your RRSP to purchase another property.
It is like a Guaranteed Investment instead of the risky stock market.
However, you have to open a self direct account that will hold mortgages and I think there is only two financial institution that allow that. One is B2B trust, I forget the other and there is an annual fee, which the investment property can use as a tax reduction .
Feb 23rd, 2009 @ 3:52 pm
14. mfd
I agree. It sounds pretty good for an investment property but not worthwhile for your primary residence unless interest rates spike than it would work in your favor.
Feb 23rd, 2009 @ 4:08 pm
15. Nicolas
“I forget the other and there is an annual fee”
That would be TD Waterhouse with a set-up fee ($100/y) and admin fee ($200/y) .
Feb 23rd, 2009 @ 5:10 pm
16. FocusLiberty
There are 4 institutions that I’m aware of: TD Waterhouse, B2B Trust – which is Laurentian Bank, Canadian Western Trust and Olympia Trust.
mfd: Let me explain myself. If I have an income producing property (5plex for example) and I am looking to access the equity but not sell it, I could offer someone the opportunity to place a RRSP mortgage against it. So say its worth 500k and its fully paid off. I could offer you a 1st position of lets say 6% interest for 3 years if you’re willing to invest $250k. You might think its a good investment and tell your friend. Your friend wants to invest as well, but because he is second position and only can invest $50k of the available $175k, i might offer a higher interest, 12% for 1-2 years. Again, only 85% of the property value – in this case $425k since its free and clear. This provides the RRSP lender security in case the property market falls which it would have to drop 15% for it affect the RRSP portfolio. So in essence you are the bank.
Feb 23rd, 2009 @ 6:18 pm
17. mfd
@ FocusLiberty: Holding someone else’s mortgage in your RRSP is interesting. I believe that’s outside the original scope of the article which seems to focus on holding your own mortgage within your RRSP which is where I was a bit confused.
I can see the benefits of holding a second property that you own as an investment within your RRSP (which Dave discusses) but holding your primary residence not so much. You would have to look at what your RRSP investment returns are and what your mortgage rate is. If you’re paying 4% interest on your mortgage but expect to get a 6% return on your RRSP investments then its not worthwhile to bring your mortgage into your RRSP.
Feb 23rd, 2009 @ 8:53 pm
18. Thomas
I’m also interested in Nicolas’ question. It seems like most RRSP owners will have to sell a lot of equity in their RRSP to do this. Could someone who fully owns their home
1) Sell investments in their RRSP
2) Get an RRSP mortgage
3) Use the money they have “borrowed” from their RRSP to invest in a non-registered account
4) Deduct the interest (SM)?
What are the advantages and disadvantages compared to
a) just not doing the SM
b) doing the SM by mortgaging your house to a bank and not selling RRSP investments?
Feb 24th, 2009 @ 10:36 am
19. JMEDY
We’ve been holding our mortgage in our own RRSP for the last 3 years – and it’s the best thing we’ve every done. We set our mortgage rate at 7.65 % – an average rate in 2006 – and we pay our mortgage back into our RRSP monthly – just like everyone’s else’s mortgage payment. There were some costs up front to set it up (they are held in our CIBC Self Directed RSP) but looking at everyone elses portfolio in the last year, we are way ahead. We are guaranteed 7.65 % every year, with minimum expenses (no MER’s). We’ve set it up to pay ourselves for the next 15 years – which will take us to age 65. The interest we pay ourselves is not deducted from our regular yearly RSP maximum allowance – so in effect – your are actually contributing considerably more into your RSP than your maximum allowable contribution. The most difficult part was getting the bank and lawyer to do all the paperwork and figure out all the details as they were both unfamiliar with the concept. If you have any cash left in your RSP – it’s a great option
Mar 10th, 2009 @ 4:14 pm
20. SC
Very interesting article.
Would it be possible to fund any other type of loans (e.g. car loan) using an RRSP?
Mar 11th, 2009 @ 1:42 pm
21. Alnasir
Hi,
I am looking for advisor or lawyers in toronto who can assist me with setting up of the procedures and paperwork to borrow from my RRSP for a 2nd mortgage…
can anyone give me some references..
thanks
Alnasir
Mar 12th, 2009 @ 9:05 pm
22. Sharon D.
How would it work if a friend lent me $2,000 as a second mortgage? Would she have to borrow the money from the RRSP? If it was an interest only loan, would the interest I pay to her go back into her RRSP which she could use as a contribution each year? I am slightly confused about this. Any clarification would be greatly appreciated.
Mar 13th, 2009 @ 7:15 pm
23. Ed Rempel
Hi Everyone
The main problem with this strategy is that you can make quite a bit more with your RRSP invested effectively than a mortgage rate. JMEDY is doing okay on the RRSP, but has the most expensive mortgage in Canada.
Our clients have been taking variable mortgages for the last few years, so most have a mortgage rate now of 1.65%. It is shocking how much principal you pay when your mortgage rate is only 1.65%! The RRSP invesments are of course down a lot in the last year, but we still expect an equity return long term. So, 7.65% is an okay, but a bit low for a long term RRSP return, but is a horrible mortgage rate.
If your RRSP long term averages 6,8 or 10%, and you can get a mortgage between 4-5% almost all the time, then there is a spread profit that you lose, in addition to the high setup and annual fees of an RRSP mortgage. With an RRSP mortgage, your mortgage rate and RRSP return are the same. In all cases, this either means a low RRSP return or an expensive mortgage.
I realize it sounds good, but it is not the same as being mortgage-free. Your mortgage will have to foreclost on you if you don’t pay. So, it is no different (except more expensive) than having a mortgage at x rate and investing your RRSP in a bond at x rate.
Investing in a rental property is intersting, but has the same problem. The interest is tax deductible, but so would any other mortgage that you could get at a better rate.
Investing in someone else’s mortgage is also interesting, if you can charge them a higher rate. The issue is risk. Anyone that is willing to pay you a high rate is probably a credit risk. Do you really want to invest your RRSP in a mortgage that could take a big loss?
The real high rates are if you have a 2nd mortgage, but the risk here is much higher. If the mortgagee does not pay you, you cannot foreclose, unless you buy out the first mortgage as well. If that is not possible in your RRSP, then you have zero ability to enforce any mortgage payments.
SC, it can only be mortgages, not any other type of loan.
There is also not an SM version of an RRSP mortgage. It can only be a conventional mortgage, not a readvanceable mortgage.
While it may sound good, you can essentially always do better by getting the lowest possible mortgage rate and investing your RRSP effectively. Even if you only use if for the fixed income part of your RRSP, it is still not affetive.
Today, you can get a mortgage at 3.5% or less and you can buy a long term bond at a better rate. This makes more money than an RRSP mortgage, plus avoids high setup and annual fees. And of course, you can probably invest better than just having a bond.
Ed
Mar 13th, 2009 @ 8:58 pm
24. Marina
Is it possible to hold mortgage for the foreign property inside RRSP?
Apr 10th, 2009 @ 12:35 am
25. Marcel Therrine
Hi,
Can you please refer me to a good advisor or lawyer who can assist me with the paperwork and the procedures to set up “holding a mortgage within an RRSP” for my rental property.
Thanks,
Marcel Therrien
May 4th, 2009 @ 1:46 am
26. Owen
Can such a mortgage be used to buy a renovation property? Say you have a shell of a house that’s on the market for $200k. It needs $100k of reno work to make it liveable again and would then be worth $400k. Could you loan yourself $300k from your RRSP for such a project?
Aug 5th, 2009 @ 12:44 am
27. FrugalTrader
Owen, I believe you can use this strategy for an investment property. As per the actual amount, you would need to discuss the details with the RRSP mortgage provider.
Aug 5th, 2009 @ 10:56 am
28. Owen
Thanks FT
Aug 9th, 2009 @ 9:22 pm
29. FirstGenerationWealth
I cant find the CRA policy line online but I know RBC requires a self directed RSP Mortgage to be on an owner occupied property. Meaning, no secondary or vacation properties. As was said above, you run the risk of an under deversified portfolio and if it is within the right allocation the mortgage amount will probably be so small that the fee’s will negate any benefit. And intersting option, but not for most people
Sep 15th, 2009 @ 8:31 pm
30. Marian
Can you purchase a rental property through your own company and have a mortgage through your personal RRSP? Marian
Sep 21st, 2009 @ 6:15 pm
31. jkimball
Intersting thread here. I am alittl econfused on the banks role here.
I have 50k in cash, sitting in ING right now. I have a 50k mortgage on my prinicipal residence, at 3.75%, no penalty to pay it off. I also have 50k+ of RRSP contribution room for 2009.
I could just pay off the mortgage. Done. Home free.
But why not put the 50K in tot he RSP, get a massive tax break this year, and then borrow from the RRSP to pay the bank loan? I could charge myself , say 6.5% interest. I get tax break, I am home free (essentially) and I am contributing more to my RRSP then the normal cap limits would allow…
And what happens if I don’t make the payments? The RRSP forecloses on me? I sieze my own home and give to back to myself?
Am I missing something here?
Dec 28th, 2009 @ 1:07 pm
32. James
certainly an individual thing. I think this might be for me. I am very risk intolerant. I waited for almost 10years for the market crash and was all in GIC’s. I then got into stocks and have near doubled my RRSP’s in 12 months to the point that it covers my mortgage. I think this might be a good way to use the prophets.
After all…. as an amatuer I realize that I gotta get out before I am eaten by the big boys.
Dec 28th, 2009 @ 10:28 pm
33. James
jkimball
From what I understand. If you can’t make the payments the bank reposes the house and sells it to pay back your RRSP. just like any other mortgage.
I am thinking that an open mortgage that you pay only interest is the way to go. To me the big advantage of this is you can set the worst mortgage terms possible for the best flexibility. Pick the lowest interest rate of course. Another words the retards 40 year mortgage or an interest only mortgage works here cause the stupid money in garbage payments actually go into your own pocket. But for a normal mortgage I am not so sure this is the way to go unless interest rates go monkeydog which I do expect once the recovery is in full boom.
IMO
I am seriously thinking about setting this up.
Dec 28th, 2009 @ 10:40 pm
34. cannon_fodder
Jkimball
Depending on how much money and how high your tax rate is you may want to consider the following option. Take $50k out of ING right now and deposit it into your (self-directed) RRSP. Then in the new year you have the choice to assign a part of your contributions to 2009 and a portion to 2010. It may make more sense to split it up because the net benefit of the contribution is reduced if it takes you to lower and lower marginal tax rates. If you can find a maximum amount that you can deduct and keep in a high tax bracket you benefit the most.
Then you can use the substantial tax refunds to help pay down the mortgage. You could be mortgage free before the end of 2011 depending on how aggressive you can be with your payments.
Dec 29th, 2009 @ 10:57 am
35. cannon_fodder
Jkimball
I don’t mean right NOW. I should clarify that you have until the end of February 2010 to make a contribution that will count towards your 2009 tax year.
Dec 29th, 2009 @ 10:59 am
36. D Stevens
Hello Folks,
There is one question here that seems of primary importance, and I can not find the answer anywhere.
I understand that the repayment of the mortgage to the RRSP does not count against your contribution limit. To me this implies that you are deferring taxes on both the amount made as a mortgage payment, and on your regular contributions.
Can anyone link me a page that explicitly states that the mortgage payments result in tax deferal?
It would seem to me that this is the critical point, as anyone who is seriously saving for retirement will max their contributions quickly, and receiving tax deferral on mortgage payments makes this a much better ROI then any other possible investment.
Here is how I see it (numbers are for convenience sake, assuming >100k yearly income, RRSP contribution room limited to yearly max)
$200k mortgage paid off with RRSP.
In the first year then we get the following situation…
Contribution of $21K to RRSP (assumed max), assume a high interest rate payment on mortgage, so an additional $1500/month in mortgage for a total of additional $18k contribution. If the mortgage repayment results in deferred tax, the resulting tax refund of minimum $13k (likely much more, depending on marginal tax rate. rates can be found here http://www.taxtips.ca/taxrates/on.htm).
So with a bank mortgage the payments increase my home equity. With a RRSP mortgage, the payments increase my home equity, but they also give me deferred tax at a rate of >30% which can be reinvested (TFSA), AND the interest on the mortgage is actually being paid to my retirement savings???
Please tell me how I have gone wrong here, if at all, it seems to good to be true. Include links to source informatoin would be appreciated.
(OK, if you read all this, my apologies. Gordon Pape says that the mortgage payments do not count as contributions, but are also not tax deductible. Never mind.)
Jan 16th, 2010 @ 1:29 am
37. Wil
The payments of PRINCIPLE are just the repayment of the RRSP amount you took out so no addtional tax deferral here.
The INTEREST payments, while not using up RRSP contribution room, also do not result in tax deferral. In fact that money is double-taxed – once upon earning it and again upon withdrawing it from the RRSP.
Feb 8th, 2010 @ 10:53 pm
38. sg
JMEDY
Could you mind to provide lawyer name …/CIBC Branch .
I am in need to use my rrsp for my investment property
what will be the approximately cost for this set up
Thanks
Feb 27th, 2010 @ 7:53 pm
39. Gerald Francis
I would like to use money from my rrsp as down payment for rental property anyone know if this can be done without being penilized
Mar 13th, 2010 @ 7:56 pm
40. FrugalTrader
Gerald, if the rental property is your first property, then you can use the HBP for the down payment (up to $25k). If not, then any RRSP withdrawal will be taxed at your marginal tax rate.
Mar 13th, 2010 @ 10:14 pm
41. Pat
I have one mortgage currently within my RRSP. Can I hold another
mortgage on a different property using what is left in my RRSP?
Mar 21st, 2010 @ 2:34 am
42. Walter
Holding a mortgage within your RRSP saved my RRSP portfolio. However I only participate in in “arm’s length mortgages”. There are plenty of borrowers willing to pay me 14 to 18% and payments are made on an interest only basis. I’ve spoken to several accountants and they have told me this is the “holy grail” of RRSP investing. If you’re not doing this yourself, you’re losing money.
May 28th, 2010 @ 2:47 pm
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