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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?

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 78 comments… add one }

  • James January 15, 2011, 4:23 pm

    The peeps that say you can get a better return by investing make me laugh. Show me a gauranteed risk free investment that beats mortgage rates and I will sign up.

    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.

  • Sherene January 17, 2011, 9:46 pm

    Loan against my RRSP

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

    Any advise or opinion.
    Thanks,

  • Alan February 8, 2011, 1:35 pm

    Okay folks here is my situation…

    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?

  • Ed Rempel February 9, 2011, 3:01 am

    Hi Alan,

    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

  • Barry February 18, 2011, 4:51 pm

    This sounded like a good idea until I considered what (Post #37) Wil had to say on the matter. The payments you make to your mortgage inside your rrsp WILL BE DOUBLE TAXED – once when you earn the money to make the payment and then once again when the money is withdrawn from the rrsp at a later date.

    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

  • Jamie February 19, 2011, 6:36 pm

    $200 per year is significantly less that the fees charged on every single mutual fund available. On $100,000 that works out to 0.2%. You’d be giving up more than that on an index fund.

    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.

  • Jamie February 19, 2011, 6:59 pm

    http://www.wiseword.ca/art_oct99.htm

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

  • Bubba Gump February 25, 2011, 5:41 am

    @ Ed Rempel.

    “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.

  • swilt March 9, 2011, 3:01 pm

    One of the things that I am trying to sort out is the 7.36% that I can charge myself, what does that equate to as a return?

    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).

  • Sam April 27, 2011, 2:42 am

    RRSP….get your money out!
    R.etirment R.educe S.lowly P.lease

    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.

  • - June 22, 2011, 8:14 pm

    You can leverage in RRSP too. It’s worthwhile it’s rate is relative low and tax bracket is low.

  • Ian December 3, 2011, 11:50 am

    Everything has changed now that market returns have gone soft. How interesting it would be to do the math on having an RRSP in mortgage vs. investments in the past 5 years. You would be way ahead with a self-directed mortgage.

  • Lawson May 28, 2012, 11:56 pm

    It is important to realize that you are only moving ahead in terms of overall profit if consistently the mortgage interest rate is higher than your typical RRSP[i.e. mutual funds-for example] percent earnings.
    With interest rates so low on mortgages currently, there really isn’t any net gain.

    If mortgage interest rates were 10%, and the best you could get on your RRSP was 5% you are moving backwards and that would be the occasion to move everything towards paying your mortgage within a self-directed RRSP. Your return would be zero, but that is better than -5%.

  • Nora May 31, 2012, 1:07 pm

    I’m a vendor who wants to sell to an investor and rent back as a tenant. (Have to sell due to divorce but want to continue living in this house). Will sell privately to a buyer who will let me stay. House is in a great location (35 min from downtown Toronto — nearby, not in, that runaway real estate market).

    My father investigated the details of this investment and it seems very sound. However as a non-resident of Canada it turns out he’s ineligible for a Canadian mortgage.

    How to I make contact with other potential investors?

  • Ed Rempel June 1, 2012, 1:32 am

    Hi Lawson,

    You are right, but there are 2 other pieces to this puzzle. You are only ahead with an RRSP mortgage if all three of these are true:

    1. The mortgage rate is higher than you could make long term investing in your RRSP (in mutual funds, for example).
    2. The mortgage rate is as low as you can get by shopping around for the lowest possible rate.
    3. The savings from 1. and 2. above are more than the fees involved.

    In your example, if your mortgage is paying you 10% and you can make 5% in a mutual fund, you are ahead 5%. However, you can get a mortgage at 2.79% today, so you are behind 7.2% on the mortgage. That puts you net 2.2% behind, plus you need to adjust for fees. It should also not be hard to make more than 5%/year long term with your mutual funds.

    Ed

  • L Leeman July 25, 2012, 9:09 pm

    Now I am trying to sort through this …a few things are percolating around in my brain. If my thoughts do not seem correct, then please post a correction.
    Notes to SELF:
    1. You pay your payments with after tax dollars no matter who you pay to, your RRSP or your bank. So there is no double taxation.

    2. You pay tax on everything that comes out of your RRSP be it investment income or your accumulated self held mortgage interest payments.

    3. Interest payments made to the bank are GONE and cannot be reinvested. Interest payments made to your RRSP mortgage can be reinvested and any profits made grow and compound tax free until you take them out.

    4. Depending on your income, company pensions, etc. you CAN bypass the RRSP contribution limits by formulating a mortgage with big payments but…you will not get a tax refund on anything contributed this way. You only gain by reinvesting these payments and then reinvesting the returns again.

    5. You have to have already accumulated a decent sized RRSP value to be able to do this.

    6. You lose any RRSP growth you get now from the money you lend yourself.

    7. This is tricky enough with people thinking they can give themselves a reverse mortgage and so on…that you really need to see a tax and investment professional before attempting this.

    8. You gotta be able to make the payments and qualify for a normal mortgage anyway.

    9. What happens when you hit 71?

  • Ed Rempel July 26, 2012, 12:10 am

    Hi Leeman,

    All of your points are accurate – but you are missing one. The RRSP mortgage can only trick your mind into thinking it is a good idea if you inflate the interest rate.

    It is an idea that sounds good until you do the math.

    The way the strategy is marketed, you choose the highest possible reasonably justifiable interest rate. If you choose 6%, that sounds like not a bad return for your RRSP and it is guaranteed. Sounds good, right?

    However, once you realize that you are artificially putting money into your RRSP without a deduction that you will have to pay tax on to get out, then you realize it makes no sense.

    It sounds tricky, but if you take a market rate, it all makes sense. You should do this at the mortgage rate you would normally take. Any higher rate means you are paying extra tax for nothing. Today, the best rate we are finding is 2.59% on a 2-year fixed. So let’s use that rate.

    This strategy means that in your RRSP, you can invest to get a 2.59% fixed rate. Of course, you have to pay close to $2,500 to get it, but it is guaranteed. Of course, it is not guaranteed by the government or a huge financial institution – it is guaranteed by someone with your financial strength.

    See what I mean?

    2.59% is a lousy RRSP return by anyone’s standard. When you use a market rate, this strategy becomes clear as a waste of time. With a little looking, you can find a GIC at that rate or higher (guaranteed by the government) and avoid all the fees.

    Sorry if I sound a bit sarcastic. I admit the RRSP mortgage can sound good. I did that math on it back in the 90s, but have been asked about it many times since then.

    I think the RRSP mortgage is one of the worst ideas out there. I’ve seen the finances of thousands of people and cannot imaging any situation where there is not a better idea that is easily done.

    If anyone out there is doing it, I would recommend to get out of it.

    Ed

  • Gearld Frances July 26, 2012, 6:52 am

    Ed’s comments I totally diagree with.
    I hold mortgages for others as a 2 nd position on a property and charge 12% and the investor pays the fees also. If they default on the rrsp mortgage I can have a lean against the property as a second position. The thing to ensure is that the 1st and 2nd mortgage dosent exceed 85% of the property value.

  • Ed Rempel July 27, 2012, 3:09 am

    Hi Gerald,

    Good point. I think there is never an advantage having your own mortgage in an RRSP, but it may make sense to hold someone else’s. That way, you can charge a higher rate without having to pay it.

    What happens if the person you are lending to stops paying you? Are you able to enforce your lien? For example, if you foreclose, you must first buy out the 1st position in order to foreclose – is that right?

    That would mean that if they did not pay your mortgage, you can sit and wait for years with a lien against their property, so you can collect if they ever sell. But you cannot actually foreclose.

    Am I understanding that correctly, or is there a way for you to foreclose, if necessary?

    Ed

  • Warren July 29, 2012, 1:37 pm

    I currently have a locked-in RRSP and an aversion to Mutual Funds. I’d like to invest in realestate and have enough locked-in RRSP and cash on hand to purchase and finance an income property.

    Can someone comment on this strategy? This is what I’m thinking:

    1. I pay no interest (only to myself) and no tax (if the rental income is balanced with interest and expenses) assuming the interest payments are income tax- deductible (or counted as RRSP contributions).

    2. While the interest rate return may not be great it is stable. And one must not forget that the income property is appreciating in value – that must also be factored into the return.

    3. As interest payments are made but to the RRSP – those payments may also be used for reinvestment (perhaps arms-length 2nd mortgages).

    4. When the property is paid-off it generates income. That effectively means you have used your locked-in RRSP to set-up a means of generating income outside the RRSP. You also own the home. If you live in the home for a period of time you may not need to pay capital gains when you sell it. That’s a nice bonus.

    Am I missing something?

    Cheers,

  • Lou October 4, 2012, 5:39 pm

    I would appreciate any guidance. Due to recent divorce, I am now apparently low income and do not qualify for mortgage. But I have about $100,000 in my RRSP (in cash), but I have just been told by bank I cannot use this money for monthly mortgage payments. I also have about 8% of cost of house as a down payment. Should I attempt to try to establish a mortgage inside my RRSP – the payments could be made for a few years, and then I would sell the house. I am not concerned about growth inside my RRSP. My immediate concern is a nice house to live in. Any suggestions or advice gratefully appreciated.

  • Sandy October 6, 2012, 2:34 pm

    Lou:
    Unfortunately, a condition of holding your own mortgage in your RRSP is that it must be insured (i.e. Genworth or CMHC) which means you must qualify – more or less the same as a regular mortgage. If you do not qualify for a mortgage – you will not qualify for a Personal (RRSP) Mortgage either…sorry. You may be able to access your RRSP to bulk up your downpayment, but until you have the income to qualify for a mortgage, you have to consider renting as a viable option as well..
    S.

  • Ken Gallagher June 10, 2013, 6:22 pm

    I retire next year. For the past 10 years investments in my RSP’s have been flat. Taking some RSP money and buying a vacation home makes sense to me. I get to enjoy a Vacation Property while my monthly payments could be adjusted to fit my monthly affordability by adjusting the amortization period.

    Could I just take my money as a line of credit only paying the interest until I sell or die? My objective is strictly cash flow and disposable income for travel and enjoyment.

    Another thought is that I borrow from my kids and they finally receive a return on their RSP in a very secure investment. They too have been struggling with poor returns on their RSP’s. Could I pay them 10%? One of my investments lends money at 18% and pays me 10% so why could the same principle not apply here?

  • Sandy June 11, 2013, 3:45 pm

    Ken:

    The key CRA Rule for this strategy is that the mortgage held in your RSP must be default insured by CMHC or a private insurer. That means you must qualify for your own mortgage. After you retire, qualification will be harder – maybe impossible – assuming that your income will be significantly lower.

    “Could I just take my money as a line of credit only paying the interest until I sell or die?” Sorry No. CMHC insurance rules require an amortizing mortgage.

    Your kid strategy might work. You can also pay their TFSAs as well as RRSPs which might be better. Banks will typically only let you go as high as 6.14% on an RRSP mortgage, but some trust companies will allow higher interest rates – but keep in mind that you must qualify through CMHC at the Contract Mortgage Rate. Just remember, if you default the mortgage, your Kid’s RRSP will take your house – the kids have no discretion in this matter.

    In general, borrowing the money from your RRSP to buy a vacation home is not as good a plan as borrowing RSP money to buy an investment property. Why? If you “invest” the borrowed money within CRA guidelines – your interest payment to your RSP is tax deductible…

  • oceanbuoy February 18, 2014, 1:29 am

    I have a sizable rrsp and own an investment property outright in Vancouver. I am purchasing a new home to live in and will need to take out a mortgage of around $150k to buy this home. My rrsp is around 4 x this amount and is invested primarily in equities. If I fund the mortgage with rrsp money that would give me about 1/4 of my rrsp in fixed income at a time when fixed income investments are abysmal. This sounds like a great strategy to me when I am looking to diversify some money into safer investments.

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