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.
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.
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?)
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?