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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?





78 Comments, Comment or Ping

  1. 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.

  2. 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.

  3. WOW… never thought this was possible. You would have to be older I imagine to have enough contribution room to do this, correct?

  4. 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.

  5. 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

  6. 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..

  7. 7. Nicolas

    Would it be possible to mix this in with the SM?

  8. 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.

  9. 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.

  10. There are definately some intersting benefits to doing this but the drawbacks are also compelling.

    Interesting post though!

  11. 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.

  12. 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%.

  13. 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 .

  14. 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.

  15. 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) .

  16. 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.

  17. 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.

  18. 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?

  19. 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

  20. 20. SC

    Very interesting article.

    Would it be possible to fund any other type of loans (e.g. car loan) using an RRSP?

  21. 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

  22. 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.

  23. 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

  24. 24. Marina

    Is it possible to hold mortgage for the foreign property inside RRSP?

  25. 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

  26. 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?

  27. 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.

  28. 28. Owen

    Thanks FT

  29. 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

  30. 30. Marian

    Can you purchase a rental property through your own company and have a mortgage through your personal RRSP? Marian

  31. 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?

  32. 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.

  33. 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.

  34. 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.

  35. 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.

  36. 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.)

  37. 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.

  38. 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

  39. 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

  40. 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.

  41. 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?

  42. 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.

  43. 43. Gary

    Hey my name is Gary and today I opened an RSP account with my bank because i want to purchase a house next year! the banker advised me that it would be better to use the money in an RSP because its tax free! But im still not sure if should proceed with this account! is it better to just keep my money in a chequing account or RSP!

  44. 44. Walter Monteiro

    Further note. Make sure you just put the rrsp money in like a GIC or something similar so you don’t pay redemption fees.

  45. 45. Ed Rempel

    Hi Gary,

    I assume this is your first home? Saving the first $25,000 of your down payment in an RRSP is often a good idea. This is because of the Home Buyer’s Plan, not the RRSP mortgage.

    You can contribute to an RRSP and borrow up to $25,000 for the purchase of your first home. This gives you a tax refund and still allows you to use the money for a down payment.

    If you are in a low tax bracket (say income under $44,000), then it is probably not worth claiming the tax deduction. However, you if you will be in a higher tax bracket in the future, you can still make the contribution now but carry forward the deduction until you are in a higher tax bracket.

    Ed

  46. 46. susan

    Hi , This is a little strange ..Mu husbands business partner used his rrsp to place a mort on our home for 50 K to use towrds the business .The business was to pay the mort ..it has been ten years since this happened and now the mort is in forclosure …..i have never made a payment on it and the payment history shows only a few payments ever being made .I am filing a defense to the forclosure …on the basis I was forced to sign an agreement without independent legal counsil .Any input on this one ?

  47. @susan, i think it would be in your best interest to consult legal council now to get real advice.

  48. 48. buff_butler

    Hi FT,

    What do you mean by “highest allowable at the time”. Is there both a floor and ceiling on what I am allowed to charge? Meaning if the going rate on the big 5 banks is ranging 4%-5% I am not allowed to charge 18% to myself?

    Thanks!

  49. buff, I believe there is a limit to the amount you can charge yourself, but I’m not sure as to the numbers. Might be best to check with an institution that supports RRSP mortgages.

  50. 50. Barb

    Can I hold a mortgage in my self directed RRSP that is on a property in the united states? ( owned by myself)

  51. 51. John

    When placing your mortgage in your RSP it seems to me you’re no longer losing the money you pay in interest as you would with a more traditional mortgage. I understand the argument of possible lost returns comparing fixed income to equities. That said, for lower income families in major metropolitan areas with higher cost of living, where it would be difficult to invest in an RSP and own their own home, can someone explain to me what the downside would be?

  52. 52. Ed Rempel

    Hi buff-butler,

    The interest rate you charge has to be “reasonable”, since it is not an arm’s length transaction. “Reasonable” usually means that independent parties might choose that rate, so it would probably include rates from the lowest to the highest that you see in the mortgage market.

    The :highest allowable at the time” would probably be something like today’s posted 5-year fixed rate.

    These strategies are usually marketed as thought they work better with higher interest rates. I don’t see it, since you are putting money into your RRSP without getting a deduction, and then you will have to pay tax to withdraw it later.

    Ed

  53. 53. Ed Rempel

    Hi John,

    The benefits of an RRSP mortgage are perceived – but not real. You are still losing the money you put into your mortgage because you have to make the same payments that you would have to make with a regular mortgage.

    A better way to look at it is that it is almost exactly like you getting a regular mortgage, while you buy a GIC in your RRSP that happens to pay the same rate. Let’s say you pick 5% as a rate. There is no difference between an RRSP mortgage at 5% and the normal situation where you making payments on a 5% mortgage to a bank while investing your RRSP in a 5% GIC – other than the thousands of dollars in setup and annual fees.

    You are not really paying yourself. A bank or trust company administers the mortgage for a hefty fee. If you don’t make your mortgage payment to your RRSP, your RRSP will foreclose on you and kick you out of your house just like the bank would.

    RRSP mortgages might be okay for people that have a large mortgage and would otherwise invest 100% of their RRSP in a GIC. This will give them a bit higher return that could justify the high fees.

    For anyone with any investing savvy or working with an advisor, the RRSP mortgage is a ridiculous idea. It is the most expensive mortgage in Canada combined with a horribly low rate of return in your RRSP and very high fees.

    Today, we are getting mortgages at 2.59% and investing in equities that should average 10% or more long term. That is a difference of more than 8%. If you choose your mortgage well (usually 1-year or variable) and invest your RRSP well, your RRSP return should be far higher than your mortgage rate.

    With an RRSP mortgage, you give up this 8+%/year difference and you have to pay thousands in fees.

    You asked whether this would help people who don’t have the money to put into RRSP. If they don’t have the money to put into an RRSP, they can’t do the RRSP mortgage.

    Remember, if you think of the RRSP investment and the mortgage as separate transaction that coincidentally have the same interest rate, then you have a clearer picture of why the benefits are perceived – but not real.

    Ed

  54. 54. James

    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.

  55. 55. Sherene

    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,

  56. 56. Alan

    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?

  57. 57. Ed Rempel

    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

  58. 58. Barry

    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

  59. 59. Jamie

    $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.

  60. 60. Jamie

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

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

  61. 61. Bubba Gump

    @ 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.

  62. 62. swilt

    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).

  63. 63. Sam

    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.

  64. 64. -

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

  65. 65. Ian

    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.

  66. 66. Lawson

    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%.

  67. 67. Nora

    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?

  68. 68. Ed Rempel

    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

  69. 69. L Leeman

    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?

  70. 70. Ed Rempel

    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

  71. 71. Gearld Frances

    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.

  72. 72. Ed Rempel

    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

  73. 73. Warren

    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,

  74. 74. Lou

    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.

  75. 75. Sandy

    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.

  76. 76. Ken Gallagher

    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?

  77. 77. Sandy

    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…

  78. 78. oceanbuoy

    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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