Pros And Cons Of Holding Your Mortgage In Your RRSP

One investment that is eligible to be held in your RRSP is your mortgage.  You need to have enough cash, or assets that can be converted to cash, and hold your mortgage in a self-directed RRSP.  You then make your mortgage payments to the RRSP instead of a financial institution.

You can fund your own personal mortgage (new or refinanced), an unrelated party or a rental residential property.  The mortgage payments can then be invested in any way you like, taking advantage of dollar cost averaging.

Holding Your Mortgage In Your RRSP: How does it work?

You must meet all bank lending policies for the mortgage, including – but not limited to – verification of income, credit check, purchase agreement or copy of title (for refinancing).  An appraisal is done on the property and mortgage documents are drawn up by a lawyer – just like a regular mortgage.

Of course, you need to have sufficient funds in your RRSP.  If necessary make sure you have enough time to convert your assets to cash.  You also may need to transfer your RRSP to an institution that will handle this.

If you don’t have enough money yourself you can share with your spouse.  However, this will double the costs.

What about fees?

  • Standard mortgage fees – appraisal and legal fees.
  • Self-Directed RRSP fee (if applicable).
  • Application fee.
  • Mortgage administration fees.
  • A one-time mortgage insurance fee for non-arms length mortgages (i.e. your own mortgage).  Depending on the loan to equity this will be from 0.5% to 2.5%.  It can be paid immediately or added to the mortgage.

Benefits

  • All the mortgage interest goes to you, the investor.
  • You can use the highest allowable interest rate, which is usually quite a bit higher than GIC rates and many bond rates.  The current 5-year term interest rate at TD Canada Trust is 5.24%.
  • If you are refinancing your mortgage for investment purposes, the costs to set it up, as well as the mortgage interest are expenses that can be deductible from the investment income.
  • Suitable for the income portion of your asset allocation.
  • Payments don’t count as RRSP contributions.

Disadvantages

  • High fees.
  • Possible lack of diversification.
  • Requires large RRSP holdings, or a small mortgage.
  • If you have to sell existing securities to have enough cash, there may be penalties.
  • You may have difficulties finding a banker familiar with the process.  In my old lending days I processed a few of these mortgages, but they were not common.
  • You will be making larger mortgage payments if you take the posted interest rate.  You could likely negotiate a lower rate on a regular mortgage.
  • You could possibly earn more with other investments.

Keep in mind that this is still a mortgage, administered by the lender.  Even though you own the mortgage, you can’t miss or be late with your payments, or take a mortgage vacation.  If you are in default the bank will foreclose.

This strategy is suitable for a conservative, low risk investor who would normally invest in GICs.  It obviously is not appropriate for everyone.  It would be beneficial to have someone crunch the numbers versus other investment opportunities.


35 Responses to Pros And Cons Of Holding Your Mortgage In Your RRSP

  1. Great post! I had no idea you could do this and am definitely going to read up on it. It’s amazing how you never know what it is that you don’t know. I agree with Jeremy that it’s too bad they don’t teach personal finance in school. You can’t teach yourself about things you don’t even know exist (like this in my case).

    • @Jeremy
      @Marianne. Actually, I was reminiscing about the good old days (?) and I remembered that I did a few of these mortgages several years ago. I had not heard anything about them lately so I was curious to see if they were still available.
      They were not that common at that time because RRSPs were just starting to become more popular and most people didn’t have enough holdings to turn into a mortgage.
      Times have changed. I suspect that one of the reasons they are not widely recommended is they are not profitable to the account manager, but they are worth a look.

  2. Hi Boomer,

    We have looked at this strategy and see no benefits at all. Here is how we see it. It is a combination of the:

    Worst mortgage in Canada
    + a poor RRSP return
    + high fees.

    The fees are also NOT tax deductible, since the investment part is inside your RRSP.

    The strategy usually uses the highest possible rate, which could be the 5-year posted rate you quoted – 5.26%. If you use that, you have the worst mortgage in Canada. We are getting 2.49% today and have been below 5.26% for all of the last decade.

    Secondly, for a diversified portfolio, 5.26% is not a good return. The stock market long term has averaged 10-12%/year. If you have a 25-year mortgage, the worst 25-year period in the S&P500 since 1950 was a gain of 8%/year.

    The point is that normally RRSP returns should be far higher than your mortgage rate. A long term RRSP return with a quality equity portfolio should make 8-12%/year, depending on your risk tolerance. Meanwhile, mortgages have been below 5% for almost all of the last decade and are at historic lows.

    This gives you a spread of 6-10%/year between your RRSP return and your mortgage rate. With an RRSP mortgage, you give up all of this spread and you pay high fees to do it.

    I think this concept is getting noticed a bit more lately because the stock market crash in 2008 is still fresh in our memories. However, it is important to take a long term view when evaluating strategies like this.

    Ed

    • Hi Ed. Thanks for your input. I have a few comments.
      1. Since the mortgage interest is paid back to the investor you have to consider the interest rate as part of the investment strategy rather than just a straight mortgage.
      2. Equity returns are higher, but since this is considered the income portion of an asset allocation it should be compared to bonds or GICs. You are comparing the mortgage return to an entire diversified RRSP portfolio which includes equities. The mortgage payments can be used for any purchase and you still have your regular RRSP contributions to keep it diversified.
      3. Fees should be compared to those of other investments such as mutual funds.
      3. Loans to invest in RRSPs are not tax deductible. According to HM Wise Asset Mgmt if you refinance your mortgage within the RRSP and use the money for income producing investments the expenses are deductible. It may come down to a discussion with CCRA.
      Not all products are suitable for everyone. I believe that potential investors should be aware of what’s available so they can make informed choices.
      Regards, M

  3. I have been doing this for our mortgage for 10 plus years. It has worked for us as part of a diversified portfolio.
    When you “pay” this mortgage you have the ability to funnel those payments into any other investment ( mutual funds,bonds,etf’s,GIC, etc).

    As part of a well diversified portfolio, it may work for some individuals particularly those who have maxed all of their RRSP room and contributions, all of their TFSA’s,and any RESP’s.

    • Teresa – glad you posted your comments. Can you tell me which bank set up your mortgage? We have spoken to several, none of whom have any significant information to share and some of whom state that they will only set up arms-length mortgages (not to self). My guess is that the banks don’t cooperate because this takes away their profit. Any suggestions?

  4. Hi Boomer,

    I realize I came down hard on this strategy, but I just find it so hard to understand.

    Here is my problem. The strategy results in you drastically over-paying your mortgage in order to put the money into your RRSP. However, you don’t get a tax deduction for putting money into your RRSP – even though you will have to pay full tax on that same amount when you withdraw it.

    Here is how I analyze it. I pay a very high mortgage rate of 5.26%. If it is a $100,000 mortgage, my RRSP gets $5,250. I pay costs of $500/year, so my RRSP grows $4,750. Then I withdraw it from my RRSP and pay 46% tax. That leaves me $2,565.

    In short, I paid $5,260 of my hard-earned, after-tax money (plus $500/year in fees) and it increased my net worth by only $2,565.

    Net position, I am down $2,695 (less the principal portion of the mortgage payment).

    I could instead get an actual mortgage from a bank at 2.49%. There are no annual the fees. I pay only $2,490. I am already ahead before considering any return at all on the $100,000 in my RRSP.

    Then I invest my RRSP in a GIC at 2%. If I withdraw it, I clear $1,080.

    In total, I paid $2,490 and increased my net worth by $1,080.

    Net position, I am down $1,410 (excluding the principal portion of the mortgage payment).

    In summary, I can beat the RRSP mortgage by a lot if I just invest my RRSP in a 2% GIC!

    A better way to beat it by a lot would be to get a mortgage at 2.49% and then invest my RRSP in a higher return fixed income investment, such as a MIC or a diversified income fund. With either one, you can make 6-8% with not a lot of risk.

    There is also a risk from putting all your eggs into one basket. You can see this if you look at the worst case scenario. Let’s say you lose your job and can’t pay your mortgage. Now your RRSP must foreclose and kick you out of your house. Then your RRSP must sell off your house as a power of sale, which means your RRSP takes a big loss.

    In short, you lose your job, your home and your RRSP takes a big loss – all at the same time.

    I think the problem is that it makes it look like you are mortgage free. However, to understand the strategy, you need to think of the RRSP investment and your mortgage completely separately.

    You are not mortgage free because your RRSP MUST foreclose on you if you miss your payments, exactly like a bank would. Your RRSP mortgage is administered by a trust company, which carries out the foreclosure.

    It is the same as you buying a fixed income investment of some sort that makes 5% and having a mortgage of 5%. The fact that you pay into your mortgage only provides a false appearance.

    The strategy is easier to understand if you take a good mortgage rate. Let’s say you set it at 2.49%. That is a good mortgage rate today. That means you are investing your RRSP at 2.49%, less annual fees of $500.

    You can easily beat that with a fixed income investment.

    The fees can be higher than you realize. A $200,000 mortgage will probably cost $3,000 to setup and $500/year to administer. Setup includes CMHC fees, legal fees, appraisal fees and a setup fee.

    The fees are only tax deductible if you do a mortgage on a rental property. They are not deductible if it is your home. The fees are treated exactly the same as any fee for any mortgage, such as legal fees.

    If you do it on a rental property mortgage, the setup costs would be part of the capital cost to buy the rental property, just like the legal fees are. So they are not deductible in the year you spend them. They are part of the cost if you claim CCA and they reduce the capital gains tax when you eventually sell.

    Bottom line – I wouldn’t recommend an RRSP mortgage for anyone.

    Ed

    • Hi Ed. It’s clear that you have no liking for this product. All opinions are valued. A couple of things though. You say that the mortgage payments will be taxed when you withdraw the funds from the RRSP. How is this different from, say, investing the money into a bond? The interest earned will also be taxed on withdrawal.
      Also I disagree that you are dealing with two different products. I think you have to see it entirely as an investment strategy.
      I would definitely not use this with my entire RRSP portfolio, but I think you are doing people a disservice when you say they think that it looks like they are mortgage free. People are not that naive.

  5. The initial costs to set up the RRsp within our Mortgage were if I remember correctly.I’d have to go back and look under $500.00. The yearly service fee is $236.00.

    This mortgage worked for us as we had the liquid assets in an RRSP. We determined the rate with the trust company. Just renewed in Feb. paying 5.9%, was paying 8.9% for previous 3 years.WAS double digit’s before that.
    Works if this is one part of your diversified porfolio.

  6. Hi Boomer,

    I’m trying not sound too negative, but this is one idea that sounds good, but just does not work once you get out your calculator.

    I have had quite a few clients ask me about this strategy in the last 15 years. It is surprising how many people tell me they think it makes them mortgage free, since they only owe themselves.

    There is an emotional feeling of not owing a stranger, which I think is nearly the entire attraction of this strategy.

    I have talked with many people wanting to do it, but none had done any calculations to see if it is a good idea.

    Once I showed them the math, everyone is shocked at how bad an idea it is.

    The reason you can’t think of it as just an investment strategy is that the people who advocate it recommend that you vastly overpay on your mortgage. For example, they would recommend you take a 5.26% mortgage, not a 2.49% mortgage.

    Here is my advice. If you are thinking of doing this strategy, you should not waste money on your mortgage (since you will have to pay tax to get it out later). Look around and find the lowest rate mortgage you can find anywhere and use that rate. Today, that is probably 2.49%.

    If you use 2.49%, then you are not wasting money on your mortgage any on unnecessary tax. At that rate, you can see the strategy accurately. How thrilled are you with a 2.49% investment in your RRSP, minus high fees?

    The biggest fee is CMHC, which ranges between .5%-2.9% of your mortgage balance. For example, if your mortgage is $200,000 and 80% of your home value, then the CMHC fee is 1%, or $2,000. Legal fees are probably $700. Appraisal fees are about $300. The trust company setup fee is at least $3-500. Total setup is probably over $3,000.

    The annual fees are the mortgage admin fee and RRSP admin fee, which are $3-500/year. There are a few smaller additional fees.

    Bottom line: I think you will find that if you get out your calculator, you will probably always be ahead by just taking a low rate mortgage and buying a GIC in your RRSP. Of course, you would be far ahead if you invest in higher return investments than GICs.

    Ed

      • I think Boomer may be a little too kind to Ed.

        Please draw the comparison without taking the worst from the one you oppose with the best from the one you prefer.

        1) There is a price to pay for having a locked in RRSP rate so compare apples to apples. 3.99 outside or 3.99% inside would be a fair comparison. Not 5.26 with 2.49%; isn’t that like comparing a 10yr term with a 6 month variable?

        2) RRSP’s averaging 10 – 12% is nothing but propaganda. Anyone can pick them out of the historical data after the fact but virtually no one is seeing that return currently.

        3) The MER% is about 1.5% ANNUALLY! making the expenses for mutual funds HIGHER than the self-directed mortgage – though initial set-up cost is higher.

        4) If we were going to be honest with ourselves would we not need to subtract the mortgage costs we are paying (3.99%) from the gain of our investments? By paying myself a 3.99% return and avoiding the 3.99% interest I am currently paying to the bank am I not actually ahead by 7.98%

        After watching all the different layers of vultures ravage my RRSP’s in spite of them producing little return it is painfully obvious that the self-directed mortgage option is a good one for many Canadians – though undoubtedly scary for the finance industry.

  7. Today is the first that I’ve heard of this strategy. I admit that I havent had a chance to run the numbers, but I hav to correct one thing that i’ve read here.
    - the money used FROM the rsp is in the form of tax-deferred earnings. Therefore, in order to make a 200,000 investment in real estate from an taxable acct, you would have had to earn 200k/(1-tax rate)….say 285k.
    - you can’t get a tax benefit twice…once when you contribute to rsp and again when you repay ur rsp…same a the repayment of the hbp withdrawal. There is no double taxation as people here are pronouncing.
    - last thing is the performance of the asset (ur home) is more than just the 5% return ur paying in interest. You also get shelter use out of the asset. How do you use a gic for this? Would it make sense to put 200k in a gic and pay rent of 1200/mo for my shelter costs? I think not.
    - last thing, and i admit i’m not a math wiz so dont ask for the calculation, but every payment with interest made back to ur rsp can earn interest, so you have “interest on interest” and “interest on principal repayment” to include in the calc. The bank does not pay you interest on the principal or interest you pay them.

    • @Sam: This is a qualified RRSP investment so a resident of any province can use it. When I worked for the TD Bank many years ago I set them up through TD Waterhouse. I imagine most financial institutions can do this.
      I would first check with the brokerage arm of your bank for information and direction. Many branch personnel won’t know what you’re talking about.

  8. We have used CIBC Trust.I am not from Ontario and have no other CIBC accounts other than this one.It is held by CIBC Trust in Toronto.

    When I pay my fees I just go to a teller and they send it in to my mortgage marked “Fee Payment” since I don’t have a bank account there.

  9. Just read the comments on RRSP mortgages and I have done a few over the years within my RRSPs. The real advantage is that you can ‘dollar cost average’ both the interest and the principal into other investments all within the rrsp. The real return is then a result of the compound interest on your investment choices that are funded by the mortgage payments to yourself. You get to keep it all but the start up is costly and you need to hold a large amount of cash in your RRSP(s) to start the process. Rules with CMHC may have gotten tighter of late and I suggest having at least two institutions who administrate these (some banks and some credit unions in BC) lined up as the attitude of some mortgage handlers may discourage even vetrans like me.

  10. Thank you for this post. It’s a truth many Canadians do not realize. When you can leverage the available funds in your RRSP account and pay off a higher rate of interest loan to the bank, the monthly payment is smaller, freeing up funds to do more with. This includes investing in other wealth-generating activities. if you’re considering your options, consider a totally passive income property investment option.

  11. I’m 32, and currently live and work in Fort McMurray. I’m in the highest federal tax bracket. When I leave, likely in 2 or 3 years’ time, I will drop a bracket (or even two). The pay here is off the charts compared to the rest of the country.

    My goal is to save up a down payment to buy a house. Could this RRSP mortgage strategy work for someone like me, since I’m only temporarily in the highest tax bracket?

    • I don’t know Brendan if it would be beneficial in your situation.
      Though you do have the use of your money and would as a result of your higher income for a few years have more contribution room is that the best strategy for you?

      When you drop down in income bracket you would still be paying yourself back .But with the drop in income if there was a possibility of not being able to maintain the mortgage payments you could also be forclosed on. Just because the money is in an RRSP does not “protect” it if you are unable to repay.

      Here’s an idea, just one of many I am sure you will be given. When I have had opportunities with “windfall” money I go through a few steps.

      (1) Is all your debt paid off?

      (2) Do you have an emergency fund? Dependent on your employment situations these usually are all household obligations and expenses over a 3 – 6 month period that you have saved,( for an emergency:)

      (3) Do you have an up to date will? ( Probably you instead of the gov. would like to see how your assets are divided). Also not sure if you have dependants?

      (4) Though a depreciating asset. Would you like to put money away for a vehicle purchase that you would pay for in cash. A rule of thumb I have heard is all vehicles ( cars, boats, quads etc, their value should not exceed half of your average income ( not just the income of the good years:))

      (5) Have you fully funded your TFSA’s though you could use these $$ for a down payment you may do better with investing in this vehicle and not with drawing the money.

      (6) Have you maximized all other retirement options. i,e,if your employer offers any match for contributions have you taken advantage of these.

      (7)Typically the contribution room to make a self directed RRSP holding your mortgage work would have to be pretty high probably close to $150,000.00 to make this strategy worth while.

      You are paying this back to your self so you do have to determine if you will be making the income to pay back.

      My suggestion, max out all investments for your retirement.
      Save as much cash as possible. When this opportunity passes you will be well set up. Though others might disagree I would pay for a house in cash and then direct what would have been the payment to other investments and savings and start to build those up.

      I think a mortgage held with in a self directed RRSP does work for some people. I would qualify that it would be one of many investment strategies to be implementing.

      Your house is all your own,no payments, pretty sweet place to be:)

      Best of luck Brendan at recognizing the amazing opportunity you have. With a little foresight,planning and hard work you could be setting your self up for a remarkable future, bravo!

  12. With TD Price Waterhouse shutting down its self-directed RRSP branch, does anyone have any recommendations for a bank/trust company that will do Non-Arms Length Mortgages?

    (I believe B2B or Olympia will only do Arms Length).

  13. Ed you don’t like the strategy because you lose the trailer fees you get from the funds the client is invested in.

    DSimpson commented that if his mortgage outside was being charged 3.99% and he charged himself 3.99% inside his mortgage, then isn’t he ahead by 7.98%. Sort of.

    If you look at a simple $100,000 mortgage, at 4.5% outside, 5 year term, with a 20 year amortization. The total interest you are paying to the bank is $51,296. Now if you are to pay yourself that money and dollar cost average invest it into a good quality equity fund every month, now your net worth is really growing.

    I have several clients that have used this strategy for a number of years and love it. The reason adviser’s and banks don’t recommend it, is simple, they don’t make it any money on the strategy.

    It is a win-win strategy for the client.

  14. Hi Scott,

    I am just here trying to give some honest advice. I have analyzed this strategy to death and can’t see any advantage – except for mortgage brokers.

    You cannot add your interest paid to your interest received. They net out.

    RRSP mortgages are sold as you are paying yourself. The truth is that you are using after tax money to put into a before tax RRSP without getting a tax deduction.

    If you could take $5,000 cash every year and put into your RRSP without getting a tax deduction, would you do it? Remember, you have to pay full tax on it when you withdraw.

    That is the part people forget. Using an inflated mortgage rate with an RRSP mortgage is a disaster. If you withdrew the money the next day, you would have lost money at your tax rate.

    Also, the rates you mentioned of 3.99% and 4.5% are horrible rates in today’s environment. We are getting 2.45% today. If you use those rates, you need to include in your calculation that your after-tax money is overpaying your mortgage by almost 2%/year.

    Here is my advice. For anyone considering an RRSP mortgage, take the lowest possible rate. Why put after-tax money into a before-tax account without getting a tax refund. Today, you could do the RRSP mortgage at 2.45%. Then you are not losing on your mortgage.

    Plus you can see the strategy without smoke and mirrors.
    I think the strategy only makes sense for 100% GIC investors – those that believe their long term RRSP return will be lower than today’s mortgage rate. Only those who believe that their long term RRSP return will be less than 2.45% (and are willing to pay the fees) should consider this strategy.

    Ed

    • Ed,

      I disagree with how you’re looking at it. I think you need to look at it from two points of view. One from your RRSP’s point of view and the other from “your” point of view.

      From your RRSP’s point of view, ANY growth is taxable when you withdraw it. 2% from a GIC, 4% from a mortgage, 5% from a dividend or 12% from a capital gain in a stock. So, your RRSP has to look at this from a balanced-portfolio perspective. Does it make sense to have a mortgage as part of your overall fixed-income portion of your funds? And, as others have mentioned, as soon as you make a payment, your RRSP can do whatever it wants with that payment – buy stocks for instance.

      Now, from your point of view, your mortgage payments are never tax-deductable, so that point is moot.

      The real debate you need to have with your RRSP is “can the RRSP get a better rate of return than the current mortgage rate”? For the fixed-income part of your portfolio, I doubt it. Bonds are about to tank, I think.

  15. hi my plan is this. pay of my existing mortgage with the cash that i have and remortgage using the self directed rrsp funds.this will eliminate a 470.00 a month payment to the bank and create a 470.00 a month payment to my self directed rrsp the cash that i paid off my existing mortgage with will be replaced with the funds from the rrsp after i complete the remortgaging process. now here is where the benifit to me becomes apparent. i make the 470.00 a month payments to the rrsp, thats 5640.00 per year. then i withdraw 5640.00 at the end of the year and use it to make the next years payments. as my yearly income is very low the 5640.00 withdraw from my rrsp will be tax free. as i will be refunded the tax with held upon withdraw at the end of the year, and yes the cost of doing this is tax deductable including the intrest payed into the new morgage plus all other costs as i would be doing this to aquire funds from my rrsp to use for investing purposes outside my rrsp. cra states that it is a cost of doing buissness. i no that the rrsp account basicle stagnates and will not show any gain. it also shows no loss. the return that it does produce is the 5640.00 a year that i withdraw each year and when i use that to pay the next years mortgage payments it in affect eliminates the original 470.00 per month mortgage payment i was making to the bank. its a good way to for lower income folks to withdraw from the rrsp and not deplete it.sort of like having your cake and eating it to.

  16. Hi Bill.

    Why not just use your cash to pay off your mortgage, then get a new mortgage or credit line from the bank to invest? That will put you in the same position outside your RRSP than your plan.

    Then you can actually invest your RRSP properly and get a decent return over time. If your income is very low, you can figure out the optimal amount that you can withdraw every year with little or no tax. Most likely, that would be more than the %5,640/year. You can use that to pay the tax deductible interest.

    You may be able to take a larger amount out of your RRSP and deplete it over time, which could help you qualify for some government benefits after you retire.

    My point is that any plan involving the RRSP mortgage can be improved by doing the same thing without the RRSP mortgage. Without it, you can do the same thing, except actually invest your RRSP properly as well and you can also withdraw a higher/optimal amount from your RRSP. And you can avoid the fees of any RRSP mortgage.

    Ed

  17. Does anyone know if 2 people can hold an RRSP mortgage on the same property? I’m assuming the second mortgage would be, well, a second mortgage. Also, double the fees.

    But can it be done?

    Thanks

    • @Doug: You’re right. The second person would be the second mortgage holder and also pay fees. It can be done.

      I suggest going to a mortgage broker experienced in these types of mortgage to set it up properly.

  18. Hi Team
    I got a RRSP mortgage and it cost me large. The RBC bank no longer holding mortgage so I have to close it next year when the mortgage is do. I have to pay the mortgage with money outside the RRSp. If I use money inside the RRSP i pay 500 withholding taxes for every 5,000 withdrawn. All money I saved on paying myself interest i now pay tripple to government for taxes when i withdraw.

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