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.
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.
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
4. You can hold the mortgage under RRIF.
A 5.25% might be small under RRSP but it’s a good one under RRIF.
This strategy is wonderful if you retire and still have to pay a mortgage.
Boomer,where are you investing to get 10 to 12 percent. Those returns are not true
Hi Ed. I have read all your posts here and appreciate your considered responses. Just one further question. If I put my self-directed mortgage (at the lower posted mortgage rate) into my RRSP and then also trade it (which I do) wouldn’t it be better to have the 2% mortgage rate (just an example) going into my RRSP trading account so I could leverage that mortgage payment amount to invest it? I can get between 6-20% on my RSP trading account annually and am wondering about doing this to leverage that mortgage payment myself rather than give it to the bank. While I understand that if you get the low bank mortgage rate you can invest in the RRSP for higher gains, I’m just still wondering how you feel about it if you are further trading the RSP on top of it all. Thank you.
Let’s not forget though that when that mortgage is PAID IN FULL, all that cash is back in the mortgage holders hands (yours), NOT the banks. That’s where the true benefit of a self-directed lies, not in any interest rate comparison. Also, since payments are made, at minimum on a monthly basis, those payments can be applied (monthly) to a mutual fund stock portfolio for a potentially greater return.
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: I’m glad to here from someone who is successfully using this strategy. Thank you for commenting.
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?
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.
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.
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
Thanks Ed. Good points to consider.
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.
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.
Who in Ontario can setup this kind of investment?
@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.
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.
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.
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.
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!
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).
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.
Does anyone know who’s can setup a non-arms length mortgage in Ontario?
Scott,
What institutions do your client’s use to set up and administer their mortgage within RRSP’s?
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.
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.
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
Ed,
Your post is pretty old so this may not reach you…
I may not understand all of this but you keep saying that you pay the mortgage into your RRSP without getting a tax deferral but… if I need a $100000 don’t I need $100000 in previously invested RRSP? That moneys tax WAS deferred wasn’t it or am I missing something?
Ned
Hi Ned,
The way this strategy is usually marketed, they suggest using the highest reasonable interest rate, because that is the return of your RRSP. This will build up your RRSP faster than a low, market rate of 2.2%.
By choosing the high rates, you are building your RRSP, but without getting a tax reduction for the inflated rate.
For example, today you could use a high rate of 6%. That means your RRSP is making 6% (not bad), but your mortgage is at 6% (horrible).
You could also take a low actual rate of 2.2%. Then your mortgage is at a market rate, but clearly your RRSP return is horrible.
If you take the higher rate, you end up paying an extra 3.8% into your RRSP, but there is no tax deduction for this extra payment.
Ed
Is it possible to do an RRSP mortgage to purchase investment property?
@Dilesh: You can use this for a rental property that you own.
Ed,
That I agree with. I missed that you were only talking about the interest and not the principal.
What about setting an interest rate matching the market? Isn’t it better to pay yourself the interest than paying the banks? Doesn’t this guarantee you a 2.2% return (using your numbers)?
The interest migh be lower but you have a guarenteed return. To me it’s like changing a higher risk portfolio to a guaranteed return one (bond/GIC). It all comes down to risk management/tolerance.
As Boomer was saying it’s just another tool and is not meant to replace you whole portfolio.
If you do this with an investment property you can deduct the interest so it would be better to charege yourself maximum interes.
Ned
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.
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.
Ed, I’d like to hear your thoughts on an income property scenario where the interest is deductible and a third party is making your payments
i was just wondering. When you make your payments on the self directed mortgage, are you just paying the interest or a combination of principle and interest.
Example. 100 thousand @ 7% roughly 700 a month interest. Would you just pay the 700. I have no idea how this works.
We currently have a self directed mortgage. The mortgage will be paid in full in three years. My wife works from home and uses the home costs as a tax deduction. This includes the interest we pay into our self-directed mortgage. Is it possible that we could re-mortgage so that we extend the term thus allowing us to claim a tax deduction for a longer period of time?
I would like to share my thoughts, I’m 55 yrs old and have accumulated a decent RRSP savings, I’ve been reading up on using a self directed mortgage from my RSP’s for purchasing a condo and quite honestly, little confusing but I think I get the just of it. It my simple mind, I get the fact that I’m paying myself the interest instead of the bank. Realizing today you can get a mortgage let’s say for 3%, I know you can get it slightly cheaper but let’s say 3% for discussion sake. So, I would roughly get a 3% return which is not very attractive but I also see that in addition to that 3%, you should also get the additional return on the growth of the property which should also be factored into the overall return correct? Assuming the property value goes up roughly 5% annualy plus the 3% your paying yourself, leads me to believe you are getting roughly 8% annual return? Am I thinking of this properly? Last comment, my plan would be to rent this so, in addition to my math on roughly 8% return, the amount (give or take depending on how much rent I received) I would have pay back to myself from the RSP plan could now be covered by the rent I would be charging so there would be a gain from that also? Am I missing something because if I add all this up, pretty decent return?
Mike,
(forgive the typos)
It’s probably higher. It depends on the amount you are mortgaging. For example let’s say you have a 50% down payment on a $200k condo, the mortgage is only $100k. You would make (or save) 3% on that $100k since you pay it to your self. However a 5% increase in value is calculated on the full $200k. So 3% on the $100k RRSP and about 10% on the $100k cash you invested. So it’s closer to 13%. Try and wrap you head around that one ;). That’s the power of levraging.
You have to think that way even when you buy a house using the banks. You only put 20% down of you own cash on the house. The rest is bank money. So on $200k you put down $40k (plus closing costs but $40k is a nice round number). The house goes 10% (nice round number). You don’t make 10% return. That 10% is on $200k so it’s a $20k return. That’s a 50%/year return on you $40k investement minus 3% so 47%. (Those are simplified numbers but you get the idea).
Ned
Hi Mike,
Yes, you are missing something. You cannot count the increase in value of the rental property or the rent income. Neither of these have anything to do with the RRSP mortgage.
If you invest your RRSP in a proper portfolio, you can still get the same growth & profit on your rental property.
The RRSP mortgage in your example would only make 3%, which as you say “is not very attractive”.
In fact, it is much worse than that. We are getting mortgages at 2.09% today. It is not hard to get a higher return on your RRSP than 2.09%!
In addition, the RRSP mortgage has a bunch of fees. You have to pay CMHC fees even if you have 25% down. There are setup fees and annual administration fees.
Plus there is no advantage of paying yourself. A bank or trust company must administer the mortgage. If you don’t make your payments, the bank must foreclose on your home and your RRSP takes the loss.
The RRSP mortgage is either the worst RRSP you can get in Canada or it is the most expensive mortgage you can get in Canada (depending on the rate you choose).
Invest in equities and get, say, 8-10%/year long term. Get a mortgage at 2.09%. The difference is a 6-8%/year. With the RRSP mortgage, you lose all of this gain, and you pay high fees.
A little tough love, Mike – abandon this horrible idea!
Ed
Ed,
I agree taking the highest mortgage rate possible would be bad because when you take the money out of your RRSP it will be taxed (remember its only on the interest you pay to yourself though). Why take your taxed income and put it in your RRSP to be taxed later…that sounds awful.
But the Banks don’t make you choose the highest rate. Actually they say you cant go over there posted rate. Why not get yourself a 25 year mortgage amortized over 10 years at 1% interest. Its your mortgage do as you please. (go for 10 because CMHC charges it every time you renew)
This mortgage doesn’t make any money for you because your paying yourself (if its in your checking or your RRSP it still your money your not creating more). For that reason it shouldn’t be your reason for to do the RRSP Mortgage.
But Lets say I have enough to cover my existing Mortgage and then some. $100,000 left to pay in my existing mortgage and I have $200,000 RRSP contribution.
Get the RRSP mortgage for $175,000 and put $25,000 of it with the lender in a RRSP account and negotiate so you don’t have to pay the annual fee… (save $125-$300 a year). Create your RRSP mortgage for $175,000. $100,000 of it goes to pay off the existing mortgage to the bank. (now you are free of the Bank and paying them that stupid front end loaded interest). And now you have freed up $75,000 into available Cash. Do as you want with this money because its not in your RRSP any more its a loan to yourself. (I’m not condoning blowing it all, unless your buying local 🙂
You could take it to Ed and he can put it in an Mutual fund for you :P. Get that sweet 10% he quoted you earlier or use it as a down payment to buy another property and get a Mortgage through Ed’s brokerage fund. Then write off the interest on that Mortgage since it isn’t on your principle residence. $$$$
At the end of the day you charge yourself as little interest as possible and keep the mortgage forever…well until your 71. Use that money to invest & every time you pay back to your Mortgage you can invest it in your RRSP account that you already set up previously GIC’s, Stocks, Bonds, ETF or whatever.
Again when you talk about 3% that your mortgage is “making” you are putting it from one bank account to another, you are not creating wealth.
I’m just trying to prevent the other account from being the Bank… and paying 2.09% to those Fat Cats.
As for Defaulting on your Mortgage payment. why is this a risk for anyone with 6+ figures in you RRSP. If you cant handle your finance to miss a small payment (in my example of above would be $660/month) you have never heard of “Cash is King” or played Monopoly. You shouldn’t have this Mortgage in the first place because you overleveraged yourself and your RRSP…
Also if you ever want to get rid of this mortgage…you know to stop the bank from foreclosing…because your overleveraged or because you want to move into a bigger home because Ed made you mad money in his portfolio. Then cancel this mortgage at any time and get the bank to set you up with a standard mortgage. the fee now to close out this RRSP mortgage is $45 yahh $45 whoop. not the banks standard screw you for close out early business they usually try.
Here is my math for justification.
*RRSP Mortgage*
$175,000 RRSP Mortgage
$100,000 to pay out Existing Mortgage
$75,000 to purchase down payment on $350,000 Rental (20% down to stop CMHC)
$175,000 – RRSP Mortgage @1% 25 year amortization 10 years
monthly payment $660.
Total Interest Paid on my RRSP Account interest after 10 years $14,310
Costs…
When I Retire 35% tax Rate – $5008.5
CMHC – 0.6% of the loan amount- – $1,050
Initial Set up Fee – $300
Appraisal – $400
Bank Lawyer – $300
Annual fee – Waved by bank (negotiated)
Total Cost of Mortgage $7058.5 After 10 Years
Earnings
RRSP mutual fund with 3.5% annual on $660 monthly repayments = $13,962
Taxes on These Earnings @ 35% when retiring = $4887
Total Earnings after 10 years = $13962-$4887 = $9075
$9,075 Earnings – Cost $7,058.5
Total Gain $2016.5
*Traditional *
Refinancing home for $175,000 Mortgage.
$175,000 – RRSP Mortgage @2.59% 25 year amortization 2 years
Monthly Payment $792
Interest Paid to Bank for 2 years $8,766
If I extend that out saying interest would stay the same you are looking at $38,130
Bank will wave most of these Fees (Since you already have an existing Mortgage)
Lawyer $300 X 5
Total cost to have that down payment money for the Rental $39,530 for 10 years.
RRSP gains from a Mutual Fund 3.5% / year over 10 years on $175,000 = $61,360 (10% is unrealistic and if you can show me one that performs for longer than 3 years my mind will be blown)
Taxes on Mutual Fund 35% when removed from RRSP= $21,476
Total gain = $61,360 – $21,476 = $39,884
$39,884 Earnings – Cost $39,530
Total Gain $354
When you break it down the bank or the taxes gets you either way… With the RRSP account you don’t have the risk to depend on getting a year over year 3.5% interest or hope the mortgage rates stay the lowest they have ever been or when you retire the government hasn’t jacked up the tax rate.
Hope this helps and if I Screwed up anywhere I would love to know.
Hi Ryan,
Interesting idea, but a couple flaws.
1. The RRSP mortgage rules require that it be a “market” rate. You need to be able to prove this. That means your lowest mortgage is about 2% for a 2-year term, not 1% for a 10-year term.
This leaves the obvious question – why not just borrow at 2% for 2 years from a bank?
This means you can do this entire strategy without using an RRSP mortgage.
(I should add, that I do not have a bias here. I do not have a mortgage brokerage, as you suggest. I only have a free Smith Manoeuvre mortgage referral service.)
2. Your strategy has most of your RRSP making 1%/year. This is the worst RRSP I can imagine!
Remember, I try to make 6% to 8% higher on my RRSP than on my mortgage rate. With any RRSP mortgage, you lose all of that 6-8%/year profit.
This is the reason I don’t like RRSP mortgages.
3. All the rest of your strategy you can do with any mortgage. Borrowing an extra $75,000 to buy a rental property or a mutual fund from me with an All Star Fund Manager 🙂 (as you suggested). Or invest it in my unique Index Plus Program. 🙂
4. If you are using your mortgage to borrow to invest, you may be better off doing the Smith Manoeuvre. RRSP mortgages do not work for the Smith Manoeuvre. The rules do not let you have a HELOC or a readvanceable mortgage.
Bottom line – your strategy is interesting, but you can do all of it, plus more by doing it with a bank readvanceable mortgage, instead of an RRSP mortgage.
I actually agree with Ed’s analysis. Assuming that you can stomach the risk, and assuming that your profit exceeds your costs, you are always better off investing with other people’s money. The reason for this is that the same money is now working twice as hard for you. You are profiting from the bank’s loan, AND you’re also profiting from your own investing by keeping that money invested in your RRSP.
The only benefit I see from a self-directed mortgage is for those individuals who are already maxed out in their RRSP, want a small portion of their huge RRSP in cash/income equivalents, but still want to be able to increase the annual contributions they make to their RRSP. If they select a high interest rate for the mortgage, the difference between the high rate and low rate, is an implied additional contribution to their RRSP. However, that additional contribution is not tax deductible.
(picture this: $2,000,000 RRSP; $500,000 Mortgage; Selects 6% rate instead of 2%. This is a 4% or $500,000 = $20,000 additional annual contribution to RRSP. )
I think this might be a good strategy for some wealthy individuals.
How come no one is factoring in the 2.5% we pay the bank to manage our RRSP portfolio? If my RRSP has a good year, say 10%, the bank takes 2.5% on the overall value of my account as a “management fee”. That means I make 7.5% doesn’t it? if my RRSP has a bad year, say -10%, the bank still takes its pound of flesh from the total value of my RRSP meaning I lost 12.5%. If the RRSP is self directed there is yearly fees but I’m not getting the royal finger from the bank every year. Am I missing something?
I have read with much interest the different opinions on the subject of non arms length mortgages. I have a scenario that i think was not touched upon -using non arms length mortgage funds from a RSP to fund a business venture where I will be the owner/operator. The funds are liquid but in an RSP from a pension payout from a former employer. Business loans are currently +/- 6% and mortgage rates are +/- 2.5%. Any opinions?
Just a follow up before I receive any replies, the RSP is self directed at TD Waterhouse and by ‘liquid’ I mean they are in a cash account within the RSP.
Hi Bruce,
I don’t think your idea works. The downsides are:
– You are contributing an extra $20,000 to RRSP without a tax deduction. You will have to pay tax on that when you withdraw.
– You have a $500,000 mortgage at 6%! That has to be about the worst mortgage in Canda.
Don’t forget you would have to pay hefty fees to setup and maintain the RRSP mortgage.
Just get your mortgage at 2.3%. If you wnat to buy a low interest GIC or bond or bond fund, you may make a similar low return in your RRSP, if that is part of your allocation. No complications. No appraisal. No legal fees. No setup fees. No annual fees.
The RRSP mortgage is virtually always a horrible idea. It makes you think an expensive mortgage is somehow not expensive or a low RRSP return is somehow not a low return.
Teh RRSP mortgage is a brain fart. It sounds good at first – but when you think about it, there is always a massive flaw.
Ed
Most of these comments seem to be missing the point of having a portion of your RRSP in fixed income. This might range from 20 to 50% depending on your age. A few advisers are suggesting even more because of the expected correction in equities. So give the low return on GICs and bonds why not consider it? What you will be saving is the amount you spend per year on interest being given to the bank holding your RRSP. Some ETFs with preferred stocks are considered fixed income as well but there is little protection in the case of a significant correction. Same thing for many bond ETF as their value will go down over time. The problem is finding a place to do it. BMO Advice Direct will not!
I’ve seen something that uses both RRSP / RRIF and TFSA mortgages to move money from the RRSP to TFSA without any tax issues. Has anyone looked into this and can comment? Here’s a link to a video that I found:
https://www.youtube.com/watch?v=l6e0dX9VyQ0&t=816s
Freddie. Thanks for sharing the link. Turns out in order for Gravitas to facilitate these investments, they require a minimum of 1Mil in equity.
Hi All,
Great discussion here. I want to use my RRSP to fund a rental property I am holding with my holding corporation. The holding corporation is owned by myself and my wife. I have this scenario and please let me know if this makes any sense.
I am reaching my TDS/GDS limit and I may not be able to borrow more from my bank, can I use RRSP to fund my mortgage thinking that this will bypass the TDS/GDS test/rule? But this post did say that funding your own mortgage will still need to go through the bank’s rule, hence the TDS. But this is funding the mortgage of a holding corp, although it’s own by myself and my wife…
You guys get what I meant? For this discussion, let’s put aside, rates, returns, taxes, etc… just purely so that I can fund another mortgage and get another rental property when I am maxing out my TDS.
Thanks,
Sam
Great discussion and informative.
I’ve looked into this to mortgage a rental property with my rrsp and TFSA (1st and 2nd positions respectively). But there’s a catch…CRA requires non-arms length mortgages to be insured by CMHC, yet CMHC will ONLY insure the mortgage if it’s a primary residence or vacation property. How do I get around this to qualify my single unit rental property for a non arms length self directed mortgage?
Any feedback would be greatly appreciated
Thanks
Joy
Putting your mortgage into your RRSP is a very good strategy for getting money out of your RRSP effectively tax free. Assume you have a 800,000 house free and clear, you put a 65% mortgage on the house, to keep the Insurance fee low at .5%, any higher and you pay 2.5%. You then take the proceeds of the mortgage, put them in a separate investment account and buy safe dividend producing stocks like Bank or utility shares.
This makes the interest you pay on the mortgage tax deductible as you have borrowed for purchasing qualified investments earning income. It also makes the setup costs deductible. You can withdraw the interest paid on the mortgage every year, effectively tax free from the RRSP, by offsetting it against the interest expense on the loan. There is a little more to it than I have typed out but this gioves you the basic idea.
hi – i have a question i was hoping you could answer. If I own my home outright, can I use a self-directed rrsp to get a mortgage on my home, so that I can use the funds elsewhere? Something like a reverse mortgage, i gues. Thx so much for your help.
I have been looking into this and wnder about the CMHC “Insurance” – if the mortgage payments are not made, does the CMHC insurance pay off the lender?