Have you ever considered the possibility of lending yourself money in the form of an RRSP mortgage on a property you own?
For example, if you were buying a house for $400,000 and had $150,000 to put down on the property, you would still need to borrow $250,000 from somewhere – traditionally a bank – to pay the rest.
What if you had enough money invested in your Registered Retirement Savings Plan (RRSP) to cover the remaining cost? Legally, an RRSP cannot own a piece of real estate, but it can lend money, in the form of a mortgage, for a piece of property. Many people are not aware of this option.
Self-Directed RRSPs
The only caveat is that you will need to have a self-directed RRSP, which means you are responsible for all the investments that take place within the account. Alternatively, you could hold a self-directed RRSP for the mortgage investment and a traditional RRSP for other investments.
There are strict guidelines you must follow, if you decide to go this route.
For instance:
- The mortgage must be administered by an approved lender (not all banks will do this and there will be a fee);
- The interest rate and terms must be in line with the standard rates at the time; and
- The mortgage must be insured by the Canada Mortgage and Housing Corporation.
If this just sounds exactly like a regular mortgage, you are right. It is set up like any mortgage from a financial institution would be, except that you make the payments to yourself (through your RRSP), and you get to keep the interest.
Pros and Cons of Using a Mortgage Through Your RRSP
As with any financial decisions, there are pros and cons.
Some of the pros include:
- You keep all the interest;
- Protection from rising rates;
- Guaranteed investment return; and
- Interest and principal payments do not count as RRSP contributions.
Some of the cons include:
- The fees associated with taking out a mortgage through your RRSP;
- The large RRSP holdings requirement;
- The locked-in nature of the investment; and
- The risk of losing out on other RRSP investment opportunities, which may provide a better return over the course of the mortgage period.
There is no question that it was more beneficial to hold a mortgage when the interest rates were higher than they are today. However, it can still be a useful tool if you are taking out a large mortgage or worry about rising rates.
Speak with your advisor to discuss the advantages and disadvantages of RRSP mortgages as they pertain to your specific situation.
