For those who don’t know, yes, you can put a mortgage on your house (or your cottage or rental property) inside your RRSP. That way you actually make payments to yourself, instead of the banking oligarchs.
Now that interest and mortgage rates are on the rise, there’s more appeal to doing it. Up to this point, with sub-3% home loans available everywhere, it made more sense to float your house with cheap bank cash and use your own retirement funds to achieve much higher returns inside a financial portfolio. However, with posted mortgage rates nudging the 4% mark, an RRSP mortgage may be a way to finance a property as well as invest money.
So how does it work?
Not simple, nor cheap, nor easy set up and maintain, but possibly worth the effort.
First, find a lender willing to host what’s officially called a non-arm’s length mortgage. The best bet will be one of those less-than-blue-chip guys like B2B Bank or Canadian Western Trust, because the last thing the Big Six want is for people to create their own borrowings. Second, you need money in your self-directed RRSP to use to finance the house.
Then there’s the set-up. That will involve having the property appraised for mortgage purposes, staying within established LTV (loan-to-value) parameters, paying your lawyer to draft the mortgage and funding the administrating bank. This will cost a few thousand. The big expense comes with mortgage insurance which is required by law. The cost will be up to 4% of the face value of the mortgage, which is (obviously) a lot. But no getting around this.
It’s important to understand the mortgage you’re creating isn’t something you can diddle with, even though you’re both borrower and lender. For starters, it must be a reasonable amount – so no 0%-down. Also you can’t grant yourself a 1% mortgage rate. In fact, you can’t even use the rate your bank is offering everybody else – it must be the posted one, devoid of any discount. However, since the interest you pay is to yourself, this isn’t necessarily a bad thing.
You can’t miss, skip or ignore payments. If you do, your RRSP can actually foreclose on your house (as strange as that sounds) through the trustee which administers it. Payments can’t be late, nor can you decide to pay yourself more or less in a single month. In fact, the mortgage can’t even be paid out early without incurring the same penalty as would be collected by an evil commercial lender.
On the plus side, all these mortgage payments you make into your RRSP aren’t considered contributions and don’t affect your ability to generate more space through earned income. The cash paid into the retirement plan accumulates, of course, and can used to buy other assets, achieving greater diversification.
As mentioned, this strategy can finance a house, your ridiculous money-losing rental condo or a commercial property. In fact, a non-residential use is probably the best. That way not only do you pay mortgage interest into your own retirement plan, but you can deduct that same interest from taxable income. And since commercial loan rates are w-a-y higher than residential ones, this is a big win. Take that, Bill & Justin.
Now that sounds like a plan;
A. you have a well funded RRSP, and you have to move some or all of it out of mutual funds and into cash which becomes the principal of the loan. B. you pay mortgage payments back to your RRSP. C. the officiating bank gets a cut of the payments?? D. Once the payments are made back to your RRSP you can continue to invest them as per normal.