Holding Your Own Mortgage in Your RRSP
Tired of paying mortgage interest to someone else? How would you like your RRSP to be your mortgage lender? The CRA allows self-directed RRSP funds to be used for a non-arm's length mortgage investment. It is possible, therefore, to give yourself a mortgage from your own RRSPs, with your RRSPs essentially becoming your bank.
Although this sounds like a pretty cool idea, it's not for everyone and there are a number of factors to consider before this strategy makes any sense:
- Fees: The mortgage, regardless of loan to value, must be CMHC or Genworth insured. The mortgage must also be administered through a trustee which typically involves set up fees, legal fees and ongoing administration fees.
- Sufficient Funds: This may sound obvious but you need sufficient funds in your RRSP. If your current mortgage balance is $200,000 then you won't be able to refinance with your own RRSP if you only have $150,000. I haven't found any outright restrictions on using this strategy for a second mortgage (and thereby refinancing part of your mortgage) but it is unlikely that the holder of your first mortgage would allow it and you may not be able to find a trustee or administrator who would want to deal with the additional complications.
- Rate: The rate you give yourself must be in line with the prevailing market rates which means there is little room to use rate as part of a larger strategy, whether it be ultra-high (to maximize the return in your RRSP) or ultra-low (to minimize your non-RRSP expenses).
- Don't Default: You might think that because it's your own money it doesn't really matter if you miss payments or if you give yourself a "payment holiday" from time to time. Not true. The administrator of the mortgage is required to treat it as they would any arm's length mortgage and act in the best interest of the lender, being your RRSP, not you as an individual. If things go terribly wrong you could end up receiving a notice of power of sale from your own RRSP.
- Asset Mix: A diverse mix of investments is usually best for any investment strategy. This holds true with your own RRSP mortgage. It is best suited for those for whom the RRSP portion will be only a part of their overall investments.
This is not a strategy that suits everyone but can work well for some. A thorough examination of the costs and benefits with your financial advisor is essential. Please click on the following links for additional information.
- The Globe and Mail
- Genworth Canada
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John Freeland Smith
Posted by John Freeland Smith
on March 4, 2014