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.
