How does a mortgage inside an RRSP work?

How does a mortgage inside an RRSP work?

It’s risky. Instead, focus on easier ways to reduce fees and optimize taxes

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From the June 2016 issue of the magazine.

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Q: Is it possible to arrange a mortgage inside my RRSP, so the interest payments are paid back to me?

A: I love the question, but recommend you pursue a less risky hobby. Say, axe throwing or BASE jumping? Setting up your mortgage inside an RRSP requires a lot of work with low return, says Joe Jacobs of Mortgage Connections in Calgary. He points out that “a self-funded mortgage through an RRSP has to be insured by Canada Mortgage and Housing Corp. the plan administrator will also charge set-up and ongoing fees.” You’ll also need to charge commercial interest rates on the mortgage, so the return on your self-funded mortgage will be limited to 3% or 4%. Compare this to what you could earn over the long haul if your RRSP funds were invested in equities and you’re not much further ahead. Now, if you’re interested in reducing your non-deductible debt you could focus on paying down your mortgage. Or you could try using the Smith Manoeuvre, a method of making your mortgage debt a deductible investment loan. To do that you have to liquidate your nest egg, pay off your mortgage and then re-invest the money in equities using a loan against the equity in your home. It’s not for the faint of heart. To play it safe, you should focus on easier ways to reduce investment fees and optimize tax efficiency in your portfolio. For added thrills, you could always take up a safer hobby, like “duct tape art.” It’s a thing.

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