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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2 comments on “How does a mortgage inside an RRSP work?

  1. I believe this is actually a very interesting question that can be explored more seriously. The scenario that I would explore is using RRSP money to finance a mortgage on a property that can be used as a rental. The mortgage amount financed by an RRSP might only be 25, 30, 40% or more of the property’s value. The rest of the mortgage can be placed with a bank or a mortgage broker. This strategy offers lots of opportunity for cash flow streams and capital gains as well.

    Please discuss this scenario.

    Reply

    • Short answer, few cash flow streams and no capital gains.

      There is documentation for this on the CRA website(it is an older document, but still appears to be valid). The mortgage must be done at arm’s length, so you can’t hold your own properties, and you are basically setting up a new account in your RRSP as a bank to lend the money for the mortgage(mortgage payments go directly to that account). You are also basically competing against the other banks for people to lend to, and you’d more likely end up as a bank of last resort. And with these lower mortgage rates today, do you really want to risk locking in under 3% for such an extended time? You most likely won’t be getting the higher credit score people, which does mean a higher risk of a borrower defaulting. However, this does bring the one way that you can see capital gains into play.

      The only way to hold the physical property in your RRSP is if you foreclose on a mortgage. So you’ll only see capital gains if you foreclose and then the price of the property goes above what the mortgage was for, so depending what caused the default in the first place could leave you waiting for a long time.

      And as mentioned somewhat in the article, you’re on the hook for all of the due diligence as well(checking the actual property values, credit scores, etc.), plus all of the other associated fees, so it does end up being fairly high risk for relatively low return.

      Reply

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