Yvonne wants to know how she can use her RRSP to reduce the mortgage on her current home, or to help with the purchase of a second property.
Photo by Samia Liamani on Unsplash
Q. I currently own a house in Edmonton that is mortgaged, and looking to purchase a property in Vernon, BC, that I will eventually retire to. Until then, I am liking the idea of renting out that property to help support the additional mortgage.
I am wondering if it’s possible to transfer my existing mortgage into my RRSP and access the cash there by reducing the amount of additional mortgage I would need to purchase the Vernon property? Otherwise, is there a way to purchase the Vernon property using my RRSP funds?
–Yvonne
A. I am often asked about buying a home to retire to eventually, and renting it out in the meantime. I question the approach because a home you want to live in is not necessarily a good property to rent out to a tenant. A property that is easily rentable to tenants may be close to transit and jobs for example, whereas a property you may want to retire to could be more rural or have different attributes.
In addition, there are things that could change in your life by the time you retire. What if your kids move to another city and you want to be close to them? What if you decide you want to travel and would prefer a condo to a house? What if you have medical issues and need to be closer to a hospital? There may be things you cannot foresee now that make it hard to plan that far in advance.
I also worry that people may have too much confidence that real estate prices will continue to grow at high rates in the future. Given you are in Alberta, Yvonne, you probably have a better sense than other readers in other parts of the country that real estate prices do not always go up. So, this next warning is broad rather than directed at you.
For many reasons, it is unlikely that real estate prices will rise as much in the next 10 years as they have in the past 10 years in some Canadian cities. That is not to say real estate is a bad investment, but it is to say that real estate may not be such a great investment that you should raid your RRSP or do everything you can to buy a second property. If real estate prices rise at a modest rate, which may be the most likely long-term scenario given how high prices are in some cities right now, a rental property may provide a comparable return to a balanced investment portfolio.
If the only way someone can buy a rental property is to use their RRSP, they should also consider the risk of putting too many eggs in one basket. Rental real estate can be part of a diversified portfolio, but going all-in on real estate has risks.
On to your question about using your RRSP to fund a mortgage or rental property purchase, Yvonne. One of your biggest challenges will be finding a bank, credit union or trust company that will let you hold your mortgage in your RRSP. I understand this is becoming more difficult to do, even though a mortgage is a permitted RRSP investment, according to the Canada Revenue Agency.
The same qualification requirements as a regular mortgage will apply, and there will be additional fees for setting up and then administering the mortgage annually in your RRSP. The interest rate will be the posted rate, not the discounted rate most mortgage borrowers end up with when they borrow.
This high interest rate may seem appealing at first, because it results in a high guaranteed rate of return for your RRSP. But it may ultimately work against you, because you end up paying the high interest rate—albeit to yourself and your RRSP—when you could have otherwise borrowed for less.
As an example, Yvonne, you might transfer your mortgage to your RRSP and establish a 5 % interest rate. Your RRSP will earn 5% but, at the same time, you are borrowing at 5% as well. It could be more advantageous to borrow at current 2% discounted mortgage rates and invest in something else in your RRSP at a 5% return over the long run. You could have the same return for your RRSP, but pay less interest by borrowing from the bank instead of yourself.
Many people do not have enough money in their RRSP to transfer their entire mortgage into it. So, they may only be able to have part of their mortgage in their RRSP.
You cannot use your RRSP to buy a rental property, Yvonne. You can invest in publicly traded real estate investment trusts (REITs) or some private REITs as well if you really want to invest specifically in real estate with RRSP funds. Even then, I would suggest caution, and encourage a diversified investment portfolio.
Pulling money out of your RRSP to use as a rental property down payment can be highly punitive, because RRSP withdrawals are fully taxable, and as much as 54% could disappear to tax depending on your income and province or territory of residence.
In summary, Yvonne, I would start with determining whether buying the home you want to retire to and renting it out in the interim is a good approach. You may be better off figuring out where to retire when you are ready to retire. If you really want a rental property, you may be better off buying a property that is easily rentable. And although you may be able to hold your mortgage in your RRSP, I am not sure that is the best overall financial strategy for most people.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
MORE FROM JASON HEATH:
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
Presented By
National Bank Direct Brokerage
You can exclusively hold international ETFs in any Canadian account, without paying a penalty. But there are taxes and...
When you have the choice for withdrawals, it makes sense to look at the pros and cons of taking...
Withholding tax is generally the only Canadian tax a non-resident pays for their CPP pension, and the tax burden...
You can claim a property that your child lives in as your principal residence if it is legally or...
In the first quarter of 2023, investors wrestled with fast-changing market conditions. Here are some takeaways and tips on...
Can you transfer funds out of your registered pension plan (RPP) and invest them yourself to reduce investment fees?...
These GICs track the markets, offering low risk and some upside potential to investors. Here’s how to know if...
Don’t go claiming a deduction for mutual fund fees on your tax return. Why? Because they’ve already been indirectly...
Excellent reply Jason
Just want to concur that most institutions simply do not seem to offer the RRSP mortgage (defined as letting your RRSP invest in a mortgage that you then become the customer of). Some banks that did before (BMO) simply don’t any more. So, beyond the valid warnings in the article, if you still want to get an RRSP Mortgage, where should you go?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
This may not be entirely accurate. One needs to converse with Jodi Vetterl, author of Beyond The Banks, and latest Forbes cover.
How about if you have enough money in your RRSP to finance a second house. The situation is we have the equity in our existing home to get a higher mortgage to pay cash for the second property but not enough qualifying income to support it. In the end, we would possibly move to the second property and sell our primary residence. Is there any way to use the equity of our RRSPs to leverage a mortgage without withdrawing and paying high tax? We have double the value of RRSPs than we would need to make the second purchase. Would an RRSP mortgage be the answer?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
You most certainly can mortgage a rental income property through your RRSP. I’ve done it and it is quite amazing. Yes you pay set up and admin fees every year but because it is a rental income, the fees are tax deductible. The interest is at the going rate but is going into your RRSP instead of to the bank.
it is advantageous to investors when the mortgage investment pays a higher rate of interest. However, why would it not be advantageous if you are the mortgagee? I find paying a high-interest rate on the mortgage yourself is still a plus to the investor. I find nothing but pluses here since the interest and principal are paid to you while you eventually own the asset once paid in full. YOU eventually pocketed the money that is supposed to go to the bank.
Yvonne
IMO, Jason has given a very well thought out and informed reply, however, I have a couple of tweaks.
1) You seem to want to buy your retirement home now to hedge against increasing prices. Jason is correct that a single family property is generally not a good rental investment so perhaps you can buy a multi-unit in the same area as the hedge. It would generate better rents and increase in value in a similar way to a single family property. When you are ready to retire sell one and buy the other.
2) You can lend in the form of a mortgage from your RRSP to 3rd party borrowers at much higher rates. We currently get 12-15% interest (secured at max 75% LTV) paid monthly and tax free until we eventually withdraw it. You can thus grow your RRSP at that rate until you are ready to retire so unless your retirement property value grows faster than that, you will not “lose ground” so to speak. Most banks do not facilitate this but CWT (Canadian Western Bank) specializes in this so that is where my RRSP is.
Best of luck