Holding your own mortgage inside your RRSP

Normally the sequence of reactions to the discovery that you can hold your own mortgage inside your RRSP (and essentially pay yourself interest instead of the bank) goes from tremendous excitement to indifference (after some serious number crunching anyways).

To cut to the chase: YES – you can hold your own mortgage inside your RRSP. The interest that you were paying the bank can instead be going to your RRSP. But don’t confuse the “badge of honour” of crafting a complex financial strategy get in the way of a true financial analysis. I would say that this strategy (like many) has a real sweet spot in terms of who it is right for. Let’s find out why…

HOW IT WORKS

First off, you need to have more money inside your RRSP than is outstanding on your mortgage (well, technically you can setup a mortgage sharing strategy with your bank – but that is beyond the scope of this discussion for now). What you are doing is essentially turning your RRSP into “the bank”.

Instead of the bank loaning you funds: your RRSP is loaning you funds.

Consider that the interest rate you charge yourself is going to be the rate of return for your RRSP portfolio. (Or at least for the portion of your RRSP that holds your mortgage). You will make your mortgage payments to your RRSP instead of to the bank. It may be this point that makes most people stand up and take notice – more so for the fact that if they have to pay interest, they would rather pay it to themselves.

You’ll have some costs to set it all up of course. Your financial institution will charge around $300 as a one time setup fee, a trustee and mortgage administration fee (the same financial institution normally acts as the mortgage trustee) of about $175 and self-directed RRSP fee of $60-$125 also applies (but you were probably paying that anyways for your self-directed RRSP).  Finally, there may be some legal costs associated which can take your total start up costs to the $1,000 range.

You’ll also have to follow some rules. You cannot just arbitrarily charge yourself a low rate of interest to save on interest payments, nor can you charge yourself a high rate of interest to increase the rate of return on your RRSP.

You wouldn’t want to charge yourself a LOW interest rate, because that would be offset by sacrificing RRSP growth.

You wouldn’t want to charge yourself a HIGH interest rate, since… well, you would be charging yourself a high interest rate to borrow money from yourself. So even though your RRSP would be growing faster, you would by paying more towards interest payments on your mortgage.

But the decision as to what rate of interest to charge yourself is somewhat moot, because one of the conditions of holding your own mortgage inside your RRSP is that you charge yourself the going market rate. Hence, the posted mortgage rates of all the Schedule I banks might be all that you could reasonably use anyways.

ADVANTAGES

The main advantage is that you know that the portion of your RRSP that holds your mortgage will have a very safe and reliable rate of return equivalent to the posted mortgage rates – this can be higher than typical bonds and GIC’s. I suppose  another advantage is that you have the benefit of paying interest to YOURSELF AS OPPOSED TO A BANK – but that might only serve to make you feel like you are not contributing to the gluttony of our venerable financial institutions more than anything else.

DISADVANTAGES

Well certainly there are the start up fees and extra annual administration costs. These alone may require that the total amount of your RRSP used for this strategy should be north of about $30,000 before you would even consider the strategy – otherwise these costs may outweigh the overall benefits.

There is also the requirement that if you invest in a “non-arm’s length” mortgage (meaning you or someone related to you owns the property that is being mortgaged), then you are required to purchase mortgage default insurance (from CMHC or GE Capital Insurance Canada). Normally, you don’t need mortgage-default insurance when you have a loan-to-value ratio of 80% or lower, but in this case, you will need to get it – and the lowest you can expect to pay is a premium of 0.50% of the total mortgage amount (for loan-to-value ratios up to 65%).

However, consider that this is actually a good investment as if you default on your mortgage, the insurance will serve to protect your retirement savings!

Speaking of defaulting on payments – you may be thinking that since you are lending yourself money you could be lenient on yourself since it is YOUR money. Well, remember that mortgage trustee and administration fee you are paying? The financial institution will act in the best interest of the lender (your RRSP) and not “you” per se. As such, they monitor the mortgage payments and if you miss them and/or default, they have the option of forcing a power of sale of your own house in order to protect your RRSP! So in short: you cannot skip payments.

I have heard many people indicate that when the interest rate environment is lower, this strategy becomes less attractive. I would argue that the current interest rate environment moves almost in lock-step with current mortgage rates, hence if you are looking to use this to replace only the fixed income portion of your RRSP – it doesn’t really matter what the current interest rate environment is. However, if you do decide that you will hold your mortgage inside your RRSP and it represents the majority of your RRSP holding – then, yes – it would make more sense when interest rates are higher – especially if you are violating your asset allocation profile in order to engage in this strategy.

CONCLUSION

So if you’ll remember, I mentioned that there was a sweet spot as to who this strategy is good for. I would argue that the ideal candidate would look something like the following description:

A person who is probably in their 40’s or 50’s and has about $50,000 to $100,000 of a balance on their mortgage.
In addition, they have around $150,000 to $500,000 value in their RRSP. The reason for this “spread” is that if you were to only have enough in your RRSP to hold the mortgage, you are restricting your RRSP investment portfolio to a 100% fixed income investment – which may not be in line with your risk tolerance – hence you could be giving up long term growth. Instead, if you are supposed to have a basic asset allocation of 75% equities and 25% fixed income – you could use 25% of your RRSP for holding the mortgage and the rest to diversify and invest in equities appropriately.

Remember – consult a financial advisor with experience in setting these up if you want an analysis done on your own situation.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 46 comments
  • Qcash

    WDAMMG

    There is one other scenario to consider.

    Using a SDRRSP to finace the mortgage on a rental property.

    In that scenario, not only to you get the interest that would go to the bank, but the interest you paid to the mortgagee (i.e. you) is also tax deductible against rental income.

    Also, you say that you shouldn’t have 100% in your RRSP, but consider this:

    Each payment gives you cash inside your RRSP to buy other investments which would grow over time.

    Finally, you can set the amortization and term of the RRSP mortgage to be the same so you have long term stability for both.

    Q

    PS As for the posted rate: When I deal with B2B trust on my arms-length mortgages, if I get questioned on the rate I am offering, I simply cut out the "rate" list from the local paper finance section. As long as my rate is on that list somewhere for the same term, they accept that as a "market rate".

  • Preet

    Hi Q – thank you for the additional insight.

    You are quite right – the payments made to the RRSP mortgage can be used to invest in other types of investments.

    Sorry, I didn’t mean to leave the impression that you shouldn’t have 100% of your RRSP as a mortgage in all situations – but rather to consider your asset allocation when choosing how much to hold.

    Thanks for your comments! :) Especially about the rental property – that is a GREAT point.

  • Qcash

    WDAMMG

    I now look at the asset allocation of my entire portfolio of assets and consider the RRSP my "fixed income" component.

    That way I put my growth and divident assets outside my RRSP.

    So if my RRSP is 20% of my net worth and it is all "fixed income" then my fixed income is now 20% and that is where I am comfortable.

    Q

    PS Love your blog — added it to my daily read.

  • Preet

    That is an excellent way to structure your investments – and good advice for others.

  • Perry Crann

    I have been considering doing this for a while. Thanks for the additional information.

  • James

    I have a question about the insurance premium.

    My house is worth about 350k. I owe 60k. I have 60k in RRSP.

    I will qualify for the 0.5% interest premium. will the premium be o.5% of the 60k or 0.5% of the 350k.

    the other question…. is the insurance premium paid 0.5% annually or is it a one time fee.

    • Jim Bob

      The insurance premium is based on the mortgage amount not the value of your house. It is a one time thing

  • rick

    I believe the strategy may also lose effectiveness after one has enough cash in non-rrsp savings to pay off the mortgage. Otherwise, while you continue to beef-up your rrsp spending after tax dollars, (without any of the same tax benefits that standard rrsp contributions receive) one is taxed again when withdrawing from the rssp. so perhaps better to pay-off and use the monthly payments to invest in securities that offer dividend tax credits and capital gains tax benefits vs a double taxation situation?

  • Chris

    I have 200K in my RRSP and 720K left on my mortgage (home is worth 1.1). My bank is offering me 6.5% if I transfer over my 200K in RRSP and convert it over to RRSP mortgage. I am thinking that I no longer have to pay 4.5% interest on the 200K mortgage, plus I am paying myself 6.5% effectively gaining 11%. Is my thinking on track here or am I misssing something?

    Thank you

  • Rod

    We did this with a $150,000 mortgage and pay it back at 7 3/4 interest – I then invest the $1,000 RRSP Mortgage payment into 4-5% GIC – so I’m making almost 13% interest. I’ll double my RRSP every 6 years…. I set this up through TD CanadTrust. Very happy I did this before the Market collapsed in 2008.

    • badmath

      Rod, I’m afraid to tell you your math is flawed.

      First off, you are not earning 4-5% on the entire $150k, just on the payments you make. So you cannot add 4-5% to 7.75% to get your total return.

      Secondly, you are not earning 7.75% on $150k for the next N years because as a mortgage payer you do not continue to pay interest on $150k for the life of the mortgage, you only pay interest on the remaining principal.

      So essentially as you pay off principal (to yourself) you are converting RRSP investment A at 7.75% into RRSP investment B at 4-5%. That’s a bad thing, not a good thing (from your RRSP’s point of view).

      • Rod

        badmath, True.

        But I am placing $13,284 into my RRSP mortgage every year where my RRSP contribution limit is normally $0 due to my Pension plan.

        If I continue to earn about 4% on my monthly contribution I’ll have $163,548 at the end of 10 years where I otherwise would have had $ 0 (new contributions into my RRSP) If I were to risk those contributions on the Stock Market I could gain more, or less. Since 2007 I have done better to stay in GIC’s (although I have purchased some Apple )

        If I had kept my regular Bank Mortgage I would have paid 3 % interest (now increasing) on $150,000 (diminishing) each year to the Bank.

  • John

    I don’t see the logic in wanting to pay your RRSP a high rate of interest on your mortgage. Sure, your RRSP is earning a great return, but at what cost?

    If the posted rates varied between, say 3.5% and 5.5% for a 5-year rate, I would think paying yourself 3.5% makes more sense. To pay 5.5% interest effectively means you are transferring an additional 2% of your outstanding mortgage principle into your RRSP per year. You are NOT getting a tax credit for this additional “contribution”, yet you will be taxed on it at your marginal tax rate when you take it out. Why make additional contributions without an accompanying tax credit?

    • albherre

      The tax credit is 100% which is the money you’re not paying the bank but paying yourself instead.

      • albherre

        Correction. You’re right John. The difference between the low rate and the high rate will be taxed later on (at whatever rate) plus any gains you make on it.

  • Jaime

    How would this work for a retairee converting the RRSP into a RIF in three years from now? How would you calculate the RIF withrawals? Based on what amount?
    Thanks

    • Preet

      Sorry for the delayed reply, only saw this now Jaime. RRIF withdrawals are based on RRIF rules, nothing to do with the mortgage. Consider these as totally separate issues. Your RRIF withdrawal requirement is based on the overall RRIF balance, not the mortgage balance. The mortgage is just like another investment inside the RRIF.

  • Alex

    Hi,I am thinking of converting my existing mortgage, $150,000.00 using my RRSP, I have read about this and I have a financial institution telling how great this would be, at a rate of 6.35% fixed for 7 years. The other bank is offering a renewal rate on a regular mortgage at 2.05% variable for 5 years. I cannot make up my mind because I don’t want to make a mistake for either 5 or 7 years…what are the pros and cons of either. Thanks

    • Preet

      Hi Alex, sorry for not seeing this sooner.

      Right now after the recent market meltdown, hindsight would leave most people with a bad taste in their mouth for the stock market. Mortgage rates may be lower. The contrarian approach would suggest avoiding this strategy now, as the likelihood of getting a good return today is higher than yesterday for stocks. But psychologically, engaging this strategy would bring stability to your portfolio. Lots of tradeoffs to consider.

  • Terry Aucoin

    Hi, I have two questions; first I used $25,000 from my RRSP to purchase my first home. I also have $21,000. in an additional LOCKED IN RRSP I cannot contribute or withdrawl funds until I am 60? my First question is…
    Can I use this LOCKED IN RRSP account to hold my mortgage in as you describe, or is this concept only for a regular RRSP(I think it is self answered but would like to know the official answer).
    Secondly,if this is possible, is this enough or do I require the full mortgage amount, this I was not too clarified on.
    Thank you

    • Preet

      Hi Terry, sorry I didn’t respond to this earlier.

      A locked in RRSP can invest in the same things as an RRSP so it is possible.

      As to whether you can partially fund a mortgage is up to the RRSP mortgage administrator – I believe there are some firms that allow this, but I’m not sure which ones. I *think* B2B might, but you would have to check with them.

      • jr2walsh

        Non-arms length, only TD at the moment does LIRA or Locked-in RRSP. All other trust companies are based in Alberta (so far) and are not allowed by provincial law to offer this product, by extension the rest of Canada. I’m hoping to persuade them to do this outside of Alta.

  • Sam

    Hi, here are my questions if someone can help:
    1- would the bank set up a self directed mortgage from 2 source of RRSP, mine and my wife 75K each?
    2- Does the property has to be a primary residence? or we can use our RRSP to fund 2nd property like cotage?

    • Preet

      Hi Sam – You would have to check with the RRSP mortgage administrator, but I believe this is possible with a few of them. As to your second question: yes. But always remember to check with a licensed advisor who is qualified and experienced to advise you on your specific situation.

    • jr2walsh

      1- It can be setup from multiple registered accounts, you’ll need to know which trust will allow which fund, but you can have a mortgage held across RRSP, RIF, LIF, LIRA, Spousal RRSP & even TFSA now… RESP… not yet.
      Keep in mind fees for each account, each year, even though there’s only 1 mortgage.
      2- Any property you own in your personal name (home, cottage, rental)… in Canada (with Quebec as a notable exception, unless you live in the province)

  • Denis Charron

    When I look at the rate of return that I get on my RRSP these days….oops, I mean of “sometimes little returns”, I think I would be very happy in knowing that I could get a consistent 3% – 4% return. I would have to give it to my bank anyways, so why not give it to myself.
    It would mean using the whole of my RRSP.
    I know that I would be loosing the possibility that the RRSP could grow much faster if the markets would come back to the 7 – 10% returns of days gone by…..but I find myself unable to believe in those kinds of returns coming back for quite some time(given the market turmoil that is sure to continue for many years thanks to the long term debt problems that europe is facing)
    QUESTION : Can the mortgage be “open”?….if I sell the house I want to pay it off early.

    • Mark

      I too have been contemplating this strategy for a long time. I believe the question comes down to how one sees the Expected Costs of Borrowing Vs. Expected Returns from the Market.

      Until very recently I found if very easy to conclude that Expected Market Returns should easily exceed what are historically low borrowing rates. My Long Run Portfolio returns suggest otherwise. Furthermore I see very little evidence that suggests that the next 10 years of Market Returns are going to be significantly different than the last 10 years.

      Re: Whether the mortgage can be “Open”…. yes…. so you can always wind up the strategy by paying off your mortgage.

      • Preet

        For an open mortgage, just make sure that is in the paperwork when speaking to the mortgage administrator.

  • Rod

    I am planning to purchase a land for a future country home, I want to use $70,000 of my RRSP to mortgage 60% of the land’s value, while I pay the other 40% cash.

    1- do I need to take an insurance?
    2- who determine the amortization period.
    3- how to go about doing this?

    • Preet

      1 = Yes
      2 = You, so long as the mortgage trustee is okay with it
      3 = Find a financial institution who is used to executing this strategy for more help. They will normally have a brochure or other materials. I know B2B offers it. Last time I checked Scotia’s fee schedules, they had a line about holding a self-directed RRSP mortgage in the fee booklet, too.

  • Sheng

    Hi, I’m wondering if I could get RRSP mortgage for my rental property in the States? Thanks.

    • Preet

      Hi Sheng – not sure. You may want to check with a cross border specialist.

    • jr2walsh

      I’ve checked on this. Properties must be Canadian and must be held in your personal name.

  • Hudson

    Preet

    Heres my situation.

    Looking to purchase a our first house.

    Purchase Price $550K

    My Current assets
    RRSP $350K getting 4.5% return mostly strip bonds
    Cash $100K

    Heres the kicker…
    Owner will finance property for 5 years at 4% with 125k down we can do for 20-25years.

    Would you still set up a RRSP Mortgage or take the Vendor Take Back Mortgage?

    Im 37 years old.

    Thank you very much. Enjoyed learning from this page.

    Hudson

    • Preet

      Sorry for the delayed reply. As you may know, it’s tough to give specific advice with so few facts. If you held the mortgage in your RRSP you might get a lower return than what you seem to be getting now, but a lower interest rate on your mortgage which means it could be paid back sooner. If you do the VTB, that might be a higher rate than what’s currently available. 

  • Jayne

    As per above, its my understanding you can’t old “vacant” land in your RRSP as I would like to do as they are suggesting. Only “arms-length” transactions qualify for vacant land. Could you clarify this…very important to me as could lose the land for lack of financing otherwise.
    Thank you,

    • Preet

      Sorry – I don’t have the answer for this. Please do let us know if you find out.

  • Lenny

    Hi, I have a question I hope anyone of you can answer to me. I have a Self Directed RRSP with more than 700K, I’ve been lucky investing in stocks for the past few years. I stopped my rrsp contributions to that account when I joined my current employer 3 years ago, with my current job I have a RRSP group plan with a different institution. I do contribute to the group plan and my company matches my contributions up to 6%.

    My question is: By holding a mortgage inside my SD-RRSP, and then start paying my mortgage (through contributions). Are those payments consider actual RRSP contributions, that I’d need to report when filing my tax return? What I mean to say is I would like to continue taking advantage of my RRSP group plan and report those as my RRSP contributions.

    Many thanks. Sorry for the long posting, and my mistakes.

  • Scott O

    Preet, I have recently discovered this borrowing, strategy threw a book I was reading. Now my question is I’m 29 I have a mortgage of 178,000.00 on a house worth 425,000.00. I have 50,000.00 in RRSP’s now. I’m set to receive a final payment for a company I owned of 180,000.00 that is already taxed. I have a max contribution to my RRSP’s of 98,000.00. Would it be better to max out my RRSP and then hold my mortgage threw my RRSP’s or just pay off my mortgage?

    Thank you

    • Preet

       @Scott O If you max your RRSP you won’t get as big of a refund as if you spaced out the contributions. You’ll fall through a bunch of tax brackets and might get quite a bit less than you were expecting. Personally, I’d be leaning towards just paying off the mortgage and keeping things simple, but I can’t give specific advice with only a few facts on hand. Good luck!

  • Question

    Hello, we have recently purchased a condo as an investment property that we will rent out to my parents. My inlaws have the full value of the condo (200k) available in an RRSP and are willing to willing to use it to do a non-arms length mortgage for us. I’m still researching this idea, but I was hoping you would be able to offer some insite and opinions on this. Thank you.   
     

  • RIFFER

    Preet. I have my SDMortgage already set up in a RRIF account and its is generating income at the prescribed withdrawal rate based on age. I am 67. Since this is generating taxable investment income, to supplement my pension, can I not deduct the interest  on the mortgage as an expense? This will be the same issue for anyone when they are forced to set up a RRIF(age 71).

  • Cam

    I want to build a vacation home in mexico and would like to use my rrsp funds to mortgage the cost of building the house? Can I do that?

  • bro617

    Hi!  I need a second opinion on a mortgage refinance situation and choosing to hold a mortgage in my SDRRSP.    My husband and I refinance our  mortgage of $100, 000 this Oct.   I would like to use all of my RRSPs to refinance our mortgage for the full amount.  We are about 23,000 short but have cash elsewhere in TFSA of about 20,000 each right now.  I believe our best option is to both make RRSP donations this year, myself of about 15,000 and my husband at about 9,000 but his should be a spousal so it goes into my SDRRSP to help get full amount of fund to 100,000.  This would give us about 6500 and 3500 in returns for this tax year and accomplish our goal.  Is there anything further I need to consider or does this sound about the smartest thing to do for us??   other option is to pay down mortgage with TFSA cash and further pay down mortgage amount with no tax benefits coming back.  What do you think??

  • Aleksey

    Can you give a list of trustees that still do arms length mortgages in Ontario and that do non-arms length mortgages in Ontario?
    I know that TD Waterhouse stopped doing arms length mortgages in April 2012 which was the biggest one and not sure who else does these.

  • goforstars

    Now with TSFA, if one hasn’t contributed to one, a person could hold a (small) mortgage inside that too? I was told this by a bank a few months ago. Not that I can do anything about this type of suggestion. Anyway, TSFA is a relatively new baby…