RRSP Mortgages

One of the biggest decisions you have to make about your retirement savings is where you’ll invest that money. Will you have to settle for 2% on a GIC to keep your money safe?

Many years ago when the markets were in gyrating my ex and I wrote our mortgage from our RRSPs, transferring the cash to pay off our bank-held mortgage and creating an entirely new investment strategy for our retirement savings. It wasn’t a decision made overnight. We spent some time moving our portfolios to cash so we’d have the juice we needed to do the deed when our existing mortgage came up for renewal.

Since mortgages rates are typically 3% or more above GIC rates, our self-directed mortgage (SDM) would earn a decent return without the slightest bit more risk. After all, if you can’t trust yourself to repay the loan, whom can you trust?

You need to have a whack of cash in a self-directed RRSP for this to work. Some experts say you need at least $50,000 to offset the fees. I’d say no less than $100,000, ‘cos those fees ain’t chicken feed. Don’t have enough cash in your own RRSP? You can write a “shared mortgage” where each spouse kicks in money and the RRSPs split the fees accordingly.

The tax man has specific guidelines for how SDMs work: the interest you pay has to be comparable with current rates, the mortgage must be insured, and you must qualify for the mortgage just as you would if you had gone to a financial institution. Payments must be made on time or your RRSP will be forced to foreclose. If your SDM doesn’t meet the guidelines, there’s a big ouch! The mortgage would be a non-qualifying investment, its fair market value at the acquisition date would be included in your income and any interest earned by the RRSP would be taxable to the RRSP.

Since a large portion of your RRSP portfolio in an SDM might weight you too heavily on the fixed-income side, you’ll need to rebuild your diversification. Y’know those monthly mortgage payments you’re making to your RRSP? Time to dollar cost average those suckers into a mutual fund. Viola: security, diversification and the elimination of the market-timing question.

Arranging for an SDM is no small feat. You may have to meet with mortgage officers, your financial advisor, and your lawyer to get it all accomplished. There’s no question that part of your success using this strategy will come from having an advisor who can run with the ball. This isn’t a horrendously complex investment strategy, but it does require you to step out of the box. It will require homework and careful planning.

12 Responses to “RRSP Mortgages”

  1. does it make sense to use current RSPs to pay off debt? I have a great retirement plan through work so the RSPs are supplemental but I do owe consumer debt slightly less than my RSP total. What are we looking at for penalties, would it actually be worth it?

  2. Erin, she’s not talking about withdrawing from rrsp to pay off debt. She’s talking about RRSP mortgage which is something completely different and not for everyone. You can research it more online.

  3. We are very fortunate…we own our home, have no mortgage and no debt. Due to an inheritance, we also have some cash we’ve been sitting on…we were kind of shell-shocked after the stock market crash in 2008. While we watched all of our other investments perform very well – especially last year – we are still not sure what to do with this cash. We want to keep it safe since my husband will be retiring within a couple of years. We are both self-employed, so no pension. Any suggestions?

  4. Why are you just promoting GIC’s and not other forms of investments? Last year was a great year for investments. My mutual and ethical funds did between 14 and 29% last year. This is quite high and will not do this every year and some years you will loose money but at that point just relocate your money with your adviser to a more bond heavy fund. I think this is a much better idea than a 3% GIC.

  5. In the late 70’s and early 80’s – mortgages held in RRSP’s were a big thing…. Interest rates were out of this world and those who had enough in their RRSP’s made a great return even though they paid higher interest rates, many others actually held mortgages for others to take advantage of this… The trust companies had zero risks and made off like bandits with the fees for the administration of both the SD trust and the SD mortgage…. Some RRSPs however collapsed in foreclosure especially in areas where property values dropped and unemployment skyrocketed… I remember a lot of these ‘foreclosing’ upon themselves in the Niagara region! especially those who were written for seasonal ship workers. Everything has a risk.

    In these uncertain times however, I’d personally would rather have the bank hold my mortgage, and if property values ever tanked – the bank can keep the house while the RRSP remains intact, and in most cases creditor proof. To even think about this, you’d have to ask yourself… Is this the home I am willing to live in until the day I die — irregardless of upswings or severe downswings in property values?

    The trust companies offer these as they provide a business benefit to them. It’s great for the trust company, but is it the best for your situation?

    This certainly isn’t advice or an option for the everyday average Joe, a small percentage of people have the assets to do this, and usually those who have the assets usually already own, or are near to owning their home.

    Currently a five year variable rate is 2.6% APR… is it really worth the expense for a small spread on return? Probably not, but every situation is different.

    Don’t ever take the advice of a banker. They truly are the last group of people who can in most cases sell financial products and services without a Licence, or training.

  6. >>>>. This is quite high and will not do this every year and some years you will loose money but at that point just relocate your money with your adviser to a more bond heavy fund. I think this is a much better idea than a 3% GIC.

    Bad, bad emotional advice.

    You can’t sit in high earning equity funds and then jump into bond heavy funds before the market crash – because you don’t know when the market is going to crash.

    And if you move to bonds after the market crashes, you’re doing exactly the wrong thing by moving to bonds – that’s when you should be rebalancing over into equity funds. That’s right – after things crashed is the time to move money into equity funds.

    When equities are high, rebalance over to something like bonds. When the market crashes, move from the bonds back into equities. That’s buy low, sell high. Except what people do is read on the internet about ‘I earned 29%’ and they buy at the top. Then things crash – like in ’08-’09 and everyone runs to ‘safe’ things like bonds. And that’s the opposite of buy low, sell high.

  7. Great article! I have had questions about this before and this provides more good information about this as an option! Thanks Gail!

  8. I get that Elena, I guess I’m just asking the question. Given the disparity of interest rates, does it make sense to case in low yield investments to pay high interest rate debts? If you did, what other costs are associated with this….

  9. I work for a large bank and I would guess that your average branch account manager does very few of these so research a lot yourself before you commit. I have lots of work friends and anecdotally I know of no one that has ever sold one

  10. As Jeff mentions and the term “self-directed” indicates you need to find out if a self-directed mortgage is best for your situation. You may have to meet with mortgage brokers and lawyers to better understand this and help put this in place. Also outside of the tax man many trust companies typically have requirements and restrictions that need to be met as well. Canadian Western Trust in my experience has done a great job in outlining some of this information. Although it may not be for everyone it does work for many people.

  11. Hi Gail,
    I was hoping you could recommend a list of providers in Ontario that can help me do a RRSP mortgage. I was about 200k in cash in my self directed RRSP. I have over 50% equity in my home. I also have 2 investment line of credits 1 for a business and 1 for a rental property. I know the banks don’t want to do this as it takes business away from them.
    Also, I want to do more of these in the future to find more rental properties.
    Thanks for your help

  12. Gail, this was very helpful and you offered insight that other web sites didn’t. thanks!

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