Mortgages in a RRSP
Reader P.S. asks: Do you have any information on holding a mortgage in a RRSP? Do you know of a good site with possible assessment of costs, advantages and disadvantages?
At first glance, it seems like a great idea to put your mortgage in your RRSP and pay money to yourself. In theory, you will be saving the spread between the commercial mortgage rate and a corresponding bond or GIC. But there are some issues to consider.
If you manage your RRSP as an institutional investor would manage a pension fund, it should be well-diversified into various asset classes. As a mortgage is just a type of bond, you will be giving up a lot of potential growth by investing most or all of your RRSP in your mortgage.
The theoretical spread is whittled down by costs and fees involved in putting the mortgage in a RRSP such as a mortgage insurance premium, mortgage administration fees ($200 per year at Action Direct) etc. Personally, I did not go this route because when we bought our house there wasn’t much capital left over in the RRSP after taking out a Home Buyer’s Plan loan.
I can only think of one instance where this makes sense: an individual wants a guaranteed way to increase their RRSP, so they put their mortgage in it and pay a relatively high interest rate (say the posted rate of the big Banks). It’s just that most people have the opposite problem of too much unused contribution room!
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