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!

Related useful articles on the web:

  1. Refuge in an RRSP
  2. Garth Turner

This article has 38 comments

  1. Hi,

    Thanks for the posting, appreciate you taking the time to research and post your thoughts. Great blog btw!

    I too think as the last line in one for the links you provided concludes, “Simple? No. But it’s still a cool idea.”

    If you have 65% equity in your house, the CMHC fee is .50%, which is not too high. Certainly the cost to setup/enroll in the first year sounds high. But in the second year, it might be well worth it. I wonder if these costs could be rolled into the mortgage too? Or if they could be considered investment related costs and therefore tax deductible?

    Another curiosity is if any portion of the payments is tax deductible to reduce your income tax. In particular the interest, similar to interest on an investment load.

    If this second point is true, I am thinking to buy RRSPs instead of making extra payments until we have reached 65% equity.

    If I find out anything more I will post. Seems like I will need to find a good tax accountant/financial advisor soon.

    Thanks again.

  2. Canadian Capitalist

    PS: Do not forget that you might be giving up the opportunity to earn a higher return by holding your mortgage in your RRSP. The mortgage insurance is rolled into the mortgage but nothing related to this is tax deductible. Having a mortgage in your RRSP is no different from a third-party mortgage, so interest payments are not tax deductible either. My suggestion is to research this topic thoroughly and discuss with a good advisor before plunging in. Good luck!

  3. Hi,

    You say:
    “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!”

    You’re correct that this would be a good way of doing that. But you will be double-taxed on that money! You first pay income tax on it when you earn it; then, it goes into the RRSP in the form of some exorbitent interest rate, but without the tax deduction. When you eventually take that money out of the RRSP, you will again pay income tax on it. I haven’t done the analysis to show the break-even point, but I can’t think of a good reason that anyone would want to do this. Capital gains and dividends are taxed at a low enough rate outside of RRSPs that you’d only want to hold income-producing investments inside, and those typically do not produce the spectacular gains that you’d need to offset the double-taxation.

    Tom

  4. Canadian Capitalist

    Tom: To a certain extent, I agree with you. The mortgage payments made to the RRSP are a return on the capital within it. In that sense, there is no double taxation because it is exactly like the RRSP holding a bond.

    The problem of course is that you are paying the interest to yourself. Your argument about the dubious benefits only apply to the extra interest charged (RRSP mortgage rate minus best mortgage rate). I have to confess that I didn’t think about the point that you pay after-tax money into the RRSP and will be taxed on it again when it is withdrawn.

    The exact amount saved by putting a mortgage in a RRSP is the spread between the best mortgage rate and a bond with an equivalent term less any expenses. And there are opportunity costs involved in not having a suitable growth component in the portfolio.

  5. CC: You’re of course correct. But the double-taxation point is nasty because the extra taxation step (up to 46% if you’re a high-income retiree) could wipe out a lot of growth. Couple that with the fact that the extra money you’d be putting into the mortgage could instead go into a normal investment account, and you’ve got a nasty calculation coming that I think will show that it’s not worth it.

    I think we’re essentially agreeing with each other. 8-)

    Tom

  6. I don’t see how this “double taxation” is nasty when you compare this to the equivalent alternative, which is to buy bonds in RRSP and borrow a regular mortgage. You still pay mortgage interests with after-tax money, and your bond interests are still taxed as regular income when you withdraw. How is this nastier? At least with RRSP mortgage, you save on the spread as mentioned.

  7. Canadian Capitalist

    The double taxation problem only occurs for the portion of mortgage interest that is above the best rate you could have gotten elsewhere. i.e. you are paying your RRSP more interest than necessary. Otherwise, it is exactly the same as putting a RRSP in bonds and getting a third party mortgage.

  8. Here is another scenario you may consider: let say I have $100K mortgage with 5 years amortization and the same amount in RRSP and problem with cash flow. I can convert mortgage to 25 years amortization, but if I do it through bank I’ll start to pay most of the money as interest. If I do it through RRSP I can reach 2 goals:
    1) Improve cash-flow ($100K for 5 years is around $1000 a month more than $100K for 25 years);
    2) Pay this high interest to myself.

    Does anybody knows, if I would like to repay mortgage from RRSP back, can I do so?

  9. Canadian Capitalist

    Alex: I’d imagine that you’ll be able to set prepayment priveleges just like in any regular mortgage. Also, another option is to create an open mortgage (which charges a higher interest rate than closed) where the principal can be repaid at any time.

  10. Does anybody knows if the money I pay for mortgage inside RRSP considered to be my contribution for this year, i.e. if I pay $500 a month, does it mean on the end of the year I can deduct 6 grands?

  11. Canadian Capitalist

    Alex: It is not a contribution but income on your capital. It is exactly the same as holding a bond or mortgage mutual fund. If you hold a bond inside the RRSP and it earns interest, the interest income is not considered as a contribution.

  12. Hi,

    Regarding the last question about payments to the mortgage being used as contributions, could extra payments count as RRSP contributions? In Alex’s example, suppose if in addition to the monthly $500 you did a bulk extra payment of $2000 towards the mortgage at the end of the year (instead of buying traditional RRSPs for your yearly contribution). Curious.

    Paul.

  13. Canadian Capitalist

    Paul: Extra payments towards the principal will not be considered as RRSP contributions. Think of it as a return of capital.

  14. If I make an extra $50.00 payment on a 30 year mortgage with my payments already at $900.00 a month, what are my opportunity costs going to be?

  15. Pingback: Mortgage Discussion Blog » Late breaking news

  16. What happens when you sell your house on which you have a mortgage from your RRSP?
    When (if at all – I assume you have to) do you have to repay the mortgage? Does the administrator simply funnel the money back into RRSP or do you get the money and then have certain time to pay it back to the fund? I assume since you are the seller (a person) you would get the money and since the fund is the lender you would just have to deposit the funds.
    Thanks,
    Mark V

  17. This is great stuff. Lets get the word out on this and save people the heart ache of looking at their dwindling nest egg sitting in a stock or mutual fund.

    Walter.

  18. We’ve held our own mortgage two different times now within the last ten years. We pay the interest to ourselves within an rsp account set up to receive the payments. The return is 7.25 percent guaranteed and the mortgage can be paid off any time and any of the normal bank penalties are paid back to the homeowner. I know this because we paid off early the first time we set up this scenario. A lawyer sets up the mortgage payout.

  19. The CMHC guarantees the mortgage and is paid a small set up fee. The banks are very reluctant to set up these self directed mortgages as they make only a small fee to make it happen. They lose all the interest normally paid to them. Even the top people at your branch are unlikely to know what’s involved but they will find out for you if you push them. I was discouraged at first until I insisted and then I got the ball rolling. There are set up fees and the bank will cite those to discourage you. Once the mortgage is created it can be renewed every year without the set up fees. We lost nothing in the last stock market meltdown and still have the 7.25% in our account.
    You also don’t need to have the full amount of your mortgage in an RRSP to start with but it’s better financially if you do. You can have a portion of your mortgage self directed and the other portion not.

  20. Does anybody know if you can hold in your RRSP a mortgage for a properly outside of Canada?

  21. Can you do this for a third party? I’d like to provide a mortgage to a company that I am part owner for a commercial building. Is that possible? Does it make a difference who the borrower is?

    Thanks.

    • Canadian Capitalist

      I haven’t personally done this but my understanding is you can provide mortgages from your RRSP to a third party. This may be topic for an interesting post. Thanks for the idea.

  22. Dear CC,

    Thanks for keeping this blog alive. I have a self directed mortgage and I like it. Beyond the financial considerations you point out, I find it reduces my workload in managing my RRSP investments and due diligence. Call me lazy? I suspect many of us would like to spend less time managing our money, and spend less money paying others who should be better jobs for us.

    I have one question however, if I issue a mortgage to a rental recreational property i am intending to buy for myself are the payments tax deductible? My understanding is that third party mortgages are tax deductible on a income producing property, do you see it differently? or see risks?

    Thanks for the time you put into this, long live capitalism, ………….with a social consience…..

  23. Does anyone know of any company offering investment of RRSP in one’s own house?

  24. Canadian Western Trust will set up a self directed RSP for arms length and non-arms length mortgages. A mortgage on ones own house (non-arms length) can be offer either 1st or 2nd position, that is to say if someone has an existing mortgage or Line of Credit in first position you can lend yourself money from you RSP behind that first title mortgage.

    Dave W posted:

    “Can you do this for a third party? I’d like to provide a mortgage to a company that I am part owner for a commercial building. Is that possible? Does it make a difference who the borrower is?”

    Yes, this is possible and done quite frequently. As long as the land qualifies for a personal mortgage you can borrow up to 90% Loan to Value in 1st 2nd or 3rd position.

  25. We pushed our small town bank to setting up a non-arms length mortgage from our self-directed RRSP with them. And a few years later they started using the information they learned about it to hold seminars to attract new business to the bank! We used the mortgage to purchase a duplex and the interest that we pay into our RRSP is tax deductible. My only gripe about the whole thing was that the bank officer wasn’t too sure about how high an interest rate she could give us and we settled on 6.25%… we would have preferred higher :)

  26. 1. payments made to my RRSP instead of to bank
    2. use of funds sitting in RRSP to purchase investment property–which produces income today and (hopefully) increases in value over the course of many years
    3. interest that I pay to my RRSP is deducted from income earned (investment property)
    4. very safe investment –as I’m the borrower and know for a fact that I’m good for it

  27. If mortgage interest is not tax-deductible the benefits are doubtful. The main attraction of an RRSP is tax-deferral. While it indeed appears that one can grow their RRSP faster and larger by paying oneself interest on a mortgage held within it, one will be taxed on that money as income tax upon withdrawal from the RRSP – without having gained a tax deduction on that (after-tax) contribution.

  28. Hi, I happened to come across this blog and think I have found a good way to pay our mortgage. But first can someone please give me some insights (or where to read on this subject) into how the whole mortgage in RRSP thing works? eg… one can pay to himself legally and how come the public is not aware of this?

    Appreciate it

  29. The reason nobody talks about it is because there’s nothing in it for them other then trustee fees. Financing your own mortgage is not as profitable as funding an arm’s length, 3rd party mortgage. I actually have a recorded webinar online if you’d like to watch it. http://www.rrspmortgageinvestor.com/replay.

  30. Another question: if you own a company which has a bit of spare cash rattling around in it looking for a home, could you “invest” in your own mortgage?

    For example, we have a $200,000 mortgage on our house. When we next renew our mortgage, could our company (supposing it had $200,000 to spend) give us the mortgage – another way of paying interest to ourselves rather than to a bank?

    This – and the RRSP mortgage – makes huge sense to me in a time when other means of investment are producing little or, in the case of mutual funds, even losing money. With governments deeply in hock, unemployment rising daily and generally bad new world-wide, I don’t have a lot of faith in equities any more…

  31. Do you know of any companies in Canada that are approved CMHC lenders who permit self administred mortgages – I have a CMHC insured mortgage on a res rental property due in 2011-I would like to replace Bank with my own $$

  32. RRSP mortgage investing changed my portfolio forever. I now teach it to others who want to know how to do the same. http://www.rrspmortgageinvestor.com

  33. All the banks can do it. We used TD Canada Trust as my husband’s larger RRSP holding is self-directed with Waterhouse.

  34. I use Olympia Trust in Calgary. The advantage of using an RRSP is that the money you make is not taxed and you can therefore make compound interest on all your profits.

  35. We did this through TD Waterhouse back in 2006 and are very happy we did. Now paying 7.75 % interest to ourselves and seeing the RRSP Grow much quicker. http://www.RRSP-Mortgage.com

  36. Hi,
    I currently have a mortgage on my principal home as a collateral to finance my semi commercial property. the purpose is to get a lower interest rate & it’s tax reductible.
    My questions: is it possible that i can use my Self Directed RRSP to set up non-arms length mortgage on my principal to pay off the semi commercial property? Is it still tax reductible on the semi commercial? Or you think i can set up non-arms length mortgage on the semi commercial?
    Thanks.

  37. Do you know any reliable banks or brokers provide Self directed RRSP on the commercial property? I live in Quebec. Thanks

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