Mortgages: Pay Yourself

Individuals may hold their personal mortgage as an investment within an RRSP in the same way as your RRSP can hold GICs, stocks and mutual funds.  This allows the homeowner to pay themselves interest on their mortgage.

Holding your personal mortgage within an RRSP may be one way to eliminate the frustrating conflict of making regular contributions to your RRSP while making payments on the funds you’ve borrowed to pay for your home.

First things first

Arranging your mortgage within an RRSP is not as straight forward as purchasing investments typically found in such plans.  Administrative procedures are not routine and the associated costs may lead you to meet with your accountant and financial advisor to see if the numbers make sense.

Items to Consider

  • The first step is to determine if you have sufficient assets to make the mortgage option cost-effective.  Homeowners must have a cash balance (or liquid investments) within their RRSP equal to the amount of the desired mortgage.  If fees are incurred to convert your investments into cash these should be considered and factored in.
  • Some institutions may not be able to administer this strategy. Others may have systems in place that allow them to only administer specific mortgages.
  • By following proper procedures and providing the necessary documentation there are no tax consequences involved in setting up a mortgage within your RRSP.  The proceeds from the mortgage within your RRSP can simply be used to pay off your other existing mortgage.
  • The mortgage must be based on posted or market rates and have terms and conditions that reflect normal business practices.  Unlike a normal mortgage where you try to negotiate down from posted rates, you will actually want a higher rate because you are paying yourself.
  • As interest and principal payments flow back into your plan monthly, they are able to compound more rapidly and provide frequent opportunities to reinvest in other RRSP-eligible investments.
  • The fact that you now have a mortgage in your RRSP does not affect your ability to contribute to your RRSP in any way. Your annual contributions will continue to add to the overall value of your RRSP.
  • One of the requirements of having your mortgage in your RRSP is to obtain insurance (CMHC – Canada Mortgage and Housing Corporation).  As your mortgage is secured by your own personal property it is generally considered a high quality investment.
  • There are no restrictions as to how you use the funds borrowed through your mortgage.

Initial Administrative Costs

For those financial institutions that offer this service, they may have different fee structures.  Generally, they are as follows:

  • An initial set up fee of approximately $300 may be charged
  • The mortgage trustees, likely another legal entity, may also charge a set up fee of approximately $100
  • Insurance (CMHC) application fee of $75
  • Mortgage insurance premium can range from 0.5% to 2.75% of the amount of the mortgage depending on the amount of the mortgage and its loan-to-value ratio  (Note: the premium is based on the total amount of the mortgage, regardless of the portion held within your self-directed RRSP)
  • Legal fees estimated at $400
  • Appraisal fees of $275

Monthly and Annual Maintenance Fees

  • The mortgage trustees may charge a monthly administration fee of approximately $16
  • An annual mortgage administration fee may apply of approximately $60, this is in addition to any self directed RRSP fees you may be paying (generally around $125 annually)
  • Other fees, such as transfer-in, discharge and early renewals may also apply in some situations

Two additional components that may influence your decision are current posted mortgage rates and the yields on comparable low risk investments with the same time horizon.

An individual with $80,000 could purchase a low risk investment, such as a GIC or consider the mortgage within their RRSP option.  What is the difference in the return obtained from a mortgage versus a comparable low risk investment?  If this difference exceeds the cost of the strategy then this option may be worth considering.

For mortgage balances below $80,000, individuals may find that the fees offset any benefits enjoyed from setting up the program. After considering the costs involved with this strategy it may only provide benefits for some investors.

Your investment advisor should be able to assist you with an analysis that takes into account your personal circumstances including your risk tolerance, assets within your RRSP, the length of time the program will be in place, your mortgage rate and your current return expectations. This will help determine if holding a mortgage within your RRSP is a good strategy for you.