Have you ever considered the possibility of lending yourself money in the form of a mortgage on a property you own? Say you were purchasing a house for $400,000 and you had $150,000 to put down on the property. You would still need to borrow $250,000 from somewhere, traditionally a bank, to pay the rest.
What if you had enough money invested in your Registered Retirement Savings Plan (RRSP) to cover the remaining cost? Legally, an RRSP cannot own a piece of real estate; however, an RRSP can lend money, in the form of a mortgage, for a piece of property.
It just happens that a lot of people are not aware of this option.
The only caveat is you will need to have a self-directed RRSP, which means you are responsible for all of the investments that take place within the account. Alternatively, you could hold a self-directed RRSP for the mortgage investment and a traditional RRSP for other investments.
You will want to discuss this option with your financial advisor.
There are strict guidelines you must follow if you decide to go this route. For instance:
- The mortgage must be administered by an approved lender (not all banks will do this);
- The interest rate must be in line with the standard rates at the time; and
- The mortgage has to be insured by Canada Mortgage and Housing Corporation.
If this just sounds exactly like a regular mortgage, you are right. It is set up like any mortgage from a financial institution would be, with the exception of the fact you make the payments to yourself (through your RRSP) and you get to keep the interest.
As with any financial decisions, there are pros and cons.
Some of the pros include:
- You keep all the interest;
- Protection from rising rates;
- Guaranteed investment return; and
- Interest and principal payments don’t count as RRSP contributions.
Some of the cons include:
- The fees associated with taking out a mortgage against your RRSP;
- The large RRSP holdings requirement; and
- The risk of losing out on other RRSP investment opportunities which may provide a better return over the course of the mortgage period.
There is no question it was more beneficial to hold a mortgage when the interest rates were higher than today. However, it can still be a useful tool if you are taking out a large mortgage or worry about rising rates.
Taxpayers may also wish to provide an RRSP loan to an unrelated third party, as opposed to loaning themselves the money. This option has different risks and restrictions that should be considered prior to implementation.
Speak with your advisor to discuss the advantages and disadvantages of RRSP mortgages as they pertain to your specific situation.
Kody is a supervisor at Westboro accounting firm GGFL. You can follow the firm on Twitter @GGFLCA and visit them online at www.ggfl.ca.
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