This article has been updated from a previous version.
Having a sizeable RRSP account is not only a source of comfort and security for your retirement years — it can also be a solid vehicle to pay off your mortgage by making payments to yourself and not the bank.
While not a very common investment option (we’ll get into why soon enough), the Self-Directed RRSP Mortgage is an option for mortgage-holders who have sufficient funds and are looking to take advantage of a high-interest environment.
Essentially, it allows you to make regular mortgage payments to yourself rather than paying the principal and interest to a bank or other lender.
What is a Self-Directed RRSP Mortgage?
An RRSP is a tax-deferred savings account that allows the holder to house qualified investments and allow them to grow over time. They can later use their funds for retirement or towards a down payment, through the Home Buyers Plan or First Home Savings Account (FHSA).
Most people prefer to invest their RRSP in assets that either have guaranteed income (like GICs and bonds), or offer dividend income or capital gains, think stocks and exchange-traded funds (ETFs). However, as interest rates start to rise, one unlikely option has emerged as a viable investment: Your own mortgage.
A self-directed RRSP mortgage allows you to, through an approved lender, invest in a mortgage — either your first mortgage or on an investment property. This arrangement allows you to act as both the borrower and the investor, allowing you instant cashflow through the interest incurred.
How does a Self-Directed RRSP mortgage work?
Before setting up a self-directed RRSP mortgage, you’ll need to convert the existing investments in your RRSP into cash, and then transfer that cash into a self-directed RRSP account.
An approved lender under the National Housing Act must administer the mortgage and the interest rate and payment terms will reflect conventional commercial practice. Lastly, it will need to be insured by Canada Mortgage and Housing Corporation or another private mortgage insurer.
Should you open a Self-Directed RRSP Mortgage?
While it may be easy to see current interest rates and imagine diverting all that interest back to yourself, there are some drawbacks to opening a Self-Directed RRSP mortgage.
First, very few traditional financial institutions offer this as an option, so you’ll have to search a bit further afield to find an approved lender.
Second, you need to first have enough funds saved and be willing to convert a large chunk of your investments into cash in order to fund an RRSP mortgage. If you don’t much remaining mortgage balance to pay back, it may not be worth the fees and the effort of opening a self-directed mortgage account within your RRSP.
Third, be prepared to pay some hefty fees to open this RRSP account. In addition to paying the normal fee to open a self-directed RRSP, you will likely also have to pay legal fees, appraisal fees, administration fees, and more.
Plus, if the down payment on the house or condo is less than 20% of the value of the property, you will need to take out mortgage insurance. Currently, that could cost you from 2.8% to 4% of the mortgage amount, dependent on the down payment. As an example, the insurance premium for a $300,000 purchase with a 10% down payment works out to $8,370.
>> Try out our mortgage insurance calculator to figure out your payments.
Lastly, and most crucially, you’ll want to consider the long-term value of your self-directed RRSP mortgage: While interest rates are high now, they may not remain high in the 20 or 30 years in your amortization period. Meanwhile, returns on other investments may increase over that period, surpassing what you would have made on your RRSP mortgage. And unlike other investments, you can’t just sell and trade a mortgage when the market beckons.
You'll definitely want to discuss the risks and potential financial drawbacks with an expert. There may be better investment opportunities and more lucrative returns to be gained with your registered savings rather than allocating a very large sum towards a mortgage.
Still the appeal of paying yourself — interest and all — and not a bank towards home ownership is bound to tempt you, right?
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Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
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