Did you know that you can hold your mortgage in your RRSP? Up until earlier this year, I wasn’t aware that you could. All the interest that gets paid every payment goes toward the RRSP, giving the borrower a guaranteed return that is a pretty secure investment. Before you can implement this strategy, a few things have to be noted:
Contribution Room: If you don’t have enough contribution room for the entire value of the house, you’re pretty much screwed with this strategy. This means that most young people simply won’t have the contribution room to implement this strategy. It’s much better suited to a middle aged individual.
Financial Institution: There are only a handful of financial institutions that will implement this plan for a customer. It will cost quite a bit to get started as well, with an appraisal and CMHC mortgage insurance being mandatory fees, as well as having to pay a self administered RRSP fee every year.
Mortgage Rates: With mortgage rates sitting at record lows, there may be better returns to be had in other investments. Another factor to consider is that your RRSP has to charge you a mortgage rate that is comparable to what you’d get in the open market. Sure, you’d naturally make that rate as high as you can get, but these days you wouldn’t be getting any more than 5-6%.
Lack of Diversification: This strategy is pretty much the definition of having all your eggs in one basket.
I’m making this strategy sound pretty bad. It’s not all bad though, here are some advantages:
Simplicity: For someone who is either skittish or lacks understanding about investing can benefit greatly from this strategy. Mortgage rates will always beat GICs, giving the holder a return similar to fixed income over time.
Rental Property: If you have the RRSP room and want to buy a rental property in middle age, this strategy can be very effective. Remember, as an investment, the interest you’d pay to your RRSP would be tax deductible. This would be a great way to supercharge RRSP returns, assuming you’re okay with the other downfalls of owning rental property.
Paying Yourself: Another advantage of this strategy is knowing that you’re paying yourself interest, instead of paying it to the “evil” banks. This is mostly a psychological advantage, but this could be very important to the RRSP holder.
Basically Guaranteed: Thanks to CMHC making it mandatory for mortgage insurance for this strategy, the mortgage holder (the RRSP) has their principal guaranteed. This guarantee can be priceless for the risk adverse investor.
Do any readers have experience with this? Care to weigh in?