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.
For all your real estate needs visit www.bennettpros.com
