Wouldn’t it be great if you could finance your purchase of a condo at Blue Mountain, a chalet on Georgian Bay or a home in Collingwood with a mortgage you hold yourself? Wouldn’t it be even greater if the interest you pay on that mortgage was going back into your R.R.S.P. and being treated like a dividend (and not like interest?) Too good to be true? Well, believe it or not, this can be done, via a “non-arms-length mortgage’ which is held within your Self-Directed R.R.S.P.
Before we get into the nitty-gritty of these investment vehicles, let me first say that this is not for everyone, and a lot depends on your current financial situation. Secondly this represents a long term investment strategy.
The premise is this: use your CASH holdings in your R.R.S.P. to lend yourself a mortgage.
The borrowed money is set up like a typical Canadian bank mortgage, with a repayment schedule and using the bank’s posted interest rates. The payments go back into your R.R.S.P. as cash.*
Things to bear in mind:
- if the mortgage is non-arms-length, you’ll need to pay for ‘default insurance’ – C.M.H.C. or G.E. provide this and will it likely cost about 0.5% of the mortgage amount as a one-time fee
- there is a fee to set this up (paid to the financial institution/broker) and it typically runs around $250-$300
- there are ongoing yearly fees with any self-directed R.R.S.P. $225-$250 per annum (paid to the financial institution/broker)
- legal fees will be incurred during the set up and registration of the mortgage, say $1,000.
- you must charge yourself interest at the bank’s going rate
The Numbers Crunch Like This:
Let’s say you lend yourself $50,000 in cash from your R.R.S.P. as a mortgage on your home, with a 5 year term. You set up a repayment schedule based on a 5 year term, 25 year amortization with accelerated, bi-weekly payments. A quick scan of mortgage rates on CanadaMortgage.com tells me the most common, current 5 year fixed rate is 5.19%.
Your payments, bi-weekly are $148.12
After 5 years, you will have paid $11,930.00 in interest
and you will have paid down $7,326.00 of the principal.
Calculating the legal and other fees as estimated above to be approximately $2800.00, this leaves about $9,130.00 going into your R.R.S.P. which you would have previously been paying to the bank.
Compare that to investing that same $50,000.00 from your R.R.S.P. in a 5 year Guaranteed Investment Certificate (G.I.C.)** at 2.50%, where you will earn approximately $6,570.00 in interest over the term. G.I.C.’s provide security and a bit of income, BUT … don’t forget you’ll still be making payments on that $50,000.00 mortgage that you owe to the bank.
Do take note that you can lend money from your Self-Directed R.R.S.P. to someone other than yourself, but of course the risk is higher, but then so is the return usually, as you would want to charge a higher interest rate.
As always, get advice from your financial planner on holding your own mortgage under your Self-Direct R.R.S.P. – it might not fit into your portfolio or goals. All figures provided are estimates only.
Marg Scheben-Edey is a Broker with RE/MAX four seasons realty limited, Brokerage in beautiful Collingwood, ON. With three decades of experience, Marg is a leader in the local real estate marketplace and is ready to help guide both Buyers and Sellers in achieving their real estate goals. Email Marg