In the financial world, the beginning of the year has come to be known as “RRSP Season”. It may not be a coincidence that RRSP Season arrives during February - the coldest, bleakest month of the year – since both February and retirement planning can leave you frustrated and longing for a beach in the Caribbean.
Most Canadians recognize how valuable an RRSP can be for sheltering income from tax and for helping accumulate savings for retirement. You may not be aware of an alternative RRSP strategy: holding your own mortgage in your RRSP.
Since 1984, the federal government has allowed certain mortgages to be held as an investment within a self-directed RRSP. Provided that your mortgage qualifies under the guidelines of the program, and that you have sufficient assets to make the program cost-effective, you can hold the mortgage on your own principal residence in your own RRSP.
There are several advantages to setting up this type of program. First of all, you’ll be paying the interest on your mortgage to your own RRSP – rather than to a mortgage lender. Lenders normally earn a “spread” on mortgage loans (the difference between deposit and lending rates), which means you’re often able to earn a better rate of return than what is available with most other fixed-income investments like GICs.
Secondly, the fact that you now have a mortgage in your RRSP doesn’t affect your contribution room, so you can continue to make regular RRSP contributions.
Thirdly, your mortgage is a top-quality, long-term investment for your RRSP – your own first mortgage secured by your own personal property!
Benefits of holding your mortgage in your RRSP:
- Potential for higher returns than bonds or GICs
- You retain the ability to contribute to your RRS
- You are your own creditor
- Potential to unlock part of your RRSP without tax consequences
If your house is already free and clear, it may actually be beneficial to borrow against your home for investment purposes, and then establish a mortgage inside your RRSP to replace these borrowed funds. In other words, it may be possible to unlock part of your RRSP without any adverse tax consequences involved in making the transfer.
There are several conditions that must be met before you can use your mortgage as an RRSP investment. For example, only non-arm’s length mortgages – where you have an interest in the property – are eligible. Mortgage interest rates and terms must be in line with those available in the general market.
Although it can be costly to set up and administer a mortgage RRSP, for conservative investors the mortgage RRSP can be intriguing. Together with a professional advisor, you should examine whether holding your mortgage in your RRSP is more advantageous than your current plan. This “RRSP Season”, investing a few moments of your time into the mortgage RRSP may turn out to be your best investment yet. And who knows – there may be a beach in your future after all.
Greg Holohan is a Wealth Advisor with ScotiaMcLeod. Greg specializes in unique investment, insurance and retirement strategies, and can be reached at 905.479.8238 or greg_holohan@scotiamcleod.com. ScotiaMcLeod is a division of Scotia Capital Inc., member CIPF. This publication is intended only to convey information. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction.
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