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The Ups and Downs of Holding a Mortgage in your RRSP

A few weeks ago, while reading an article about retirement strategies I came across a paragraph that discussed the benefits of holding a mortgage in an RRSP.  Before this time I had no idea that this could be done, so I decided to do a little bit of research.  Apparently, if you hold your mortgage inside your RRSP, you get to make your monthly mortgage payments to yourself.  It sounds like a great idea, but the process is very complicated and has some clear disadvantages.

To get started, you must open a self directed RRSP and you must have a substantial amount of equity in your home.  Next you must transfer the equity of your home into your RRSP.  Mortgage equity held in an RRSP is not subject to RRSP contribution limits.  To go any further, you must have cash or cashable investments in your RRSP equivalent to the mortgage that will be transferred.  Once the structure is completed, you will have to make your mortgage payments to your RRSP and not to the bank.  Practically speaking, it would work something like this:  With a $100,000 mortgage on your home, and $100,000 available in your RRSP, you can take the money from your RRSP and pay the bank for the outstanding amount of the mortgage.  Now you have a $100,000 RRSP mortgage, and will be required to pay the RRSP instead of the bank.

One advantage of holding your mortgage in your RRSP is that you are able to capitalize on the mortgage amortization to maximize growth in your RRSP. The idea is to lengthen the amortization period and then charge the highest possible interest rate.  Having a very high interest rate is beneficial in this situation because you are able to deduct it.  Also, you have an option to structure it as an open mortgage to allow for early repayment without penalty.

There are disadvantages as well. For example, there are sizable fees, such as appraisal, legal, registration, mortgage insurance and trust fees involved with the set up.  You will also have to pay a few hundred dollars a year in fees to maintain the structure.  For someone with limited cash flow, it may not be worthwhile to do this since paying an higher than normal interest rate would have the effect of reducing immediate cash flow.  When mortgage interest rates were higher than 10% this option was more attractive because it provided an opportunity to deduct more in the long run in the form of interest payments.  However, with the current low interest rates it may not be as beneficial.  It may make more sense to pursue other investments. 

Before considering this option, ensure that you speak to a financial advisor and get all the facts.  It may be a good idea for you.  Or maybe not.

Copyright © 2006


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