Personal Finance

Placing a Mortgage in an RRSP?

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  • Nov 2nd, 2010 1:22 pm
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Sr. Member
Jan 11, 2005
509 posts
6 upvotes
Toronto
Ok... I guess it is correct that the final outcome is neutral.. I guess (if doing the RRSP way)... you would only be up by the interest you pay yourself (less fees) and you would also forgo any missed opportunities by not having that money availabe in the RRSP to invest...

Stupid.. stupid...me....

:confused: I completely missed the fact that the original principal was never mine to begin with. :confused: doh :!: .

So that is why the interest rate being charged is so important... it will have to be at least as good as what you expect to get as a return and also you would have to factor in any fees that you would pay for setting up this type of thing for the rate.
Sr. Member
May 2, 2005
716 posts
159 upvotes
deal_lurker wrote:So that is why the interest rate being charged is so important... it will have to be at least as good as what you expect to get as a return and also you would have to factor in any fees that you would pay for setting up this type of thing for the rate.
Exactly -- the higher the better. But, the rate is guaranteed (assuming you consider yourself a low credit risk) and if you hate giving people money, there's the personal satisfaction of "sticking it to the man".
Sr. Member
Jan 13, 2005
981 posts
220 upvotes
Montreal
deal_lurker wrote:
A)Going through the RRSP way:
-You end up with the property.
-You paid yourself back the the principal you lent yourself (and grew your RRSP because of the interest) and you get to continue making RRSP contributions.

B)Going the regular way:
-You also end up with the property.
-You paid someone else money + interest for the loan. This money is in someone else's pocket because someone else lent it to you.

For B) in the end you also get a property.

But in the end in terms of assets, because you repaid someone else the loan... you are out the principal and interest for this part. It is nowhere on your statements.

This is from a total asset amount point of view... Is there something I am missing here?
But B) you paid the bank the interest and principal, but, you end up with the original money that will earn interest or dividend or capital gain.

You gain nothing from doing this kind of thing.

If you 'save' interest by setting a lower rate then you 'lose' interest in your RRSP by having a lower interest rate. If you pay less to yourself, then you earn less. There is no difference between 'paying someone else then receiving the same amount from someone else' AND 'paying yourself and receiving the same amount from yourself'.

It would be more advantageous IF:
you don't have to pay HMC fee because you don't have enough capital.
You need a more flexible repayment schedule.
You can't imagine your RRSP earning more than 3-5% because your are risk afraid.

Also, I don't see any fiscal advantages...So...
Deal Fanatic
User avatar
Aug 19, 2001
5170 posts
115 upvotes
Vancouver
KAN wrote:It would be more advantageous IF:
you don't have to pay HMC fee because you don't have enough capital.
You need a more flexible repayment schedule.
You can't imagine your RRSP earning more than 3-5% because your are risk afraid.
Bingo!

If you want to invest your RRSP in a mortgage, I would suggest investigating a private lender who offers 2nd mortgages at high interest rates. Although it has higher risk/reward, you do get the great advantage of tax-deferral on the interest payments.
Sr. Member
Jan 11, 2005
509 posts
6 upvotes
Toronto
Yes.. thank you all for clear up my questions and for allowing me to understand it a little better... it's probably not right for a lot of people... as any fees could eat into a person's return... and you could only set the terms for only so long and interest only so high. If they were so far out or if the rate was too high... there is a risk of somone defaulting.
Rembrandt100 wrote:By jove ...........I think he's got it!

Dave
Newbie
Apr 18, 2008
7 posts
Toronto
Great thread. Hard to get over there was more solid info in here than on "Canadian Business" forums. lol.
Banned
Jun 19, 2006
9349 posts
57 upvotes
grant wrote: What a joke. That's absolutely ridiculous.
Actually, if you default, the RRSP is obliged to foreclose upon, and liquidate your house. Technically, you don't even own your own RRSP -- its a trust that you contribute to, and you are merely the 'beneficiary'.

Even without such a foolish restriction, holding your own mortgage seems like a weak deal. You are basically giving up more lucrative opportunities to save yourself the current mortgage rate of approx. 5%.
Its competitive with, for instance, holding an investment in GICs or bonds.

A situation I can think of that would be advantageous to hold a RRSP mortgage -- would be, for instance, say you hit it big in the penny stocks in the RRSP. So you are relatively young, and have a million dollars in your RRSP.

Obviously you wouldn't want the RRSP to grow much more (because most of it would be withdrawn at high marginal tax rates), but you might like access to the money outside the RRSP to make other investments. So by taking out a RRSP mortgage, you aren't taking on any additional risk, and you could deduct the interest expense paid to the RRSP if you used the proceeds for investment.

This type of setup should only appeal to very risk-adverse investors who would only otherwise invest in GICs (yielding ~4%).
...or someone who has an exhorbiantly oversized RRSP, and merely needs to chop it down to size with a little bit of financial engineering.

I agree, however, having to pay the CMHC premium is ludicrous.
Banned
Jun 19, 2006
9349 posts
57 upvotes
iluvmikeharris wrote: do you have to insure the RRSP mortgage even if it's <=80% LTV?
Yup. And the RRSP has the right (in fact, the obligation) to foreclose on your house, and put it up for sale, just like a normal bank would. The insurer, in the name of your RRSP can and will also sue you for any deficiency.

Personally I can't fathom being sued by my own RRSP, lol.

The reason why insurance is required is so that someone will sue you and/or petition you into bankruptcy if you don't pay back the RRSP mortgage. Because, obviously, you can't be trusted to sue yourself on your RRSP's behalf, now can you? :)
Deal Addict
Feb 4, 2008
3137 posts
179 upvotes
I know, old thread, but times have changed.

What are your thoughts on this now that rates of return on fixed investments are so low?
Do your mortgage math correctly!
Member
Dec 27, 2008
271 posts
14 upvotes
Abbotsford
Personally I'm not a big fan. I think it is alright for a sliver of your investment portfolio, maybe 10-15%.

I have seen more people frustrated from RRSP mortgages than not.

I would rather invest is a basket of mortgages or corporate bonds, and some hedge funds.
Jr. Member
Nov 10, 2007
114 posts
6 upvotes
Montreal
sslinn wrote: I know, old thread, but times have changed.

What are your thoughts on this now that rates of return on fixed investments are so low?
I believe it's a great investment for some people, given that the S&P500 has returned zero from 2000 to 2010, 5 to 6% is pretty darned good.

Furthermore, you're getting those returns without any volatility. Considering you could get an even higher rate on a second mortgage, that's a pretty good reward for the amount of risk.

On the other hand, pipeline inflation looming due to massive quantitative easing in the US will likely force the Bank of Canada to keep the Canadian dollar low to support exports by keeping the overnight lending rate at or near the current multi-generational lows. This creates a real to mid-term inflation risk, not yet priced into longer term government bonds (both in the US and Canada), in my opinion. As a result, mortgage rates are likely to increase, as inflation begins to appear in this scenario. In such a scenario, corporations will increase prices, their profits will keep up, and share prices will increase as a leading indicator (this could be happening already). Overweight in mid to long term bonds and underweight in stocks (as you would do by shifting from a stock to a mortgage portfolio in your RRSP) could result in a double-whammy of missed stock market returns and lower bond prices. On the other hand, you would be on both sides of the bond trade.

If you believe in the stock market, you could make a killing by staying put. The way I see it, I don't have enough in my RRSP yet for it to be worthwhile to actually go forward with it. I need to work it out some more. I'm not sure what would be better for me.
Member
Oct 10, 2006
423 posts
147 upvotes
Toronto
Great Thread..

It is assumed that you are borrowing the money for the house from bank ...

What if you already have money in the RRSP to do the mortgage?

For example, my current mortgage balance for my principle residence is $200K.
However, What if I have $200K cash in the RRSP....
Can I not place my current mortgage of $200K in the RRSP and finance with my own cash in RRSP?

Let say if I pick a term of seven year at posted rate of 7%... Will I not be paying myself 7%?

Is that not the same me purchasing a GIC in RRSP for 7 year at 7%?? minus the setup fee, as I probably do not have to pay CHMC fees which would be the deal breaker..

Any thoughts??
Deal Addict
Aug 1, 2008
1554 posts
83 upvotes
Ottawa
fch wrote: Great Thread..

It is assumed that you are borrowing the money for the house from bank ...
uhhh no....the whole idea is you are borrowing from yourself and paying yourself back instead of paying the bank back
Member
Oct 10, 2006
423 posts
147 upvotes
Toronto
SpillOnAisle9 wrote: uhhh no....the whole idea is you are borrowing from yourself and paying yourself back instead of paying the bank back
If that is the case, then why would one need CHMC insurance, as all the money is mine to start with. I mean I am borrowing money from my own RRSP... and if I can't make mortgage payments and default, bank can always take money from my RRSP.
Deal Addict
Aug 1, 2008
1554 posts
83 upvotes
Ottawa
fch wrote: If that is the case, then why would one need CHMC insurance, as all the money is mine to start with. I mean I am borrowing money from my own RRSP... and if I can't make mortgage payments and default, bank can always take money from my RRSP.

You didn't read the whole thread....did you? The bank is not involved here...your RSP (which is held in trust for you)
has to foreclose on you.

I'm not really certain why CMHC is needed BTW but it is required according to the earlier posts. Maybe that rule has been relaxed in
the 4 years since this thread was started?

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