RRSP mortgages, pros & cons?
(this is long, thanks for reading if you make it through)
Just wondering what people thought of the pros and cons of RRSP mortgages?
We are debating whether or not to pursue this option as our RRSPs almost equal our outstanding mortgage balance on our principal residence (about $170k).
First some background -
This article provides a good overview:
http://www.canada.com/finance/rrsp/stor ... 57&rfp=dta
Another one with a pretty balanced view:
This article provides a good description of the 'cons':
My issue with the 'cons' article are:
1. True there may be a lack of diversification initially, however this is balanced out over time as each mortgage payment is made. Also, non-registered funds also help reduce any lack of diversification. Plus, some planners recommend having only interest bearing investments in your RRSP with capital gains and dividends in non-registered investments.
2. Rate of Return, they're saying it won't be as high on an RRSP mortgage than if you invested in, say, equities. My problem with that argument is:
a) the posted interest rate I would 'charge' myself is a close, but not quite, a sure thing. Not quite because we might somehow otherwise lose our ability to earn our current income levels for an unforeseen reason. But helped to be more secure by having property and critical illness insurance in place while the return on equities are by no means guaranteed.
b) by pursuing an open mortgage with a longer amortization, I can 'charge' myself 8.5% (still managing to keep the cash flow lower with a longer amortization period. Combined with a), it is hard to find close to risk free rate of return on a fixed income product of 8.5%.
What I like about the idea is:
1. Obviously the idea of paying interest to yourself, rather than the bank.
A $170,000 mortgage with a 25 year term would incur approximately $120,000 to $175,000 in total interest payments (depending on the average interest rates negotiated over the terms), using no acceleration and assuming it ran it's full amortization. It would be nice to see that interest going to us rather than the bank.
This is balanced out, of course, by all the fees involved in setting up and running an RRSP mortgage:
UP FRONT COSTS: one-time bank set-up fee $200, legal fees (required to use your own lawyer) $700-$1000, CMHC premium $900-$1200 (for our Loan to Value ratio & depending on amortization period), Bank Appraisal fee $295 (often waived though). Total = approximately $2,095-$2,695 give or take and less the $295 if the appraisal is waived.
RECURRING ANNUAL FEES: annual mortgage admin fee $175-$225 (depending on bank), normal self-directed RRSP annual fee $125 (until you return the account back above $25,000 in repayments) - note: these annual fees are per RRSP account, so double up for a couple pooling the funds across two self-directed RRSPs (or more if there are LIRAs involved). Total = approximately $650 for two SD RRSPs up to the point where they are back above $25k, then $350-$450 thereafter till the mortgage is extinguished (then a normal discharge fee of approx. $200 kicks in).
Total fees charged over the 25 year amortization = roughly $12,000 to $14,000
One thing that gives me pause though and this I really need some help on. If couple has $170k in combined RRSPs, $7k in combined new contributions made each year (ignore the tax refund for now) and all those funds achieve a rate of return (ignoring inflation for now) of, say, 8%, the future value in 25 years is approximately $1.7 million.
Whereas if the RRSP mortgage is done, the combined RRSPs have $0 today (cashed out to pay-off the bank mortgage), the RRSPs receive, say, $19k in combined payments made each year ($12,000 in mortgage payments to the RRSP + $7,000 in new contributions made each year - ignore the tax refund side of things) and all those funds achieve a rate of return (ignoring inflation) of, say 8%, the future value in 25 years of the RRSP funds is just under approximately $1.4 million.
On the surface, there is $300,000 disadvantage to going the RRSP mortgage route. I suspect this would be compensated for by the mortgage interest saved from being paid to the bank, but am unsure how to account for it in a time value of money type analysis. Any help or tips on how to properly account for issue in the analysis would be greatly appreciated.
Any other comments, corrections, suggestions etc. also appreciated.
Thanks for getting to the end!!!