Should you hold your mortgage inside your RRSP?


Q. I currently own a house in Edmonton that is mortgaged, and looking to purchase a property in Vernon, BC, that I will eventually retire to. Until then, I am liking the idea of renting out that property to help support the additional mortgage. 

I am wondering if it’s possible to transfer my existing mortgage into my RRSP and access the cash there by reducing the amount of additional mortgage I would need to purchase the Vernon property? Otherwise, is there a way to purchase the Vernon property using my RRSP funds?
–Yvonne

A. I am often asked about buying a home to retire to eventually, and renting it out in the meantime. I question the approach because a home you want to live in is not necessarily a good property to rent out to a tenant. A property that is easily rentable to tenants may be close to transit and jobs for example, whereas a property you may want to retire to could be more rural or have different attributes.

In addition, there are things that could change in your life by the time you retire. What if your kids move to another city and you want to be close to them? What if you decide you want to travel and would prefer a condo to a house? What if you have medical issues and need to be closer to a hospital? There may be things you cannot foresee now that make it hard to plan that far in advance.

I also worry that people may have too much confidence that real estate prices will continue to grow at high rates in the future. Given you are in Alberta, Yvonne, you probably have a better sense than other readers in other parts of the country that real estate prices do not always go up. So, this next warning is broad rather than directed at you.

For many reasons, it is unlikely that real estate prices will rise as much in the next 10 years as they have in the past 10 years in some Canadian cities. That is not to say real estate is a bad investment, but it is to say that real estate may not be such a great investment that you should raid your RRSP or do everything you can to buy a second property. If real estate prices rise at a modest rate, which may be the most likely long-term scenario given how high prices are in some cities right now, a rental property may provide a comparable return to a balanced investment portfolio. 

If the only way someone can buy a rental property is to use their RRSP, they should also consider the risk of putting too many eggs in one basket. Rental real estate can be part of a diversified portfolio, but going all-in on real estate has risks.

On to your question about using your RRSP to fund a mortgage or rental property purchase, Yvonne. One of your biggest challenges will be finding a bank, credit union or trust company that will let you hold your mortgage in your RRSP. I understand this is becoming more difficult to do, even though a mortgage is a permitted RRSP investment, according to the Canada Revenue Agency.

The same qualification requirements as a regular mortgage will apply, and there will be additional fees for setting up and then administering the mortgage annually in your RRSP. The interest rate will be the posted rate, not the discounted rate most mortgage borrowers end up with when they borrow. 

This high interest rate may seem appealing at first, because it results in a high guaranteed rate of return for your RRSP. But it may ultimately work against you, because you end up paying the high interest rate—albeit to yourself and your RRSP—when you could have otherwise borrowed for less. 

As an example, Yvonne, you might transfer your mortgage to your RRSP and establish a 5 % interest rate. Your RRSP will earn 5% but, at the same time, you are borrowing at 5% as well. It could be more advantageous to borrow at current 2% discounted mortgage rates and invest in something else in your RRSP at a 5% return over the long run. You could have the same return for your RRSP, but pay less interest by borrowing from the bank instead of yourself.

Many people do not have enough money in their RRSP to transfer their entire mortgage into it. So, they may only be able to have part of their mortgage in their RRSP.

You cannot use your RRSP to buy a rental property, Yvonne. You can invest in publicly traded real estate investment trusts (REITs) or some private REITs as well if you really want to invest specifically in real estate with RRSP funds. Even then, I would suggest caution, and encourage a diversified investment portfolio.

Pulling money out of your RRSP to use as a rental property down payment can be highly punitive, because RRSP withdrawals are fully taxable, and as much as 54% could disappear to tax depending on your income and province or territory of residence. 

In summary, Yvonne, I would start with determining whether buying the home you want to retire to and renting it out in the interim is a good approach. You may be better off figuring out where to retire when you are ready to retire. If you really want a rental property, you may be better off buying a property that is easily rentable. And although you may be able to hold your mortgage in your RRSP, I am not sure that is the best overall financial strategy for most people.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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