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The Bank vs. The Bank of YOU!

Posted by Sherry Rioux on February 23, 2012

Wouldn’t it be great if you could finance your purchase of a condo at Blue Mountain, a chalet on Georgian Bay or a home in Collingwood with a mortgage you hold yourself?   Wouldn’t it be even greater if the interest you pay on that mortgage was going back into your R.R.S.P. and being treated like a dividend (and not like interest?)  Too good to be true?  Well, believe it or not, this can be done, via a “non-arms-length mortgage’ which is held within your Self-Directed R.R.S.P.

Before we get into the nitty-gritty of these investment vehicles, let me first say that this is not for everyone, and a lot depends on your current financial situation.  Secondly this represents a long term investment strategy.

The premise is this:  use your CASH holdings in your R.R.S.P. to lend yourself a mortgage.

The borrowed money is set up like a typical Canadian bank mortgage, with a repayment schedule and using the bank’s posted interest rates.  The payments go back into your R.R.S.P. as cash.*

Things to bear in mind:

  •  if the mortgage is non-arms-length, you’ll need to pay for ‘default insurance’ – C.M.H.C. or G.E. provide this and will it likely cost about 0.5% of the mortgage amount as a one-time fee
  • there is a fee to set this up (paid to the financial institution/broker) and it typically runs around $250-$300
  • there are ongoing yearly fees with any self-directed R.R.S.P. $225-$250 per annum (paid to the financial institution/broker)
  • legal fees will be incurred during the set up and registration of the mortgage, say $1,000.
  • you must charge yourself interest at the bank’s going rate

The Numbers Crunch Like This:

Let’s say you lend yourself $50,000 in cash from your R.R.S.P. as a mortgage on your home, with a 5 year term.  You set up a repayment schedule based on a 5 year term, 25 year amortization with accelerated, bi-weekly payments.  A quick scan of mortgage rates on  tells me the most common, current 5 year fixed rate is 5.19%.

Your payments, bi-weekly are $148.12
After 5 years, you will have paid $11,930.00 in interest
and you will have paid down $7,326.00 of the principal.
Calculating the legal and other fees as estimated above to be approximately $2800.00, this leaves about $9,130.00 going into your R.R.S.P. which you would have previously been paying to the bank.

Compare that to investing that same $50,000.00 from your R.R.S.P. in a 5 year Guaranteed Investment Certificate (G.I.C.)** at 2.50%, where you will earn approximately $6,570.00 in interest over the term. G.I.C.’s provide security and a bit of income, BUT … don’t forget you’ll still be making payments on that $50,000.00 mortgage that you owe to the bank.

Do take note that you can lend money from your Self-Directed R.R.S.P. to someone other than yourself, but of course the risk is higher, but then so is the return usually, as you would want to charge a higher interest rate.

As always, get advice from your financial planner on holding your own mortgage under your Self-Direct R.R.S.P. – it might not fit into your portfolio or goals.  All figures provided are estimates only.

*You’ll be able to invest that cash as well, in a vehicle of your choice, in keeping with your risk/asset allocation financial plan.
**Current 5 year GIC Rates with Meridian C.U. and ING


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