Education Centre

Using Your RSP to Fund Your Mortgage

By Gregory M. Colford, B.A., J.D., C.I.M.®

Introduction

Yes, you can use funds in your registered retirement savings plan accounts to fund your own mortgage! You become both the “mortgagor” and the “mortgagee”! Basically it is a non-arm’s length mortgage whereby you lend yourself your own mortgage. It sounds unusual, but it can be done and the benefits for those who can do this are several.

There are two key points to keep in mind while reading this article: (1) the mortgage has to insured by either CMHC or a private insurer and (2) it has to be administered by a lender approved by the National Housing Act. The mortgage, notwithstanding it is from you to you, has to be legitimate.

Further, there are significant risks engaging this strategy – first and foremost it may inadvertently over concentrate your retirement portfolio in one investment product.

Overview

A registered retirement savings plan (“RRSP”) is a type of Canadian account for holding savings and investment assets. RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. They were introduced in 1957 to promote savings for retirement by employees and self-employed people.

They must comply with a variety of restrictions stipulated in the Canadian Income Tax Act. Approved assets include savings accounts, guaranteed investment certificates (GICs), bonds, mortgage loans, mutual funds, income trusts, corporate shares, exchange-traded funds, foreign currency, and labour-sponsored funds. Rules determine the maximum contributions, the timing of contributions, the assets allowed, and the eventual conversion to a Registered Retirement Income Fund at age 71.

Many Canadians hold their RRSPs through “client held accounts” at various investment and/or fund companies. Every time one opens an account with a different investment company or fund manager, a new account is created. These accounts are generally specific to the investment product being subscribed for at the time. It is not uncommon for Canadians to have several of these kinds of accounts.

The other popular form of account is a “nominee account”. Essentially this is one account held by a “custodian” or “trustee” that holds several different kinds of investments on your behalf.

You need to employ a special kind of RRSP nominee account when you want to use your RRSP funds to finance your own mortgage – that account is called a “self directed RRSP” and they are widely offered by financial institutions in Canada.

The Pieces for The Plan!

The elements to you becoming both the lender and the borrower are fairly simple. First, you have to have money set aside in RRSP accounts (“duh!”) Equally obvious – the larger the RRSP the more mortgage one can create! Therefore figure out first how much of a mortgage loan you can create with the RRSPs you have on hand. Your monthly RRSP statements will provide that number.

Those RRSP funds are likely tied up in mutual funds, exchange traded funds and other pooled RRSP eligible accounts made up of the security itemized above. To fund a mortgage, these RRSP accounts have to be reduced to cash. Once you have made the decision to fund your mortgage with your own RRSP funds, you will instruct who ever has custody of your RRSPs to sell everything in the account so that the only thing that remains in the account is cash. IT IS IMPERATIVE THE CASH STAYS IN THE ACCOUNT. You are not withdrawing the cash; you are simply reducing whatever is in the account to cash.

Next, you will attend your financial institution (any Canadian chartered bank or trust companies) to open up a “self directed RRSP”. In this example, it may be most expedient to work with the approved lender required in this transaction. The lender will require you to open an account which will take very little time.

Once the account is established, you have to fill up your newly created self-directed RRSP account! You will do that with the kind assistance of the lender who has helped you set up the account. You will complete a “transfer instruction” whereby your lender will request all the other institutions who currently hold your RRSP accounts (that now hold nothing but cash) to transfer all the cash that is in those accounts to your newly created self-directed RRSP account! To help complete the transfer instruction will you provide up-to-date account statements to the lender. The lender will need to know the name of the institutions and the account numbers of the existing RRSP account in order to properly effect the transfer. Once all the forms are completed, they are filed with the various institutions instructing them to transfer your funds to your newly created self-directed RRSP account with the lender. The transfer can take up to four weeks. In order to maintain RRSP eligibility, funds must move directly from one RRSP account to another – regrettably, you cannot simply withdraw the funds and walk them across the street and deposit them.

While you are waiting for funds to move, you will attend the office of a lawyer who practices real estate law and describe to the lawyer what it is you are doing. A mortgage is simply a loan that is registered on the land title. Your lawyer will understand this and will work with you and the lender to prepare the terms of a loan agreement pursuant to which you will lend you money.

Notwithstanding you are lending yourself (or your spouse) money, the Canada Revenue Authority (“CRA”) requires that loan to be “commercially reasonable”. For example, you may be tempted to create an interest-only mortgage under which you charge yourself an inordinately high rate of interest as your objective is to exaggeratedly augment your cash flow. This transaction structure would not generally be considered “commercially reasonable”, the test your lawyer will apply to assess the reasonableness of the mortgage from the perspective of CRA.

Once you have made the decision to fund your mortgage with your own RRSP funds, you will instruct who ever has custody of your RRSPs to sell everything in the account so that the only thing that remains in the account is cash.

The Need for Advice

At this junction, it is important to get the advice of a qualified financial advisor to help with the terms of this loan. For example, it is actually in your interest not to pay yourself the lowest rate of interest available but actually a higher rate – everytime you make a mortgage payment, you are contributing to this RRSP account and paying yourself an interest payment greater than what you will ever get on a GIC or high interest rate savings account. The longer the amortization period, the longer you are able to contribute to this RRSP account without encroaching contribution limits in future years.

You Become Your Lender!

Time passes and the funds finally arrive in your self-directed RRSP account. Now you have to tell the self-directed RRSP account to fund a mortgage! You do that by way of delivering to the lender a “payment direction” – the lender has a standard form of payment direction that it will provide to you.  The payment direction tells the lender to buy the mortgage from you on behalf of the RRSP account for the amount set out in the direction. The lender then forwards the cash to your lawyer who will now registered the loan against the land title to create the mortgage – the mortgage, now registered in the name of the self-directed RRSP and administered by the lender.  The mortgage will have the benefit of insurance, most likely arranged by the lender approved to administer the mortgage.

Now you are set and you begin making payments on the mortgage as you would under any other mortgage arrangement.

The Benefits

The benefits are several:

  • You make interest payments to yourself instead of a financial institution. This creates immediate cash flow in your hands from your own funds!
  • The RRSP benefits from the interest costs. The longer the amortization period of the mortgage the more RRSP your create.
  • Monthly mortgage payments that repay the RRSP loan with interest do not count as contributions and you can still take advantage of maximum contribution room.
  • It provides a low-risk investment with a predictable return.

If your self-directed RRSP account buys from you a $200,000 mortgage that has a 25 year amortization period at a commercial rate of interest, you double it over the period without ever encroaching your contribution room!

The Drawbacks

Yet there are drawbacks.

  • Setting up and administering the RRSP is complex.
  • Insurance, legal and start-up costs and administrative fees are high. Many Canadians have their RRSPs in accounts that have significant break up costs and wind-up fees.
  • RRSP funds are tied up at the cost of other investment opportunities.
  • This concept requires requires a large sum – which begs a further issue: are you willing to put that many eggs into one basket?! This could be a huge concentration risk in an average person’s retirement investment account.

Conclusion

It is critical that anyone looking to engage this strategy speak to a qualified financial advisor and do with the advisor an appropriate assessment of the risks and costs associated with this investment approach. The investment strategy is not common as only a very few can really take full advantage of the substantial benefits it offers.

Mortgage investment nevertheless remains an imperative in anyone’s portfolio. If funding your own mortgage is not an option available to you today, then visit us at Fundscraper and join our community to learn more about private property and mortgage investment and how it can anchor a portfolio in both the good and bad trading winds! See us at my.myfundscraper.com/signup.

ABOUT THE AUTHOR

Gregory Colford
Gregory Colford

PRINCIPAL BROKER, EXECUTIVE VICE-PRESIDENT & CHIEF COMPLIANCE OFFICER

Gregory Colford, JD, CIM, was a senior partner at Heenan Blaikie LLP, once one of Canada’s ten largest law firms. Over his 12 years at Heenan Blaikie LLP, he headed the Toronto Securities Department, the Corporate Services Department, the Precedent Committee, the Legal Opinion Precedent Committee, and was the Toronto representative on the firm’s Stock Trading Committee. Through the course of his practice, he brought many companies to the public capital markets and advised extensively on corporate governance, board integrity, and market compliance.  He was also the co-founder of Carlisle Capital Structures Corporation and helped the company grow to over $1 billion CAD in AUM of mortgage securities on behalf of a top tier Ontario pension fund.