National Post - February 21, 2005

Page: FP10
Byline: Jade Hemeon

While most Canadians are familiar with the Home Buyers Plan, which allows for the interest-free borrowing of $20,000 from a registered retirement savings plan to help first-time buyers finance a home, many don't know they are allowed to hold their entire mortgage in their RRSP and make interest payments to themselves instead of the bank.

The strategy involves additional fees and set up costs, but may be worthwhile for clients with large RRSPs who can diversify into other investments in addition to their mortgage. The mortgage can be viewed as a replacement for the component of an RRSP that would otherwise be invested in fixed income securities or guaranteed investment certificates.

"For individuals who are low-risk investors, moving a mortgage into an RRSP that they would have been paying off anyway could make sense," says Tina Di Vito, vice-president and national manager of retirement planning at BMO Nesbitt Burns Inc. "A safe, predictable rate of return can be earned on this investment, and the RRSP becomes the beneficiary of the interest costs on the mortgage."

Normally, the thousands of dollars in interest paid over the course of a mortgage's life go into the pockets of the issuing financial institution. When an RRSP holds the mortgage, the repayment amounts do not count as RRSP contributions and clients can continue to make maximum allowable contributions to the RRSP. Ultimately, they will pay back much more to the RRSP in principal and mortgage interest than they initially withdrew.

Because the client is both borrower and lender, it doesn't make sense to pay the mortgage off quickly and minimize interest costs as it would with a conventional mortgage. While the mortgage must be at market rates, choosing a longer amortization period, as well as a more expensive open mortgage, and staying away from accelerated payment options is more profitable to the RRSP.

"Financing a mortgage is a profitable endeavor, that's why the banks do it and potentially that's why an RRSP investor might do it," says Howard Kabot, director of financial planning at Scotia McLeod. "You can't pay yourself 15% a year, but the asset will grow on a compounded basis over time."

"With interest rates as low as they are, holding a mortgage in an RRSP is not going to be as profitable as when rates are higher, and there is an opportunity cost relative to the rate of return that might have been made on competing investments," says Arlene Demars, a senior mortgage agent with Invis Inc. in Red Deer, Alta.

While a mortgage within an RRSP offers predictability and control, the money cannot easily be switched around if a better opportunity is available. In addition, costs specific to holding an RRSP in a mortgage will eat up some of the return.

For example, the Canada Revenue Agency insists personal mortgages held in an RRSP be insured under the National Housing Act in the same way a high-ratio mortgage is insured to protect the lender. The Canada Mortgage and Housing Corp. insurance can add 1.25% to 2.5% to the loan value, and typically is amortized over the life of the mortgage. There are also legal fees and setup costs, and a mortgage administration fee on top of the annual trustee fee for a self-directed RRSP.

Fiscal Agents Financial Services Corp. says it may not be worth holding your mortgage in an RRSP unless it is at least $60,000.

An RRSP may hold a mortgage on any Canadian real estate, either residential or commercial or even a property owned by someone else, providing it is insurable.

As well, the strategy goes beyond RRSPs to registered retirement income funds. A client with a fully paid home may find that arranging a mortgage on a fully paid up house within a RRIF is a good way to free up capital for other purposes, providing they can afford the mortgage payments.

For media comments and inquiries, please contact:

Steven Moyes
604-879-0228
E: Steven Moyes