Loaning yourself a mortgage
Scared off by market losses but unable to earn much in interest from secure investments, Canadians are starting to revive the idea of holding their mortgages within a self-directed registered retirement savings plan (RRSP).
It's an idea with "gotcha" appeal: Loan yourself a mortgage using your retirement funds, and pay the interest to yourself instead of the big banks.
"It's an idea that comes around every so often," says financial adviser Ted Rechtshaffen, president and CEO of TriDelta Financial in Toronto. "Yet, not many people end up doing it."
What is a self-directed RRSP?
It's a type of RRSP account where the owner determines what investments will be made. In other words, you manage your own RRSP -- and that takes time and knowledge. You can take on sole responsibility or use the services of a financial adviser to co-manage your fund.
What are the advantages?
A self-directed RRSP allows you the greatest flexibility in terms of investment options. This is where your mortgage comes into the picture.
You can literally loan yourself a mortgage from the money available in your self-directed RRSP. You pay interest to your RRSP account -- in other words, to yourself.
How does it work?
First, you'll need to have sufficient funds in your RRSP to make a mortgage loan, whether to yourself or another borrower.
Second, you'll need to have your mortgage approved just as you would with any typical loan. That usually means getting a home appraisal to ascertain the value of your property.
Terms, such as amortization and interest rates, operate the same as they would for any typical mortgage. However, remember to shop around. When you are the beneficiary of the interest payments, it pays to consider a higher rate since that money builds up within your tax-sheltered RRSP and is available for other investments.
You'll need to carry what's called "non-arm's length mortgage insurance." The amount of insurance is calculated on a percentage of the mortgage, namely 0.50 per cent per $100,000.