When traditional lenders dry up, use a RRSP to buy or build a home. It’s a little known way of putting your money to work for you. It could just save the day.
Tax-friendly RRSPs for Retirement or Emergencies
Like many Canadians, you’ve heard about the tax benefits of RRSPs. Come March 1, you dutifully add a little bit every year and get a 29% (or whatever your tax rate is) income tax refund. You’ve built up a tidy nest egg. It’s your retirement or emergency fund.
Who Uses a RRSP Mortgage
Awkwardly, you lost your job two years back in the 2018 stock market ‘crack’. Now you’re working for yourself. Kids at home, poor job market, getting older — you know the drill. Actually, you’re enjoying being at home. You just didn’t expect mortgage lenders to penalize you for it. You pay your bills. Why can’t you get a mortgage?
Your the Lender with a RRSP Mortgage
An enterprising friend suggests checking out a RRSP mortgage. Great idea! You can bypass the mortgage formalities and lend to yourself. Sort of. A self-directed RRSP mortgage comes at a cost. Doesn’t everything?
RRSP Lends You Secured Money
Of course, RRSPs aren’t a person or institution and can’t legally own title to a property directly. Instead, “they” lend money secured by a mortgage on the property. The equity securing the mortgage is what your home would be worth if you had to sell it, minus debts like property liens or real estate fees.
How a RRSP Mortgage Works
Tanya has $248,000 in a RSSP from 20 years of being frugal and investing well. With her partner Sharon gone, she sells their townhouse in Barrie, gives her ex-spouse half ($230,000 after realtor fees) and offers $399,999 for a highrise condo in Waterloo. She converts $170,000 from the RRSP into cash and gives herself a mortgage loan.
Mortgage Interest is Deductible
Because the mortgage is a RRSP investment, as long as she owns the home, she owes nothing to CRA (Canada Revenue Agency). The mortgage payments don’t count towards her annual RRSP contribution limit and she can deduct the interest from her income taxes. By the end of 25 years, when the mortgage is fully paid, she’ll have made $170,000 plus interest. A pretty good deal all around.
Setting Up a RRSP Mortgage
When you use a self-directed RRSP as a non-arms length mortgage, a bank or other approved lender sets up a mortgage trust account for you. The mortgage amount is converted to cash and insured by Canada Mortgage and Housing Corporation (CMHC). The seller gets cash. You pay the RRSP back by making monthly mortgage payments to the trust account.
Collecting Interest on Your Mortgage
Since you have to pay yourself interest on the loan, you could make a nifty profit when interest rates are high. Especially since your interest rate is based on commercial rates regular lenders offer.
The Cost of a RRSP Mortgage
Naturally, the one-time fee the lender charges to arrange the account and annual fees to administer it do add up. You’ll owe CMHC 0.5% to 2.9% of the total mortgage amount to insure it. And your money will be tied up in your house. Be sure to make the payments on time too or your trustee (lender) may foreclose. All investments have their risks.
Buy or Build a Home Using Your RRSP
If that costs more than you care to spend, kick back and relax while you watch your home equity (hopefully) grow with a first-time Home Buyer Plan (HBP). You simply withdraw up to $35,000 from your RRSPs and pay it back at your leisure. That avoids the RRSP withdrawal penalty and you have up to 15 years to repay it.
Borrow From Your RRSP As Often As You Want
Even better, you can make repeated withdrawals by repaying your loan and borrowing again. You can even use your RRSP to assist a relative with a disability to buy or build a principal residence. A written agreement is all it takes.
RRSP Home Buyer Plan for Couples
Couples get double mileage from the HBP. You and your partner can each borrow up to $35,000 from your RRSPs. No payments are required for the first two years, for either singles or couples.
What the Home Buyer Plan Buys
HBP can be used for:
- an existing or new build home
- single family or semi-detached unit
- mobile home
- coop unit, as long as your share gives you equity
- apartment in a duplex, triplex or fourplex
- or apartment building you live in.
Investment properties and second homes are excluded.
When you lend money to yourself you don’t have to worry about all those pesky questions lenders ask, like:
- Are you a good credit risk?
- What’s your income for the past three months?
- How long have you been working at EZY Ryder Bikes?
- Do you pay your credit cards on time?
You take a chance on yourself. After all, you’ve been doing that all your life.
Online Legal Services for RRSP Mortgages
Axess Law Ontario real estate lawyers can video conference with you 7 days a week, day or evening, to set up a trust account for a RRSP mortgage. Video calls and e-signing appointments can be arranged anywhere in Ontario. Make an appointment by dialing toll free to 1-877-552-9377 or 647-479-0118 in Toronto or use our online booking form. In person meetings are available at our Toronto, Scarborough, Vaughan, Etobicoke, Ottawa, Mississauga Winston Churchill or Mississauga Heartland law offices.
Click here to learn more about Axess Law’s real estate law services.