A client came to me the other day with the proverbial question regarding “advice they received from a friend”.  He told me that a co-worker of his had told him that he could transfer his mortgage into his RRSP.  Being smart like all of our clients, he came to me to confirm this advice.  The question isn’t really about whether you can hold your mortgage inside your RRSP, but rather, should you?

The idea of holding your mortgage as an investment in your RRSP sounds inviting at first .  The thought of paying interest to your RRSP account instead of to the bank is attractive.  However, if you or someone you are related to, own the property that is being mortgaged (ie your house), the mortgage is a “non-arm’s length” mortgage.  As a result, it must be administered by an approved lender and the interest rate and other terms must be similar to a regular mortgage.  In other words, you cannot choose an unusually low rate of interest on the mortgage to save yourself some money.  Nor can you set the interest rate unusually high in order to transfer more money into your RRSP.

In addition, the mortgage must be insured by CMHC or by a private insurer of mortgages.  This requirement ensures that if you default on your mortgage, your RRSP savings are protected.  This insurance typically is between 0.5% and 3.25% of the amount of the mortgage.

Besides the insurance premiums, certain fees will apply: annual administration fees charged by the financial institution that will monitor the mortgage; annual self-directed RRSP fees; one time appraisal and legal fees to setup the mortgage; and one time mortgage setup fees.

Similar to other mortgages, the financial institution will act in the best interest of the lender (your RRSP).  In doing so, they will monitor the mortgage payments and if you miss them or default, they have the option of forcing a power of sale of your own house in order to protect your RRSP.  In short, holding your own mortgage in your RRSP is not an excuse to skip payments.

So when does this strategy make sense?

For those individuals that have large RRSP investments that are considerably higher than the amount of their mortgage, this may make sense.  Let’s look at an example:

John Smith has RRSP investments valued at $100,000 and a mortgage of $75,000.  In order to hold his mortgage inside his RRSP, he would have to sell $75,000 of investments in his RRSP and use the proceeds to purchase or invest in his mortgage.  In effect, he is converting 75% of his RRSP to fixed income.

In your RRSP, where diversity is key, this is not a smart move.  However, if the mortgage only represented a smaller percentage of his RRSP investments (say 15-20%), the case may be different since a well diversified portfolio may include 15-20% fixed income anyway.