Dear Expert:
Currently my wife and I have a fair amount of our RRSP in short-term income and cash instruments. We have purchased a new home and feel that the upside potential of the home's value is better than anything going on in the stock market over the next couple of years. We would like to utilize this cash to help lower the mortgage on the new home. We have already used the Home Buyer's Plan for the house we are leaving and still have balances of around $10,000 each to repay. Is there any way to access the money in our RRSPs to add to the down payment? We have considered a normal withdrawal, but do not like the idea of paying the withholding tax. Expert Answer:
Other than withdrawing the funds, you can have your self-directed RRSP hold part of your mortgage. A mortgage on either commercial or residential Canadian real estate is a qualified investment for an RRSP provided certain conditions are met. The mortgage must be administered by an approved lender under the National Housing Act (which includes most financial institutions) and the mortgage interest rate and other terms and conditions must reflect normal commercial practice. In addition, where the mortgage is a "non-arm's length mortgage" (i.e. the borrower who is mortgaging his or her real property is the RRSP annuitant or is related to the annuitant), the mortgage must be insured either by the Canada Mortgage and Housing Corporation (CMHC) or by a private insurer of mortgages (such as GE Capital Insurance Canada). The mortgage insurance requirement ensures that in the event the annuitant defaults on his or her mortgage, his or her retirement savings are protected.
The main advantage of putting your mortgage in your RRSP is that you can pay yourself (through your RRSP) a higher rate on the mortgage than you may have been able to earn on the short-term income and cash instruments currently in your RRSP. Perhaps the biggest drawback, however, is the cost. There are the typical one-time mortgage expenses, which include set-up, appraisal and legal fees; however, the biggest up-front cost is the mortgage insurance premium, which can range between 0.5% and 2.5% of the amount of the mortgage. The amount of the fee depends on the loan-to-value ratio of the mortgage and is calculated on the total amount of the mortgage on the property, regardless of the amount held within the RRSP. In addition, there are annual fees for maintaining a self-directed RRSP as well as the annual mortgage administration charge that many financial institutions charge as they continue to monitor and administer the mortgage on an annual basis.
In trying to decide whether or not this is a good strategy, you should compare the rate of return on the mortgage (taking into account the one-time and annual costs associated with holding the mortgage) to the rate of return your alternative investments would yield.
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No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
