We all know the cardinal rule of RRSP withdrawals before maturity: don’t do it. Whatever you withdraw from your RRSP has to be reported on your tax return as income, so you’ll pay tax on early withdrawals. However, for those who are tired of paying interest to a bank, there are a few ways to use your RRSP to make a loan to yourself (versus a withdrawal).
We all know the cardinal rule of RRSP withdrawals before maturity: don’t do it. Whatever you withdraw from your RRSP has to be reported on your tax return as income, so you’ll pay tax on early withdrawals. However, for those who are tired of paying interest to a bank, there are a few ways to use your RRSP to make a loan to yourself (versus a withdrawal) – they are the Lifelong Learning Plan, the Home Buyers’ Plan, and the RRSP mortgage. I’ll get into The Home Buyers’ Plan and Lifelong Learning Plan another time. Today’s focus is on the RRSP mortgage. We’ll get into the nitty-gritty of loaning yourself a mortgage shortly, first we need to understand non-deductible debt and RRSPs.
In short, non-deductible debt is defined as any capital where interest can’t be claimed as a tax deduction. For the majority of Canadians, the largest non-deductible debts we carry are our mortgages (non-deductible debt also includes personal lines of credit, credit card debt, student loans, and car loans). And mortgages, as you probably know, are costly!
Then we have RRSPs (Registered Retirement Savings Plan), which as most of you know, is the most popular ways for Canadians to save for retirement. Despite this money being reserved for retirement, Canadians borrow from their RRSP to pay for things beyond their retirement. However, the government would prefer you reserve this capital for retirement and not shopping, bills, or vacations, so limitations and rules are in place to make early withdrawals costly (and as a result, hopefully more undesirable).
What Is The RRSP Mortgage?
Borrowing from your RRSP to finance a home is known as a self-directed mortgage (or a non-arm’s length mortgage). If you have a mortgage, have more than $50,000 in your RRSP, and would prefer to pay interest to yourself (instead of the bank), this is an option you may want to consider.
Here’s How It Works
Let’s say you have $100,000 in your RRSP and you need $50,000 to buy (or build) your home, or even finance an investment property. You can borrow the money from your RRSP, but the transaction must be made through a bank, broker, or licensed lender. You’ll have to meet the bank lending policies (including, but not limited to, income verification, credit check, and purchase agreement). The lump sum will be borrowed and applied to your mortgage, and just like a regular mortgage a repayment schedule will be set up.
Keep in mind, the interest rate has to be the same as the posted rate at the bank, but like any mortgage, you can shop around for different rates from different lenders. Also, this is still a mortgage, and even though you own the mortgage you can’t be late or miss payments, or you risk foreclosure.
Benefits Of The RRSP Mortgage
There are a number of benefits to the RRSP Mortgage, the three biggest being:
- Payments go directly back into your RRSP, and you keep all the interest – take advantage of the growth!
- You can use the highest allowable interest rate (which is usually higher than GIC rates and many bond rates)
- Payments back into your RRSP don’t count as contributions
As with all investments, self-directed mortgages aren’t for everyone. They require a long-term commitment, and you can’t sell your self-directed mortgage (unlike a stock). So before you make the decision to borrow from your RRSP, compare all available options, speak to a planner, and have a plan (that you’re committed to) to pay it all back.