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Own your mortgage

Many people are familiar with the federal government sponsored “Home Buyers Program” which allows tax free withdrawal of an individual’s RRSP funds to purchase a first home but many are not aware of a structured investment opportunity that allows any individual to hold their own mortgage within their RRSP.

This type of structured investment is known as a Non Arm’s Length Mortgage, in this case a mortgage where the mortgagor (i.e. the borrower) is also the RRSP annuitant (the RRSP owner) or is related to the RRSP annuitant.

A structured mortgage investment of this type must be administered by a qualifying trustee in order to provide full legal transparency. In addition all other terms and conditions such as the interest rate charged must reflect current accepted commercial market practices.

The mortgage must be insured by CMHC (Canada Mortgage and Housing Corporation) or by another alternate insurance provider. This is to ensure that if the mortgagor defaults on their mortgage for any reason then the individual’s retirement savings remain protected.

The advantage of holding your own mortgage in your RRSP is that individuals may pay themselves a higher rate of interest on the mortgage than they may be able to earn through other lower yielding income investments such as GICs. Normally, an individual looks for a mortgage at the lowest rate possible however; since the individual is paying back their mortgage to their own RRSP they would want to pay the highest available rate possible.

The drawback to such a structured investment is the costs associated with setting up the investment. In addition to the mortgage expenses (set up, appraisal and legal fees) there is also the mortgage insurance premium, which ranges from 0.5% to 2.5% of the mortgage based on a debt to equity formula. There are also administration charges and self- directed account fees charged by the trustee.

As a result this type of investment is most beneficial to individuals who will be structuring a larger mortgage amount ($100,000 or greater) and who will maximize mortgage principal and interest repayments by re-investing the proceeds in a systematic purchase plan within the RRSP. To learn more contact your financial professional for full details.

The opinions expressed are those of Anthony Bozinovski. Anthony Bozinovski is a Financial Advisor with Berkshire Securities incorporated, Member CIPF and the Investor Protection Fund. Anthony may be reached at abozinovski@berkshire.ca or call: 416-787-1616 / Ext.: 325


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