Loan yourself a mortgage

While it may be snowing in central and eastern Canada, savvy investors aren’t thinking about shoveling their driveways—they’re considering ways to dig out from potentially limiting non-deductible debt. Non-deductible debt is classified as any loan where the interest cannot be claimed as a tax deduction. This includes: mortgages on primary residence, credit card debt, student and car loans and personal lines of credit. For the majority of Canadians the largest non-deductible debt we carry is our mortgage. And over a 25-year period most of us end up paying hundreds of thousands in interest charges. In an effort to minimize the cost of this debt Fraser Smith, a B.C. financial planner, developed the Smith Maneuver. Simply put, this method of commoditizing mortgage debt worked by setting up a readvanceable mortgage (a mortgage that provides a line of credit that is directly proportional to the amount of equity you have in the home). Then by selling all non-registered portfolio holdings and using them as a down payment on the mortgage—thereby providing equity room—you were able to borrow from the readvanceable mortgage and invest this money, at a higher rate of return than the mortgage interest rate. Because you were investing the borrowed money you could deduct the loan interest and use your tax refund to pay off your mortgage faster. But there were problems: the paperwork for the Smith Maneuver could get complicated, and no software or tax programs were developed to help ease this process. Another option is to loan yourself a mortgage—a strategy even Garth Turner, the real estate cynic, suggested in his book The Little Book of Real Estate Wisdom. In order to adopt this strategy you must first have an RRSP portfolio that equals or exceeds the outstanding mortgage owed on your home. Then you need to find a lender that will set up a self-directed RRSP. Once this is set up you can put the mortgage into the RRSP—consider it a fixed income portion of your portfolio holdings. Now, instead of paying principal and interest payments to the bank, you pay them to your RRSP. To help illustrate this example, consider the following (adapted from Turner’s 2002 book):

Start with a mortgage-free home, or have at least 50% equity in your home.
Establish a $100,000 non-registered investment portfolio.
Set up a $100,000 RRSP mortgage on your home.
If your mortgage rate is established at 7%, then your monthly payment would be just over $700—and is a tax free transfer of equity from your home into your RRSP.
By setting this up you have created a $100,000 debt paid to yourself over the next 25 years (the amortization of your mortgage).
At $700 per month, with a 6% rate of return (before inflation) you will have contributed just over $485,000 to your RRSP in 25 years.

There are a couple of rules:

You must pay the current posted rate as the interest rate on your mortgage.
Your lender will use your home as collateral, in case you default on your mortgage payments.

Also, there are costs involved.

An initial set up fee from your lender. Approximately $300
Start-up legal fees. Approximately $500+
Annual administration fees, charged by the lender. Approximately $200/year
CMHC fees of around 0.5% of the mortgage principal (this is mandatory and a trustee will examine your payments annually to ensure you are not defaulting on the mortgage)
Annual self-directed RRSP administration fees. Approximately $150 per year

While this sounds fabulous, you need to keep in mind the main goal of your RRSP: to maximize the rate of return so that your money can compound and grow for use in your retirement. These days, with rates so low, it becomes very difficult to use a self-directed RRSP to both create a deductible mortgage and to grow your retirement savings. Keep in mind, as well, that mortgage payments to your RRSP are not RRSP contributions. That means those payments will not generate tax savings. But, if you are an investor who is not solely relying upon an RRSP for your retirement savings, or you are a very conservative investor who is not concerned with maximizing annual tax rebates, the self-directed RRSP that holds your mortgage debt may be the ideal solution.

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Domenic Manchisi says:

November 5, 2021 at 12:39 am

What company or institution would I goto in-order to open registered account that would allow me to direct my rrsp into a mortgage on a property I have title to? thanks for the info

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1. Courtney Reilly-Larke says:
  
  November 8, 2021 at 10:24 am
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with a qualified advisor.
  
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Debby Gear says:

February 26, 2022 at 8:45 am

Is there a list of institutions or companies that are able to support opening a registered account that would allow me to use a property that i own for this purpose?

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Fernando says:

April 6, 2023 at 8:26 am

I did this before with TD. But I have been trying to find out which banks offer this now. No answer

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Le Grand Duc says:

February 4, 2024 at 12:58 am

In Canada, you can use a self-directed Registered Retirement Savings Plan (RRSP) to finance your own mortgage123. This strategy involves placing the mortgage into the RRSP, which can be considered as a fixed income portion of your portfolio holdings1. Instead of paying principal and interest payments to the bank, you pay them to your RRSP1.

Here are some institutions that can help you set up a self-directed RRSP:

Olympia Trust
Canadian Western Trust
B2B Trust2
These firms have the authorization to facilitate Self-Directed Arm’s Length Mortgages2.

Please note that this is a complex strategy and it’s recommended to consult with a financial advisor or tax professional before implementing it. Also, keep in mind that tax laws can change, and the information I provided is based on the most recent data available to me, which is current as of 2021123.

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Le Grand Duc says:

February 4, 2024 at 1:08 am

Here are some additional institutions that offer self-directed RRSPs, which you could potentially use to finance your own mortgage:

TD Direct Investing: TD Bank offers a Self-Directed RRSP account that allows you to hold a variety of investments, including mortgages.

RBC Direct Investing: RBC also offers a Self-Directed RRSP account that can hold a variety of investments.

Scotiabank: Scotiabank offers a Self-Directed RRSP account that can hold a variety of investments.

CIBC Investor’s Edge: CIBC offers a Self-Directed RRSP account that can hold a variety of investments.

Please note that while these institutions offer self-directed RRSPs, not all of them may allow for holding your own mortgage within the RRSP. It’s important to check with each institution to understand their specific rules and regulations regarding this.

Also, remember that using your RRSP to finance your own mortgage is a complex strategy and it’s recommended to consult with a financial advisor or tax professional before implementing it.

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Guy Smiley says:

June 19, 2024 at 1:07 am

In my reading of Income Tax Folio S3-F10-C1, a mortgage issued to yourself or a connected person is NOT considered a qualified investment in a self-directed RRSP.

1.33 A debt obligation that is fully secured by a mortgage or hypothec on real or immovable property situated in Canada is a qualified investment for a registered plan, provided the borrower is not a connected person under the plan.

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