Should You Put Your Mortgage in an RRSP?

Holding a mortgage inside an RRSP

People often ask about buying the home they plan to retire to and renting it out until they move. That strategy can work, but I urge caution. A house you dream of living in may not make the best rental. Properties that rent easily are often near transit, jobs and amenities, while a retirement home might be more rural, quieter or chosen for other personal reasons that don’t appeal to tenants.

Also consider how your needs might change before retirement. Children may relocate, health needs may require being nearer hospitals, or you might choose to travel and prefer a condo over a house. These unforeseeable changes can make long-term planning for a specific retirement property difficult.

Real estate prices in Canada: investment or debt?

It’s important not to assume real estate prices will continue to climb at the same high rates seen in recent years. Living in Alberta gives you firsthand experience that housing markets can stagnate or decline. For that reason, don’t feel pressured to raid your registered retirement savings plan (RRSP) or stretch yourself financially just to buy a second property.

If housing appreciation slows to a more modest pace over the next decade, a rental property could deliver returns similar to a balanced portfolio of stocks and bonds. That doesn’t mean real estate is a poor investment, but it does mean you should weigh the trade-offs before diverting retirement savings into property.

The risks of a rental property mortgage in an RRSP

If the only way you can afford a rental is by tapping your RRSP, be mindful of concentration risk. Rental property can be a useful part of a diversified portfolio, but placing too much of your net worth into a single asset class — especially an illiquid one like real estate — increases vulnerability to market downturns, vacancies, maintenance costs and unexpected expenses.

Do banks provide mortgages in RRSPs?

Regarding your question about using RRSP funds to fund a mortgage or to hold a mortgage inside an RRSP: while a mortgage is technically a permitted RRSP investment under Canada Revenue Agency rules, in practice it’s difficult to find financial institutions willing to administer mortgages inside RRSPs. Qualification standards are similar to a regular mortgage, and custodial and annual administration fees usually apply.

Interest rates on mortgages held in an RRSP are usually the posted rate, not the discounted rates many borrowers receive. That higher internal rate can make it seem attractive because your RRSP earns the interest, but you effectively pay that higher cost to yourself instead of borrowing at a lower market rate from a bank.

Interest rates and mortgages

For example, if you move your mortgage into an RRSP and the RRSP loan carries a 7% rate, your plan’s assets will earn 7%. But if you could borrow from a lender at 5% and invest your RRSP funds elsewhere to earn 7%, you would likely be better off. You’d achieve the same investment return while paying less interest overall by borrowing externally rather than paying a higher internal rate.

Many people also lack sufficient RRSP balances to transfer an entire mortgage into the plan, leaving only a portion inside and complicating the arrangement further.

You cannot use RRSP funds directly to buy a rental property in the sense of making the plan own the property for you, although you might be able to hold a mortgage inside an RRSP if you find a willing administrator. In practice, such solutions are rare and difficult to arrange.

If you want RRSP exposure to real estate without holding property directly, you can invest in publicly traded real estate investment trusts (REITs) or certain private REITs inside your RRSP. Even so, maintain diversification and be mindful of fees, liquidity and concentration risk.

Finally, withdrawing money from your RRSP to fund a down payment is usually costly. RRSP withdrawals are fully taxable and, depending on your income and province, a substantial portion of the withdrawal could be taxed away.

Finding a financial institution to hold a mortgage inside an RRSP

In short, Yvonne, first decide whether buying the home you imagine retiring to and renting it out in the interim truly suits your goals. You may be better off waiting to choose where to retire until you’re ready, or buying a separate property that’s targeted for rental income. While it is technically possible to hold a mortgage within an RRSP, the practical obstacles, fees and opportunity costs mean it’s not usually the best strategy for most Canadians—even if you locate a financial institution willing to facilitate it.

Read more about investing and mortgages:

• Contribute to RRSP or pay off mortgage?
• Should you accelerate your mortgage payments—or invest?
• Should you hold your mortgage inside your RRSP?
• Marriage or mortgage: Which is the better investment?