There are a handful of clever financial moves out there that you can pull to work existing banking and tax rules. Using your RRSPs to pay down your mortgage is one of them.
It’s known as a self-directed mortgage. It’s not a commonly used trick, but one that might suit you if you’ve got more socked away in retirement savings than you have left on your mortgage.
Secondly, you’ve got to have a great financial team at your bank who will lead you through this somewhat complex manoeuvre. Said team should run the numbers carefully to make sure it makes financial sense for you.
What is a self-directed mortgage?
The RRSP mortgage is often called the self-directed mortgage. The premise is somewhat simple: you take your RRSP money, pay off your mortgage, and then gradually put money back into your RRSPs. Instead of merely borrowing from the bank to pay for a house, you borrow from your own RRSP savings to do the job.
That means you’re paying interest to yourself, not the bank. This is the appeal of the move.
To do a self-directed mortgage, which takes some help from the bank and legal professionals, there are additional costs. Banks usually charge a one-time fee to set up the mortgage of $250 to $300 and annual fees of around $250. As well, there are legal fees of around $1,000 at the start.
This new mortgage must be insured by the Canadian Mortgage and Housing Corporation (CMHC), the idea being that you don’t want to lose all your retirement savings if there’s a problem, so you need coverage. That will run you about 0.5% of the entire mortgage amount.
This is a strictly organized move, and your bank or financial planner can inform you of all the regulations. One is that you must pay the going interest rate to yourself as you pay back your RRSP.
Since you are paying off your RRSP mortgage regularly, with interest, you are guaranteed a good rate of return on your retirement savings. Even if the markets go up and down, you’re paying interest every month — and that’s the mortgage rate, not the very low interest rates that savings account or money market funds pay out.
Mainly, it’s the sea of charges I mentioned earlier. As well, you are locked into this program long term — you can’t liquidate your money or change your mind all of a sudden. Also, some critics note that this move works better in higher interest rate climates: so you’re making a higher fixed rate on your RRSP investment. (However, the market volatility of today might negate this situation: no one is assured of their investment returns on the market right now.)
Like many of these complex financial moves, this is not something to embark on lightly. You need a great financial advisor or bank representative to help you truly understand how this works and to crunch the numbers specific to your situation to be sure it really makes sense for you.