Making Your Mortgage Work For You: RRSP and Your Mortgage
Here's a way to help out your retirement savings, and make sure that your home mortgage works for you: be your own lender!
How the heck can you do that, you might wonder. Well, this approach requires you to have enough in assets in your RRSP so that you could buy your own mortgage. You'll need a self-directed RRSP in order to do this, as well as a financial institution to administer the mortgage for you. Unfortunately, you'll end up paying both for this administration as well as private mortgage insurance in order to go this route, but the benefits in a well-balanced RRSP portfolio and a guaranteed return can often balance this out.
This is a particularly good fit if mortgage interest rates are going up. Even though you become your own lender, you are required to charge the going interest rate on your mortgage loan. Therefore, if interest rates are going up, you are paying those higher rates to yourself! So, while others are whining about interest, you can be cheerily watching the cash in your retirement savings go up.
If you use this strategy, you may not want to pay off your mortgage early. After all, the longer you hold your mortgage, the more interest you pay yourself.
This is a very safe investment approach. If anything happens and you actually default, the mortgage insurance that you purchase will pay off the debt to your RRSP. So, you are covered in case of problem. (In fact, you buy insurance on your own mortgage to protect your own RRSP. It's one case when insurance benefits you, no matter how you slice it.) However, don't think that you can miss a payment anytime you want; the administrator of your mortgage will put your mortgage into default if you miss payments.
When thinking about this strategy, be sure to compare the costs of administration across a number of lenders. Also be sure to compare quotes on mortgage insurance.
While the Smith Maneuver can make your mortgage tax deductible, holding your mortgage inside your RRSP does not make it tax deductible. It's simply another investment you can have as part of your RRSP portfolio. But if you want to diversify your RRSP, especially if stocks haven't given you the returns you want, this could give you both some safety and a reasonable return.