Mortgage signing

Some homeowners find the idea of holding their mortgage in their RRSP appealing, particularly as interest rates remain relatively high.

While not a commonly used strategy, a “non-arm’s length mortgage” effectively allows someone to lend money to themselves (or a family member) from their RRSP to fund a mortgage on a home. The homeowner makes monthly mortgage payments back to the RRSP, which earns a guaranteed rate of return — the interest on the mortgage.

However, clients interested in such a strategy must consider the significant fees typically associated with setting up a non-arm’s length mortgage, as well as the risk of overexposure to a single asset, said Jason Heath, managing director of Objective Financial Partners Inc. in Markham, Ont.

“If someone has the majority of their net worth in their home equity and a mortgage for the balance of the home value, they don’t have exposure to stocks and bonds and other asset classes,” Heath said.

Finding a financial institution willing to set up the arrangement can be difficult, he said: “It’s not as simple as transferring your mortgage into your RRSP.”

Under the Income Tax Act, registered plans may hold a debt obligation secured by a mortgage on Canadian real estate if the mortgage is administered by an approved lender under the National Housing Act and insured by the Canadian Mortgage and Housing Corporation or a private insurer.

The interest rate charged on the mortgage, and the terms of the mortgage, must reflect normal commercial practices. Typically, the rate on a non-arm’s length mortgage would be the posted rate with no discounting, Heath said.

The mortgage must be administered by the bank in the same manner as a mortgage on property owned by a stranger. Failure to do so may result in adverse tax consequences.

“There would need to be an appraisal, and you would need to be approved for the mortgage, even though you’re lending the money to yourself,” Heath said.

For this reason, non-arm’s length mortgages are not a way “to borrow money you couldn’t otherwise from the bank,” Heath said.

In addition to the typical fees associated with securing a mortgage, the borrower would likely have to pay the bank an annual administration fee for managing the non-arm’s length mortgage and a mortgage insurance premium to the insurer.

According to a CIBC report on RRSPs published in 2023, the mortgage-insurance premium on a non-arm’s length mortgage would range from 0.6% to 4.0% of the amount of the mortgage.

Mortgage payments to the RRSP would not represent new contributions to the plan. Interest payments made to an RRSP would not be tax deductible.

Clients interested in implementing such a strategy would need a large enough RRSP to make it worth the effort and expense, Heath said: “You would never do it with a $50,000 mortgage.”

Heath said people may be attracted to the strategy because they like the idea of holding an investment in their RRSP with a higher rate of return than they feel they might get with other investments at the same risk level.

However, the borrower is likely paying a higher rate of interest on their mortgage than they could have otherwise negotiated.

Heath said he’s not a fan of the strategy: “I’d rather pay a lower rate of interest than the posted rate on my mortgage, and hopefully [earn] a high rate of return on my RRSP anyway.”

However, a non-arm’s length mortgage might be appropriate for someone who was going to invest their RRSP assets in GICs anyway.

“If anyone was going to be enticed to do this, it would be somebody with a conservative risk tolerance [and] somebody with a relatively large RRSP, so that hopefully they had some other stuff in their RRSP beyond their mortgage, [as well as] somebody lucky enough to find a trustee or a custodian who will set this up [on their behalf],” Heath said.

Heath said he suspected most banks have moved away from offering non-arm’s length mortgages because it probably isn’t profitable. Providing a client with a traditional mortgage loan and providing products and advisory services to help manage assets in their RRSP is likely more lucrative than serving as a custodian for a non-arm’s length mortgage for that same client, Heath suggested.

“I wouldn’t be surprised if [most] banks and trust companies said, ‘This isn’t worth it,'” Heath said.