Real estate prices in Canada: investment or debt?
I also worry that people may have too much confidence that real estate prices will continue to grow at high rates in the future. Given you are in Alberta, Yvonne, you probably have a better sense than other readers in other parts of the country that real estate prices do not always go up. So, this next warning is broad rather than directed at you.
For many reasons, it is unlikely that real estate prices will rise as much in the next 10 years as they have in the past 10 years in some Canadian cities. That is not to say real estate is a bad investment, but it is to say that real estate may not be such a great investment that you should raid your registered retirement savings plan (RRSP) or do everything you can to buy a second property. If real estate prices rise at a modest rate, which may be the most likely long-term scenario given how high prices are in some cities right now, a rental property may provide a comparable return to a balanced investment portfolio.
The risks of a rental property mortgage in an RRSP
If the only way someone can buy a rental property is to use their RRSP, they should also consider the risk of putting too many eggs in one basket. Rental real estate can be part of a diversified portfolio for someone who has other investments in stocks and bonds, but going all-in on real estate has risks.
Do banks provide mortgages in RRSPs?
On to your question about using your RRSP to fund a mortgage or rental property purchase, Yvonne. One of your biggest challenges will be finding a bank, credit union or trust company that will let you hold your mortgage in your RRSP. I understand this is more difficult to do now than it was in the past, even though a mortgage is a permitted RRSP investment, according to the Canada Revenue Agency (CRA).
The same qualification requirements as a regular mortgage will apply, and there will be additional fees for setting up and then administering the mortgage annually in your RRSP. The interest rate will be the posted rate, not the discounted rate most mortgage borrowers end up with when they borrow.
Interest rates and mortgages
This high interest rate may seem appealing at first, because it results in a high guaranteed rate of return for your RRSP. But it may ultimately work against you, because you end up paying the high interest rate—albeit to yourself and your RRSP—when you could have otherwise borrowed for less.
As an example, Yvonne, you might transfer your mortgage to your RRSP and establish a 7% interest rate. Your RRSP will earn 7% but, at the same time, you are borrowing at 5% as well. It could be more advantageous to borrow at current 5% discounted mortgage rates and invest in something else in your RRSP at a 7% return over the long run. You could have the same return for your RRSP, but pay less interest by borrowing from the bank instead of yourself.
Another consideration is that many people do not have enough money in their RRSP to transfer their entire mortgage into it. So, they may only be able to have part of their mortgage in their RRSP.
Jason Heath, CFP
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