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RRSP Mortgage Basics – Part 1: Pros and Cons

by Andrew C. MacDonald on December 8, 2010

Many people are completely unfamiliar with the idea of RRSP mortgages, so why not shed some light on the subject?

The bottom line is that RRSP mortgages are a great tool for both borrowers and lenders to create wealth. The ability lend RRSP funds in the form of mortgages provides a new source of capital for investors, and offers a safe and stable investment for RRSP holders. Regardless of which side of the equation you’re on, lender or borrower, this great tool can help you build your nest egg faster.

For Part 1 of this 3 part series, let’s begin by examining a few of the pros and cons of RRSP Mortgages.

3 RRSP Mortgage Benefits

  1. Stability – RRSP mortgages offer excellent security since they are backed by real property. They also offer fixed returns (depending on how they are structured) which make for a very stable investment.
  2. Returns – For such a steady investment, RRSP mortgages provide excellent returns to the investor. Rates of 8-12% for RRSP 2nd mortgages are not uncommon.
  3. Tax Advantages – Combine excellent stability and returns with tax deferred growth, and RRSP mortgages begin to really look like a winning strategy. You get a tax break break going in, and your money works hard on a tax deferred basis until withdrawal.

3 RRSP Mortgage Drawbacks

  1. Liquidity – One key drawback of RRSP mortgages are that they are not very liquid. Typically they are set up for a set period of time (usually 5 years or more). Given the nature of an RRSP, this is of little concern since the purpose of your account is to facilitate long-term wealth.
  2. Fees – Another downside to RRSP mortgages are the fees charged by the loan administrator. While these may be a couple hundred dollars a year, consider these fees relative to the commissions you’d pay to buy and sell stocks and bonds in your portfolio and see which option would built your nest egg quickest.
  3. Effort – The single largest hurdle to RRSP mortgage investing is the effort required. Finding an appropriate borrower, completing your due diligence, and setting up this investment need more involvement than your typical RRSP investment.

As you can see, the pros usually outweigh the cons with RRSP Mortgages and this strategy can be a great retirement vehicle. Next week I’ll share more details about the process of setting up and managing an RRSP Mortgage and list some administrators who can help you put this strategy to work in real life in RRSP Mortgage Basics – Part 2: A 5-Step How To Guide.

Creative Commons License photo credit: RambergMediaImages

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