Pay yourself?

After his wife was taken five years ago, life turned. “I had to load up on some debt to settle her estate,” says Shredder, “and to stay in the dream retirement home that we had built in Bunnypatch.” Part of that needed adjustment was putting a rental unit over the garage.

Now, at 67, he’s still adjusting. “I’m thinking of converting the basement into living quarters for myself, rent out main floor…more income which is always nice when retired…take off to Thailand for winters,” he says. And he’s also mulling over his investments and debt.

That led to the question he sent me: “I’d like to combine my mortgage ($200K) and line of credit ($45K) into a single mortgage inside my self-directed RRSP. Pay myself, with tax deducted on the rental income part etc… But what happens when RRSP turns into RRIF? Do I still make payments to myself?”

Yes, you can carry a mortgage on your house (or another property) inside an RRSP. Then, yes, you make mortgage payments to yourself. It’s stable, low-risk and predictable with a passable rate of return. Besides, it feels so much better than forking over payments to TNL@TB, regardless of how dreamy she is.

But does it make sense? And what about hitting 71 when, like a magic pumpkin, the retirement plan turns into an income fund?

A few facts to start.

The law allows holding a mortgage inside either an RRSP or a RRIF. So that question is answered. Payments continue to service the loan, in either account. (These are mortgage payments, of course, not contributions – so they cannot be used as tax deductions.)

But it’s not all simple. Or cheap.

The RRSP mortgage must be administered by a third-party, arms-length entity that’s an approved lender under the National Housing Act (like a bank – but good luck trying to find one that will do it). Also, the mortgage itself, regardless of size or your circumstances, must be insured by CMHC. That costs.

The interest rate on your RRSP or RRIF mortgage must be similar to current market rates. In other words, you can’t give yourself a 0.25% loan – nor would you want to. The point of having this in place is not only to better control debt, but to continue growing your retirement funds. So you really want the highest possible rate, not the lowest.

You can’t have a 50-year amortization or a 20-year term, either. The loan, by law, must be administered in the same way as it would be commercially. Even in the case of default. So if you stopped making payments to your own loan inside your own RRSP or RRIF, the arms-length admin is obligated to take action, maybe forcing foreclosure or power-of-sale proceedings. Seriously.

As mentioned above, this is not cheap to set up. The administrator will want to be paid. There are the CHMC mortgage insurance fees to hand over. Also plan for an appraisal of the property, plus mortgage application fees. Of course, the lawyer has to be financed as well (no, you can’t avoid hiring one).

Now we get to the real impediment for many people. You must have cash (or liquid assets to sell) within your RRSP or RRIF equal to the size of the mortgage that’s going to be ‘moved’ into that account.

After all, this is just like buying any other kind of investment for the retirement plan. You need money to obtain an asset that will grow inside it. In this case, Shredder better have at least $250,000 in cash, or cashable stuff, already inside his RRSP in order to set the thing up. And a quarter million in accumulated room doesn’t cut it. This takes actual money.

So there are many reasons why – for many people – this is a dumb idea. It’s important not to confuse financing a piece of real estate with financing your retirement years. These days mortgages are sinking into the 3% range, and inflation is edging up towards the same level. So setting up an RRSP mortgage smacks of buying a 1% GIC for your retirement account – making zero long-term sense. You’d be far better off with equity-based ETFs and (of course) a B&D portfolio churning out 6-7% for decades. (BTW, no write-off for rental mortgage interest is permitted inside the retirement plan.)

Remember that a mortgage within an RRSP is akin to a bond, representing the fixed-income portion of a balanced portfolio. Yes, you want some of that. But not too much – as it will drag on performance, and put more KD in your diet later in life.

Plus, a RRSP mortgage is not liquid, like an ETF. It’s debt. You can’t carve off a hunk and use it for living expenses. Also bear in mind that when the RRIF kicks in (71) your account must throw off enough cash to make minimum payments. But mortgages require money for servicing, and pay none out.

There are more considerations, but hopefully this gives Shredder some basics to work with. The bottom line is that a sexy pay-it-to-yourself sheltered home loan may be a loser.

And speaking of that, Shredder, man, seriously? You want to live in the basement of your marital dream home while rogue tenants trot overhead?

Pretty sure she’d say that’s the last place you should be.

Turn the page.

About the picture: “This is Beau on his first day home and his most recent portrait,” writes Courtney. “He turns one next week! I had to include two, he’s just too cute not to! Thanks for all of the amazing advice over the years.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.

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Source: https://www.greaterfool.ca/2025/03/23/pay-yourself/