Below is the article and link...my questions are as follows (I can't see to get my head around it):
1) How does Mortgage and RRSP mix? (if someone can explain the idea below to me in dummy terms...would be appreciated)
2) How does RRSP contribution room come in to play?
May have follow on questions depending on answer.
http://www.theglobeandmail.com/globe...1815416/page2/
Making a return on your mortgage
Now to the question of whether it makes sense to put your mortgage in your RRSP from an investment point of view. If we take all the startup fees mentioned above, we end up with a cost of roughly $1,000 to $2,000 in the first year, assuming a $100,000 mortgage. Essentially, you could have a first-year fee of up to 2 per cent if you decide to pay your mortgage insurance upfront.
The cost looks more attractive in subsequent years, when the $225 annual admin fee works out to a fee of just 0.23 per cent.
These fees tell us that conservative investors earning 2 to 3 per cent in their retirement savings should not find it hard to get a better return from the mortgage-RRSP strategy.
“If you have fixed income in your RRSP and if it’s generating a very low yield, then this may be something worth looking at,” Mr. Tsai said. “The greater the difference, the more economic sense it might make to do this.”
Mr. Wise, the Calgary investment adviser, said the mortgage-RRSP strategy works best if you use the mortgage to replace the bonds and GICs in your portfolio while leaving your holdings in the stock market.
If putting your mortgage in your RRSP leaves you light on equities, take the mortgage payments flowing into your retirement plan and invest them in stocks, funds and so forth. In fact, investing each successive mortgage payment gives you a nice little dollar-cost averaging program.
Making mortgage payments into your retirement plan does not affect your RRSP contribution room. So you can further diversify your retirement savings using the money you annually add to your RRSP, separate from your mortgage.
One of the challenges in putting your mortgage in your RRSP is to find a trustee for the plan. In addition to TD Waterhouse, the online brokerages CIBC Investor’s Edge, RBC Direct Investing, Scotia iTrade and ScotiaMcLeod Direct Investing all allow this. Bank of Montreal says it no longer offers this program. If you have an investment adviser, he or she should be able to find a trust company to hold your mortgage RRSP.
Don’t forget the usual strategizing if you’re putting your mortgage into your RRSP – amortization period, biweekly versus monthly payments and so on. An interesting question arises here: Do you put the priority here on getting your mortgage paid off as quickly as possible, or on building your RRSP?
“If I can get a fixed income investment in my RRSP that will give me 5 per cent, I think I’d want to keep that as long as possible,” Mr. Wise said.
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HOW TO DO IT
Investing your registered retirement savings plan in the mortgage on your home is not for everyone, but it can generate steady returns that beat what bonds and term deposits offer.
Step One
Find a bank, investment dealer, trust company that offers this service; some investment advisers may also be able to help you set this up.
Step Two
Tally up fees – expect to pay a set-up fee, an annual mortgage administration fee, legal fees to set up the RRSP mortgage, mortgage insurance fees and possibly discharge fees if you're breaking your current mortgage.
Step Three
Pick mortgage terms. Expect rules guiding the rate you can use, the mortgage terms available and so forth.
Step Four
Use the money you're paying into your RRSP to diversify your RRSP investments, possibly by making regular purchases of stocks or equity funds and ETFs
WHAT YOU SHOULD KNOW
Four things to keep in mind about investing your retirement savings in your mortgage:
1. You can invest RRIF money in your mortgage, but you must have enough cash on hand to fund the required minimum annual RRIF withdrawal.
2. Some banks will allow you to use RRSP money to buy a residential investment property, while others allow this only for an owner-occupied residence.
3. It may be possible to invest in a mortgage on someone else's property.
4. You'll need mortgage default insurance even though you're lending to yourself and even if you have a lot of equity in your home.
sounds like you're confused with all the numbers.
First thing you should know is that if you plan to buy a house with a 200k mortgage and fund it with your rrsp
u need 200k in your rrsp.
there's the hbp which will allow you to loan 20k to help your purchase but this method says forget that i'm going to hold my entire mortgage in my rrsp and pay myself back.
that's the essential the article goes on to list the pros and cons which you should know.
i would highlight in the article it says that if you have to sell your stocks/bonds/whatever yielding 5% then it's probably not a good idea.
2, it wouldn't affect your contribution room.
The basic idea is that you can loan the money you've put in your RRSP to other people to make a return (interest), i.e., loan it to the bank in a GIC, or via bonds to other companies/governments/etc.
With your mortgage, you borrow money from other people and pay them interest to buy a house.
An RRSP mortgage is a way to lend yourself the money to buy a house from your RRSP. You become both the lender and the borrower, and the interest you pay on the mortgage becomes a return for your RRSP.
If you have enough in your RRSP to lend out to cover your mortgage, then the payments you make on that mortgage are treated as, well, payments on your mortgage. They're not "contributions", so you can still contribute to your RRSP on top of the mortgage repayments. From the mortgage side, it's just like if you were paying the mortgage off to the bank -- you have to make your payments every month. On the RRSP side, it's just like if you loaned the money out to anyone else: you expect to get back a stream of interest and principal repayments.
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