Your investment in a principle residence can provide a number of income tax advantages that can help you to reduce overall taxes and help to increase your net worth.   Various leveraging methods to help you achieve mortgage financing are available.

Mortgage 101

Your basic financial planning should be to arrange the ability to pay off your mortgage quickly.   Request options that allow you the ability to pay down your mortgage faster with the lest restrictions.  Choose mortgage options that allow for extra payments, paying more that the required amounts, lump-sum payments, and/or weekly payments.  After setting it up, strive to pay more than the required amount especially in the first few years when you are paying the most interest and little principle.

Request a rate discount, especially if you have a good credit rating, a record of long term stability, or large investments in the same financial institution.  Most banks will match the best competition’s rate, but it is not uncommon to squeeze an additional discount for being a loyal customer or because they want your business.

Remember that your mortgage is probably one of your biggest financial expenses and is a major financial liability so ensure you are receiving the best terms and rate you can negotiate.  It should demand your special attention and duty because of the potential improvement it can have on your overall financial net worth and circumstance.

Spend enough time on being prepared as it is a significant expenditure.   Be ready to ask your mortgage lender to match the competition or better it.  That means start preparing months before the renewal date so you are ready with your request and to take your business elsewhere if necessary.

Self-direct RRSP Mortgage

There are various scenarios available that you could utilize.  Overall these plans work best on large mortgage amounts only because of the extra cost involved for professional fees and for mortgage insurance.

1. If you have enough cash sitting in your RRSP you should consider using a self-direct RRSP to finance your own mortgage.  The interest rate charged and terms must conform to normal commercial practises.  Your rate of return should be higher than a typical GIC rate of return, but evaluate the addition cost involved to see if it is worth it.   Consider having any fees charge come out from the RRSP account (if you have the room) which makes the fees paid a tax deduction otherwise the fees are paid from after taxed dollars.   Shop around for the best pricing.

2. Alternatively Revenue Canada Agency considers about a half a per cent below the lowest advertised rate as still reasonable, which allows for potentially savings of thousands of dollars in mortgage interest by charging yourself a lower rate than what is offered conventionally.   The trustee in charge of the self-direct mortgage have guidelines on how low they will allow the mortgage rate to be.

3. If you are considering selling your present home to purchase another home and have equity, it can be used to top up any RRSP contribution room available for yourself and/or spouse before you purchase your next home.  The RRSP contributions purchased can be used to off-set future taxable income.  The contributions will ensure large refund cheques which can be collected at your discretion.  Timing may be difficult but if possible arrange to have in place the paper work for a self-direct RRSP ready from the house sale to make available a new mortgage to purchase the new home.  Two sets of fees may be required if you and your spouse each want to set up an RRSP mortgage so choose an administrator that will allow you to combine your RRSP’s into one mortgage plan.

3.  Consider converting an existing RRSP into a mortgage to receive cash for the equity in your home to invest into a business, a rental property, or investments.  The interest paid to your RRSP will be a tax deduction because the mortgage funds are being used to purchase a qualifying investment.

RRSP Home Buyers Plan

If you haven’t own a home in the previous 5 years and have never participated in the RRSP Home Buyer’s Plan you can withdraw $25,000 (each spouse) from your RRSP to purchase a principle residence.

It’s a zero interest loan to yourself in order to achieve home ownership.  The money must be in the RRSP for a minimum of 90 days before it can be withdrawn for the Home Buyers Plan – so plan accordingly.  If you have a down payment for a house deposit it into an RRSP account first in order to receive a larger income tax refund cheque.

Keep in mind this amount must be paid back over 15 years, which is done by buying replacement RRSP’s each year within the RRSP buying season.  If there is a shortfall in the repayment that shortfall is added back into your income.

If you turn 69 any outstanding amounts must be paid back before calendar year end otherwise it must be reported as income on your tax return.  If you die without a spouse any outstanding amounts must be reported as income.  If you cease to be a residence of Canada the amount must be paid back within 60 days or else put back into income for that year.

The RRSP Multiplier

To boost the economic benefit of RRSP contributions you should also contribute the expected income tax refund cheques into additional RRSP purchases.   For example $300 a month at the lowest BC income tax bracket will yield a $738 refund cheque which reinvested into a RRSP will yield an additional refund of $151.00.  If the $151 is reinvested it will yield an additional refund of $31.96, which will yield $6.35, which will yield $1.31 and so on until zero.  When reinvesting each refund cheque into an RRSP purchase it is possible to maximize your RRSP contribution to a higher level at no additional cost to you.

The formula for the RRSP multiplier is $/1-r.  Where $ = expected refund cheque; r = tax bracket rate.  Using our example of a $3,600 RRSP contribution in the 20.5% tax bracket for a $738 refund you could in fact borrow $928.30 to buy an additional RRSP contribution and the refund cheque would pay for it.  Borrow for the additional RRSP contribution and EFILE your tax return to pay back the loan within a few days at a minimal cost but for a maximum RRSP contribution.

When the tax bracket is higher the rate of return is greater.

Tax Free Savings Account

Investment income in this account can be earned tax free towards a down payment.  See blog on Tax Free Savings Accounts to learn able the advantages available.