Real Estate Mortgage and RRSP – Is it a Good Mix?
A lot of people are interested in the option of using their RRSP in order to finance their home purchases. There are two ways by which this is done – through Home Buyers Plan or getting the home mortgage through RRSP. From the asset management standpoint, these options may not be a good idea. In this article, we will explore the consequential risk related to the home purchase and the possible ways that these can be prevented.
Limited Opportunity for Diversification
One the major downside of home investment is that it ties up much of your equity in one single asset. Most financial gurus emphasize the importance of diversification of the investment portfolio in order to smooth out earning potential and reduce the dips and peaks that characterize single asset investments. This is the main reason why it is wise to purchase mutual funds that are indexed. If you take hold of a few of every stock then you won’t have to worry much if one company takes a big hit, so long as there is a consistent uptrend in the market as a whole. The same rule applies to real estate investment. Aside from owning a variety of real estate properties, it is also essential that you purchase a REIT.
Once you make a purchase of a particular real estate property, you are in effect allocating a significant portion of your hard cash as investment on a single asset. Your net worth will be at the mercy of that single property. Once it goes down, your net worth will also take a dive. In general, this is not a sound business proposition, for your investment portfolio is not sufficiently diversified.
Some Great Opportunities in the Horizon
As a general rule, investing in real estate is not really bad. This type of investment is your safety net against inflation. If Canada is hit by double digit inflation, then the bonds and stock market will go on a nosedive. On the other hand, real estate property will not be directly affected by this economic condition and home prices will remain stable.
You will also enjoy substantial tax incentives when you go for real estate investments. For instance, you are exempted from paying capitals gains tax if you earn significant profit from your main residence. These are the major upsides of real estate investment.
Real Estate Investment – Its Impact on your RRSP
However, the big question that you have to answer is whether it is wise to divert the money in your RRSP to your real estate mortgage. In general, it is not a wise business decision. You want to create some semblance of diversity in your investment portfolio. And the potential earnings from your investment in real estate is likely less than your potential earnings if your funds are left in RRSP.
You are in effect degrading the level of diversification of your investment portfolio if you move your funds from your RRSP to your real estate mortgage. This is tantamount to making a bad situation worse. The home value is independent and immune from the dips and peaks in the stock market. There may be some instances where there will be a drop in the home value while stocks will go on an uptrend. Under a tight situation, banks will be forced to require higher down payment. If you have limited options, then you may have to liquidate some of your assets in order to cover the adjustment in the down payment.
This is the main argument why it is essential that we take the route of diversification. This also explains why you must not move your funds from RRSP to your real estate property.
Learn how to sell your own house here: For Sale By Owner.
If you’re looking to buy a home from an FSBO listing check here: FSBO Listings.
Mortgage FAQ:
Question: What Canadian bank is offering the lowest 10 year mortgage rate right now?
Answer: You should go to your bank and sit down with a mortgage specialist so they can work out the best deal for you. Rate shopping can sometimes be a good thing but you really should speak to a specialist so you don’t end up getting yourself stuck in something that changes later, or ends up being something you weren’t expecting. A lot of people are choosing to deal with mortgage brokers now as well because they can usually get much better deals than an actual bank branch can offer you (because they make commitments to banks and get deals from them).
But truly, the best thing you can do for yourself is go to YOUR bank and have a conversation with them. Tell them you’re looking for a mortgage, they want your business, they may be able to cut their rate to keep your business.
Question: Transferring a mortgage to the States?
I would like to know if there is a way to transfer a Canadian mortgage onto a us mortgage? Therefore the US bank will pay off my mortgage here and just add it on to the US mortgage. I don’t know if this is possible but you never know.
Answer: No. Mortgages and banking in Canada are subject to different regulations than the US. You will have to speak you your US lender about increasing your mortgage there, and then they can send a bank draft to pay out the mortgage here.
Question: Can you get out of a Canadian Mortgage?
My friend in her 20′s signed a 40-year mortgage with her mother for a home; the problem is she has a freeloading and abusive brother (along with his wife) who live at the home as well but refuse to help pay for it. This is causing her tremendous stress and grief. Her mother doesn’t want to sell, can she get her name off the mortgage? Who should she talk to?
Answer: No, she cannot get her name off the mortgage. Her mother would have to go to the lender and refinance the mortgage in her name alone based on her income alone.
Why does the mother allow the brother & sister-in-law to live there without contributing to the mortgage payment and household expenses? And how can a mother allow one child to abuse another? The mother holds the key to rectifying matters here. The daughter is pretty powerless in this dysfunctional situation since she took on the legal obligation of the mortgage.
Question: If you get a debt consolidation loan does it count against you when you apply for a mortgage later?
Answer: It significantly lowers your credit score and shows on the report that it is being handled by a credit counseling agency. You’d think they’d be glad you are paying your debt instead of filing for bankruptcy, but it does count against you in a major way.
Question: How are Canadian mortgages calculated? 3 times your salary?
Answer: The 3 times your salary is only a rule of thumb and a lot more has to do with how much money you have coming in vs. going out (aka debt ratio).
Question: Can a Canadian own or buy property in USA? How can one apply for mortgage in USA?
Can foreclosure homes in USA be purchased by Canadians?
Answer: Yes. As for the loan you apply with a lender providing proof you can afford it. A realtor in the US can help you.
Question: Are you able to add your car loan and school loan to a mortgage?
Answer: I don’t understand exactly what you are talking about. If you are refinancing your home and your home has equity in it then you can take out the equity to pay these other loans. You also can take a second mortgage on your home and use the total value of your home to pay other debts. You will then have two house payments. But you will be free from the other two loans.
Question: Financing property located in US with Canadian bank?
I am looking to buy a property in the US. However I want to mortgage if I can, with a Canadian financial institution because they’re just more regulated and safe than American banks.
Answer: TD has a lot of branches in the US now. However, you do not have to be nearly as concerned with how well the bank is run. After all, it’s not that the bank has YOUR money, it’s that YOU have the BANK’s money. I’d worry most about the interest rate.