I was just reading this article today about how to turn your rsp into your mortgage. It’s not the first time I have heard about this, but the article made it seem it is so very easy that I thought I should check the numbers out. My calculations show that if your investment rate is very low (2% below the standard mortgage rates) using your RSP for your mortgage would make sense but otherwise you are not better off using your RSP for your mortgage.
Now the article started off saying that you can guarantee yourself 5% return which I think is completely wrong. While you will be making payments as if you are paying back a mortgage at 5%, your investment will still only be reinvested at the current market rate. Therefore, if the market is offering 3% you will still only be reinvesting your mortgage payments into your RSP at 3%. I suspected that the numbers cited in the article seemed better because no one is taking into consideration that the difference in payments between conventional mortgage at 4% and your RSP mortgage at 5% should be reinvested. What if you did that? As always, please check my math in case I missed something.
- Mortgage amount of $100,000 (I know who has mortgage of $100,000? Just for simplicity sake)
- Mortgage insurance premium of 1.76% as if you had 20% down payment. Therefore standard mortgage amount would be only $100,000 but going w/ what I’m going to call RSP mortgage will have principle of $101,767
- Standard mortgage rate of 4.19% – current rate sale no other discounts, standard you should be able to get 1.5% on average off of posted rates.
- RSP mortgage rate of 5.19% – current posted 5 year rate no discount
- Reinvestment average return of 4%
This is the process of my calculation and results:
- I calculated what the monthly mtg payment would be for either convention mortgage or RSP mortgage amortized over 25 years - $536/month for conventional mtg (principle = $100,000 rate = 4.19%) and $602/mon for RSP mtg (principle = $101,767 rate =5.19%). I will assume that $66/mon difference is re-invested
- I calculated what my normal RSP (not used for mtg) future value will be at the end of 25 years if I reinvested the $66/mon difference in mortgage payments. (PV = -100,000, PMT = -66, rate = 4%/12, N = 300 (25*12)) = $305,309
- I then calculated what my RSP would be is it were to get the regular payments (PV = $0, PMT = -602, rate = 4%/12, N = 300) = $309,989
At this stage it seems that using my RSP for mortgage is marginally better, but if you consider the extra legal cost and annual maintenance fee ($250/yr over 25 years if reinvested at 4% is $10,411) then a conventional mortgage now looks slightly better.
I ran the numbers assuming the reinvestment rate is 3% and in this case the RSP mortgage is $10K better. But if the reinvestment rate is 5% then conventional mortgage options at 40K better. Therefore it would seem only if reinvestment rate is quite low then would it make finacial sense to do it.
Now if you don’t reinvest the difference between the two types of mortgage then the RSP mortgage will seem better even if the reinvestment rate is at 5%. This makes sense since you are simply making yourself pay more mortage through a larger contribution back into your RSP account. The key seems to be making you reinvest the difference in the mortgage payments – it’s a forced saving plan.
Let me know if I missed something logically and think before you act.