I'm addled. You're withdrawing money from your own Registered Retirement Savings Plan(RRSP), and you must repay it. You're not using the approved lender's money at all!
So why must you pay interest to borrow your own money?
Why is the bank using the "posted rate — not the discounted rate that most of us are accustomed to paying"?
Tax Planning for You and Your Family 2019 by KPMG. p 24.
It is even possible for you to arrange for your RRSP to hold your own mortgage—in other words, you put funds into your RRSP, receive a tax deduction, and lend the funds to yourself. This is not easy to do, however; the mortgage must be federally insured, and various other restrictions apply.
Investing in your own mortgage may make you feel good, but does not always make sense financially. Since the investment must be at the market rate, you may be no better off depending on the size of the mortgage, once all fees (legal, insurance, appraisal, etc.) are taken into account. As a rule of thumb, to be a worthwhile investment, the mortgage’s principal should be in the $50,000 to $100,000 range with a term of at least five years. Alternatively if you don’t have that much cash in your RRSP, some financial institutions offer a program through which the mortgage is “shared” between your RRSP and your institution. You should also consider whether holding a mortgage in your RRSP is consistent with your overall investment strategy.
Here’s How It Works
Let’s say you have $100,000 in your RRSP and you need $50,000 to buy (or build) your home, or even finance an investment property. You can borrow the money from your RRSP, but the transaction must be made through a bank, broker, or licensed lender. You’ll have to meet the bank lending policies (including, but not limited to, income verification, credit check, and purchase agreement). The lump sum will be borrowed and applied to your mortgage, and just like a regular mortgage a repayment schedule will be set up.
Keep in mind, the interest rate has to be the same as the posted rate at the bank, but like any mortgage, you can shop around for different rates from different lenders. Also, this is still a mortgage, and even though you own the mortgage you can’t be late or miss payments, or you risk foreclosure.
If someone wants to hold their mortgage in their RRSP, the first step is to find an institution that will allow you to do so. Your RRSP with your investment adviser or your bank is likely not an option. You will need a self-directed RRSP from an institution like Olympia Trust, B2B Bank, Canadian Western Trust or a handful of other trust companies or banks.
You will have to undergo the same income verification requirements and approval processes as you would with a regular mortgage. So holding your mortgage in your RRSP is not a way to borrow more money than you would otherwise be able to borrow conventionally.
The applicable interest rate will be the posted rate — not the discounted rate that most of us are accustomed to paying. This means more interest on your mortgage payments, but that is offset by high interest income for your RRSP.