Registered funds eligible for arms-length mortgage investments:
RRSP, RRIF, RESP, LIRA and TFSA.
Are you unhappy with your Registered Retirement Savings Plan (RRSP) investment returns?
Are you considering using your self-directed Plans portfolio to invest in private mortgages backed by Canadian real estate?
With a self-directed account, the RRSP plan becomes the mortgage holder. Each month a fixed income payment goes directly back to your RRSP account – tax free. As long as all payments are directed back to the self-directed RRSP account, the your entire profit is sheltered from tax. This will create a regular source of funds that you can choose to reinvest, without having to take from your savings or pay tax on. When the time comes to collect your RRSP, you will most likely will be in a lower tax category, which means you pay income tax at a much lower level. A trustee approved under the National Housing Act must administer an RRSP mortgage, such as Olympia Trust, TD Waterhouse, Canadian Western Trust, and B2B Trust. It is important to pick the one that will provide service to your satisfaction.
Can the request be funded by more than one RRSP account?
Yes, mortgages can be funded wholly or in part from the annuitant’s RRSP. Thus, if your RRSP is not large enough to fund the entire mortgage, the mortgage could be split between your accounts and other RRSP fund holders.
What type of properties qualify?
You can lend on single-family homes, multi-family properties and commercial real estate.
Besides cash, what other sources can be used to fund mortgages?
The same principles apply to Registered Retirement Income Funds (RRIFs), Locked in Retirement Accounts (LIRAs) and most other registered plans. For more information on your specific situation, please contact our office at 1-866-729-9988.
Are there any CRA rules and laws?
A mortgage, or an interest therein, in respect of real property situated in Canada is a qualified investment for a trust plan. There is no requirement that the mortgage be a first mortgage, second, or third, as long as the plan holder is provided a registrable interest.
CRA rules on RRSP and other registered funds investments:
The Canadian Revenue Agency (CRA) allows a wide range of investments to be held within registered accounts. Most people are familiar with holding stocks or mutual funds, but few realize that investments may also include:
- Bonds and Debentures
- Term deposits and Guaranteed Income Certificates (GICs)
- Equity linked notes
- Rights and warrants
- Covered calls, long calls, puts, and LEAPS
- Gold and silver certificates
- Mortgages secured by real property
Arm’s Length vs. Non-Arm’s Length, what are they?
The term “arm’s length” is used by CRA to refer to how close or distant the borrower/property owner and the lender are in relation to each other. The CRA regulations permit both arm’s length and non-arm’s length mortgages as qualified investments in an RRSP. However the rules differ between the two.
Arm’s Length Mortgage
This is a mortgage that allows RRSP annuitants to use the money from their self-directed RRSP to fund a mortgage to a third party not related to them by blood, marriage or adoption. There is no requirement to have this mortgage insured, and the terms and rates have greater flexibility. Example: Friends, Strangers, Uncles, Cousins.
Non-Arm’s Length Mortgage
A mortgage where the mortgagor (i.e. the borrower who is mortgaging his or her property) is, in fact, the annuitant. In order for a non-arm’s length mortgage to qualify as a valid investment within the self directed RRSP, the mortgage must be insured, and the interest rate and terms must reflect normal, commercial practice. Example: siblings, parents, children.
What are the consequences if Borrower defaults?
If the borrower is unable to make his or her monthly mortgage payments, the financial institution administering the mortgage will place the mortgage in default. It will then attempt to collect the proceeds upon a power of sale of the property. However, there are other avenues available. Please contact us at 1-866-729-9988 for detailed information on the available remedies to investors.
First Mortgage or Second mortgage investments are safer?
A mortgage is a loan secured by a property, where the loan is registered on the title of the property. A first mortgage is the standard mortgage you received from the bank when you buy your home. If you default on your mortgage payments, the bank will try to collect the debt via power-of-sale or foreclosure. A second mortgage is a mortgage in second position, meaning that the mortgagee (lender) is next in line on the property after the bank. The mortgage is secured by registering it on the title, thus the owner cannot sell the property without paying back the mortgage. A second mortgage is more risky than a first mortgage; therefore the interest payments are usually higher than a first mortgage.
For example : A property costs $300,000. Available financing is a mortgage loan covering 80% of value (LTV) or $240,000. The required cash down payment is $60,000. A second mortgage is available from a private individual for an additional $30,000 of value a 90% (LTV), reducing the down payment to $30,000. As long as the cash flow from the property can support the second mortgage payments, this is smart real estate mortgage investing.
Why should I invest in mortgages?
- From a financial planning perspective, a mortgage interest payment is a fixed income payment.
- Investing in mortgages is often less risky than mutual funds and stocks, because you are secured by both the borrower and the property.
- The lender has control over choosing the property and borrower to invest in.
- The lender has the freedom to negotiate the interest rates and terms with the borrower through the mortgage broker.
- An opportunity to invest in real estate without becoming the landlord and running after tenants is a smarter investment than owning the property and everything associated with ownership.
- Earn passive income while staying tax-sheltered.
What if we do not have enough money to fund entire mortgage?
It is common to put together a number of investors who have never met into a group to fund a mortgage. Each investor is individually registered on title for the % of the mortgage they hold. Rise ‘N Shine Homes inc. will only act as a Brokerage and will not manage investor funds or act as an investor’s agent.
How do I find mortgage opportunities to fund in?
Contact Rise ‘N Shine Homes inc. at our Ottawa office: 1-866-729-9988. We work with borrowers and lenders to ensure we can make the perfect match. Ready to get started? Complete our investor form and one of our associates will contact you directly.