Using RRSP Mortgages To Invest - Part 2
In Part 1 of this article, we discussed how you can borrow other people's RRSP money in the form of a mortgage, as well as some of the advantages of doing so. This month we'll discuss some of the requirements of RRSP Mortgage lending, and how to use them in your investing.
There are two types of mortgages that can be held within retirement accounts such as RRSPs and RRIFs:
- Arms length
- Non-arms length
The term ‘arms length’ is used by CRA and refers to how closely or distant the borrower / property owner and the lender are in relation to each other.
For example, for a borrower, the following people are considered:
- Non-arms length – brother, sister, parents, spouse (either common law or by marriage), your own children (including adopted)
- Arms length – friends, strangers, uncles, aunts, cousins
This means that for a mortgage to be classified by CRA as arms length, an individual could borrow mortgage funds from the RRSPs of their friends, strangers, uncles, aunts, and cousins, but not a brother, sister, parent, spouse or child.
For a detailed description of CRA’s definition of ‘arms length’, please refer to interpretation bulletin # IT-419R2 at http://www.cra-arc.gc.ca
All investments within retirement accounts, including arms-length mortgages, must be managed by financial institutions. For RRSP Mortgages, the financial institution acts as a trustee for the account holder and manages the mortgage on the private lender’s behalf.
For example:
- Jane has a self-directed RRSP account with TD Waterhouse
- Joe wants to borrow her RRSP money in the form of a mortgage
- Jane's financial institution acts as her trustee for the transaction
Private RRSP Mortgage lenders are an excellent way to finance a property with little to no hassle, and with terms and conditions favourable to the borrower. Anyone who doesn’t want to deal with banks, has lost their job, or needs down payment money should consider using them to finance property.
The following list is a brief overview of some ways RRSP Mortgages can be used to finance property:
- Buying property - reduce or eliminate the need for bank financing, as a substitute for a down payment, mortgage insurance, or a joint venture partner
- Refinancing - pay for renovations, buy more property, buy out any partners
- Selling property - make your property easy for people to buy with no qualifying mortgages
As with any mortgage financing, great care must be taken to ensure the investor can afford to make the payments as well as, at the end of the term, repay the original amount borrowed.
In addition, investors should also know:
- exactly how mortgages work
- how to structure RRSP Mortgages to their advantage
- what to do when the mortgage term has ended, and
- exactly how to fill out the trustee paperwork
Stay tuned for our upcoming course and seminar which provide step-by-step detailed instructions on how to do all of the above and more!
Note: This article is a brief overview of RRSP Mortgage financing and is not intended as legal or financial advice. Please consult a qualified professional before making any investing or financial decisions.
This article is copyright © 2004-2010 Spirepoint Properties. All rights reserved.
Paul Blacquiere and Joanne Beehler are full time real estate investors and have been investing in Ottawa, Ontario, Canada since 2002. They are owners of Spirepoint Properties, a Canadian real estate investing company dedicated to making real estate investing easy.
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