Look at fi­nanc­ing a mort­gage with your rrSp

Metro Canada (Calgary) - - SPECIAL REPORT: MORTGAGES - Erik Hein­rich

Robert, 61, has a large in­vest­ment port­fo­lio in his reg­is­tered re­tire­ment sav­ings plan (RRSP). He’s very knowl­edge­able in real es­tate and has been in­vest­ing part of his re­tire­ment sav­ings in mort­gages for the last 20 years. Through a mort­gage agent he learned that a bor­rower needed $50,000 to pay his prop­erty tax ar­rears, buy a new truck for his busi­ness and do some mi­nor re­pairs to his home.

The bor­rower was not able to ob­tain a bank loan be­cause he had not filed his tax re­turns in sev­eral years and had some fairly se­ri­ous credit is­sues. But his house was ap­praised at $275,000, which meant Robert would be lend­ing him less than 20 per cent of its ap­praised value.

He of­fered a one year mort­gage at 7.5 per cent and charged a $1,000 lender fee, bring­ing his to­tal re­turn for the term of the loan to a hand­some 9.5 per cent. In the mean­time the bor­rower was able to get his taxes up to date and clean up some of his old credit is­sues. At the end of the year, he re­paid Robert the loan plus in­ter­est, and was able to se­cure a re­place­ment mort­gage at a much lower rate from a credit union.

Ev­ery­one walked away happy thanks to a lit­tle known fact.

“An op­tion for RRSP own­ers is to in­vest in a mort­gage granted at arm’s length to a third party,” says James Robin­son, a mort­gage agent and owner of a Do­min­ion Lend­ing Cen­tres fran­chise.

First you will need to have enough as­sets in your RRSP to con­vert into cash, and you will need a self-di­rected RRSP that gives you more in­vest­ment free­dom and con­trol. Some RRSP ac­counts only al­low for in­vest­ing in mu­tual funds and GICs.

Third party mort­gages tend to be higher risk loans to in­di­vid­u­als who can­not qual­ify for fi­nanc­ing from tra­di­tional chan­nels. Higher risk means much higher rates of in­ter­est charged by pri­vate lenders.

Rates and fees vary de­pend­ing on cir­cum­stances, in­clud­ing the type of prop­erty be­ing se­cured, the in­come and credit his­tory of the bor­rower and the loan-to­value ra­tio (which is the value of the mort­gage com­pared to the prop­erty’s ap­praised value).

Typ­i­cally, pri­vate first mort­gages range from 6 to 10 per cent, sec­ond mort­gages 8 to 14 per cent. For the in­vestor, the ben­e­fit is a much higher rate of re­turn com­pared to more tra­di­tional in­ter­est bear­ing in­vest­ments such as GICs. But this needs to be weighed against the risk of this type of lend­ing.

“Bor­row­ers who can­not qual­ify for an in­sti­tu­tional mort­gage due to in­come or credit chal­lenges are more likely to de­fault on pay­ments, which could re­sult in the in­vestor los­ing money,” says Robin­son. “A good mort­gage bro­ker will en­sure the facts about the bor­rower, and prop­erty be­ing se­cured, are fully dis­closed to al­low the in­vestor to make an in­formed de­ci­sion.”

The other op­tion is to use your RRSP to fi­nance the pur­chase of your own home or a ren­tal prop­erty. But it re­ally only makes sense if your RRSP is in­vested in fixed in­come se­cu­ri­ties like GICs pay­ing a lower rate of in­ter­est than a mort­gage of a sim­i­lar length would charge. Un­der these cir­cum­stances you can elim­i­nate the spread, or profit mar­gin a bank makes in lend­ing you a mort­gage, by bor­row­ing from your­self and re­pay­ing your­self.

Un­der Cana­dian law you are re­quired to pur­chase de­fault in­sur­ance to pro­tect your RRSP if you de­fault on your mort­gage. Re­cent changes in mort­gage rules now also re­quire that the home be­ing pur­chased is worth less than $1 mil­lion. “In my 29-year ca­reer in the mort­gage in­dus­try, I have only had half a dozen clients even ask about this pro­gram, and only a cou­ple that de­cided to pro­ceed,” says Robin­son.

Jon nicholls

James Robin­son, a mort­gage agent, has only seen half a dozen clients in­quire about us­ing an RRsP to fi­nance a mort­gage in his al­most 30 year ca­reer.

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