How to loan an RRSP mortgage
If you want tax-deductible debt and a steady stream of returns
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If you want tax-deductible debt and a steady stream of returns
Born and raised in the east-end Orleans area of Ottawa, Tony Miller married an amazing woman, fathered two wonderful children and went to work for the federal government. But when he lost his job in 2013, he was faced with a predicament.
“I had a bit of money to play with from my severance package, but didn’t want to stick it in my RRSP,” says Miller. “I just didn’t like the returns I was getting on the mutual funds and stocks I held.” At the same time he was retraining to become a realtor and liked the idea of property investments, but didn’t relish the idea of getting involved in property management and tenant issues. “I wanted a less hands-on property investment.” So, Miller decided to imitate the banks and start lending out his own RRSP money in the form of a private loan. “It gave me much better returns,” says Miller, who calculates the annualized net return on his private loans at 10%. (Just like the banks, Miller requires full financials from potential borrowers, including credit scores and income verification.)
Miller isn’t the only one. Private lending has grown considerably due, in part, to tighter lending restrictions. According to the federal Department of Finance, the number of private lenders in the nation’s $1.4-trillion mortgage market jumped from 6.7% in 2007 to almost 13% in 2015. Comprised of everyday Canadians, publicly traded companies, investor groups and retirees, these lenders provide options to those turned down by regular banks.
But private lending comes with risk. Also known as Joe Schmo- or shadow-lending, because there is little oversight in this market, private lending comes in many forms—and they’re not all equal. For instance, there are companies that specialize in securitizing the mortgages (a way of turning an illiquid asset into an investable security), as well as groups that focus on packaging cash from hundreds of investors and turning it into developer loans (also known as syndicated mortgages). “These are complex investment vehicles that come with quite a lot of risk,” explains one Toronto-based mortgage broker. There are also products that are often sold by individuals with little or no investment training. These risky private lending investment options are the Canadian equivalent of the U.S. sub-prime market. There are few regulations, lots of money-hungry brokers and aggressive investors chasing returns that are sometimes trumped up. But this doesn’t mean private lending shouldn’t have a strategic place in your financial plan—particularly in the case of RRSP mortgages.
Most RRSPs are held by a deposit-taking institution that offers a variety of investment options. But in a self-directed RRSP, investors are free to choose other types of investment products, such as debt instruments. “In self-directed mortgages, you can use the money saved in your RRSP to fund mortgages,” says London, Ont.-based Certified Financial Planner Gerry Hogenhout.
For instance, if you had $100,000 in your RRSP, you could convert this investment into cash (this won’t trigger a tax hit) that you can then loan out (known as a non-arm’s length mortgage)—either to yourself, a family member a friend, or a stranger.
The reason for doing this is simple—“because it gives you a steady return,” says Hogenhout. Every loan repayment, including the interest portion, goes back into your RRSP. “Even if fees eat up 1% of your returns, you’re still earning more than what you’d get from GIC rates and other forms of fixed-income investments,” he explains.
Better still, these mortgage payments don’t count towards your annual RRSP contribution limits while the mortgage interest paid is considered a tax deduction. That means you not only get a tax deduction each year, while getting a steady return in your RRSP, but you can still make annual tax-sheltered contributions that further help to reduce the annual income tax you pay.
There are strict rules. Any RRSP mortgage must be administered by an approved lender, known as a trustee, under the National Housing Act, and the interest rate you charge, along with all loan conditions, must reflect normal commercial lending practices. At the moment, the posted commercial rate for five-year fixed mortgages hovers around 4.5% (and a 1% reduction, due to fees, still gives you a 3.5% return).
“It’s a good option to consider for those who have large amounts of fixed income and have several hundred thousand dollars in GICs paying a paltry return of 1.5%,” explains Talbot Stevens, author of The Smart Debt Coach. In other words, it’s a strategy that works well for those with good-sized nest eggs who also want more return on the fixed-income portion of their portfolio. “But you have to be willing to put in the effort to do the due diligence,” advises Stevens.
Of course, any advantage offered by an RRSP mortgage should be weighed against the costs and risks involved. In addition to the typical one-time mortgage expenses, most trustees charge annual administration fees and if the mortgage is to you or a family member you also need to pay mortgage-insurance premiums, which typically range from 0.5% to 2.9% of the total mortgage amount (irrespective of how much equity you have in the property). Then there’s the risk. If you lend to family members or to yourself, you need to remember that you can’t be late or miss payments, or you risk foreclosure, initiated by your trustee. If you lend to strangers you take on an entirely different level of risk, one that requires much more due diligence. “No investment comes without risk,” says Miller, “but I don’t lend to people I don’t know.”
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Hi. I’ve been trying to do a $70,000 self directed rrsp mortgage from the TD bank. I moved part of my self directed rrsp to TD bank $240,000. I told them over 6 weeks ago. The TD bank told me last week I could not do this. I was willing to pay my self 5% interest. I have a house $1,000,000 completely paid off as well as 5 acre property now completely paid off. I was hoping to use the rrsp mortgage either to buy the 5 acres or home improvements. Do you know what institutions will give a self directed rrsp mortgage. I realize there is an annual service charge to the institution that administers the mortgage. Thank you
WHO will fund a non-arms length mortgage renewal in BC from an RRSP.
Seems that all of the big lenders, even Olympia Trust won’t look at a non-arms length.
There’s loads of chatter about how this is possible yet roadblocks everywhere
Heather Hirst…did you find an answer? I just spoke with TD on Friday and they told me I cannot do this. I am in a similar situation as you are.
Great article
Who administers arm length mortgages?
was told CWT trust services
TD Waterhouse has stopped doing this since 2021. Does anyone know which bank is still doing this?