In Part 1 of this article, I 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. In this part, I’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 (www.cra-arc.gc.ca) definition of arms length, please refer to Income Tax Folio # S1-F5-C1 at http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f5/s1-f5-c1-eng.html.
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 lenders behalf.
- 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 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 repay the original amount borrowed at the end of the term.
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
If you’re interested in learning more about RRSP Mortgages, check out my home study course with step-by-step detailed instructions on how to do all of the above and more.
Creative Financing Using
Discover how to use other people’s
RRSPs, RRIFs, LIRAs, RESPs and TFSAs
to finance real estate.