5 Steps to Create Registered Retirement Savings Plan (RRSP) Mortgages

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Tired of just hoping your retirement savings won’t drop in your investments? Want some level of assurance that your money will grow in your retirement savings account? Do you want to enjoy the kind of returns a bank does? Want your retirement savings secured by a hard asset?  If you answered yes to any or all of these questions then what I’ve got for you today should get you excited!

If you’re reading this wondering what the heck an Registered Retirement Savings Plan (RRSP) is, then you’re not from Canada. And, if you’re not from Canada, what I am about to say is only going to be moderately helpful. I believe the steps are similar for U.S. folks wanting to offer a mortgage from their IRA but I don’t personally know for sure.

What I am going to share with you, on a very high level, is what we’ve learned about RRSP mortgages this year as we put together funds from four different arms length self directed RRSP accounts to borrow as a mortgage on a rental property we own. Basically, we found someone with about $30,000 in his RRSP account that was willing to round up some other people he knew with funds in their RRSP accounts to create a mortgage of $100,000 that we could use to put a second mortgage on a property we have owned for a long time.

This enabled us to free up some much needed capital for repairs, purchases, and some corporate restructuring we were doing within our family corporation. For the RRSP lenders it created an opportunity to make 11% on their money each year, backed by an asset with a lot of equity in it.

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So, what do you do to create a mortgage from your RRSPs?

  1. Move your money. You don’t move your money OUT of your RRSP account. That will trigger some big tax consequences. What you want to do is create a self directed RRSP account and move money from your managed RRSP account into the new self directed account. This needs to be with an institution that will allow you to hold arm’s length mortgages. We have worked with Olympia Trust but there are others.
  2. Find a borrower. Head on out to your local real estate investing club. I talked about how important it is be to be involved in your local clubs, and finding folks who will make great borrowers is as simple as putting the word out at your local club.
  3. Review the deal. If something goes wrong and the borrower stops making payments you can foreclose on the property. Given that you have that remedy, it makes this investment much less risky than investing in a mutual fund or a stock where you have no recourse if things go wrong. That said, you want to ensure there is enough equity in the property that you will recover your investment and then some. To do this have an appraisal done and review a recent mortgage statement to confirm the outstanding balance on the first mortgage if there is one to ensure there is plenty of equity in the property (personally I wouldn’t loan past 80% of the property value … at least not without some up front fees and a higher interest rate to amply compensate me for the additional risk). I also would investigate the area the property is located in and the rents it would get. If it’s a deal I wouldn’t ever invest in myself I am not going to loan money on it either. Finally, take a look at the borrower. What’s their experience and track record with similar investments? How is their credit?
  4. Settle on terms. Once you know what you’re getting into, you can settle on the terms of the deal. What interest rate do you need to earn? What payment terms do you want? What does your borrower need? Come to an agreement and have a lawyer draft up the mortgage document that will be registered on title. You’ll need all the details with regards to who pays what fees, what those fees are, and the payment schedule.
  5. Fund the deal and sit back while your money grows. At this point it’s mostly the trust company and your lawyer that will take care of these details. After the mortgage is funded you basically wait while your money grows. Payments will be made based on the schedule you’ve agreed to, and will be put into your self directed RRSP account. If, for some reason, you do not receive a scheduled payment, you’ll be notified and can take action if necessary.

It’s a great way to have an investment secured by a real hard asset. An asset that you can drive by if you really feel the need to check up on your money. The payments go straight into your account so you don’t have to do anything once the papers are signed. You really can sit back and relax. It’s low stress, lower risk and often higher return than any other RRSP investment option you can find out there.

Image Credit: © Bert Folsom | Dreamstime.com

About Author

Buy and hold real estate investing in Canada since 2001, Julie Broad is now a full time real estate investor and investing educator.

5 Comments

  1. Hey Julie,

    A great article for us fellow Canadian Real Estate Investors!

    How have you found your dealings with Olympia Trust?

    On the topic of RRSP mortgages, I have been doing some research this year on which F.I.s in Canada will allow a RRSP non arms length mortgage.

    I have discovered that TD Waterhouse is the only Self Directed RRSP administrator that will allow RRSP non arms length mortgages. However, as part of this, you have to pay a CMHC premium in order to mitigate the ‘increased’ risk of the non-arms length mortgage.

    The advantage I see in RRSP non arms length mortgages is that related people will be able to lend their RRSP funds to one another.

    I can’t seem to find anyone who has done a RRSP non arms length mortgage through Waterhouse.

    I would be most interested to hear from someone who has done this…

    Julie, If you every come across anyone that falls into this category, please let me know.

    All the best,
    Neil.

  2. Hey Julie,

    Nice to see you here also…it’s perfect timing for this post as I JUST raised closed to $300k for the same thing with more on the way…thankfully the ‘crash’ of 2008/09 has opened so many people’s eyes that mortgage investing with their RRSP is no longer so far fetched. The key is to educate as best as possible creating a win-win for everyone.

    My last post at http://engagedinvestor.ca/?p=296#more-296 touches on how the financial industry is out in full force now looking for RRSP contributions. Let me know what your thoughts are.

  3. Hey Neil,

    Dave writing you (Julie’s other half). Thanks for you comments about her post! To answer your questions:
    1 – Olympia Trust are great to work with, in my experience.
    2 – My understanding is Laurentien Bank and Cdn Western Trust will also do non-arm’s length mortgages with the CMHC fee of course.
    3 – Non-arm’s length RRSP mortgages are quite rare in my experience. The reason being is there are so many rules, guidelines, fees, obstacles to doing them that few people spend their time trying to use them.

    You may be better off getting your relatives (1st line relatives – Parents, children, siblings, spouse’s parents, spouse’s siblings) to invest their RRSP funds with someone you can recommend to them rather than jumping through all the hoops that the government and CMHC make you jump through just to do non-arm’s length. Yes, that doesn’t help you invest with their money but if you can help them to get a solid return on their money backed by a real, tangible asset like real estate than that in and of itself could be helpful. In turn, down the road, perhaps the Real Estate Investor that works with your family and borrows from them (that you recommended your family lend to) may have family themselves that might want to invest with you! Of course, you can’t do it at the same time like an exchange as the government frowns upon that. But down the road, something positive may come from someone you helped!

    Finally, you may have relatives like aunts, uncles, cousins, nephews, nieces that do want to invest their RRSP funds with you. They are considered arm’s length (unlike your first line of relatives) so you can avoid all the CMHC stuff by borrowing from those relatives!

    Hope this helps and good luck!

    Dave

  4. Hi Dave,

    Thanks for those insights. To your point, I too have found very few people that have done an RRSP second as a non-arms length and with a family member. The level of complication in doing one of these is quite high, and it seems that the cost-benefit just does not make sense.

    I was in touch with Canadian Western Trust earlier this year and B2B Trust, which I believe is associated with Laurentien Bank.

    Thanks again for the tips!

    Talk to you soon!

    Neil.

  5. Hey Neil,

    Yes, B2B is associated with Laurentien. I haven’t personally worked with them, but I think they would be good. I have some private lenders (with RRSP’s) that have investments with Laurentien and they will likely lend their RRSP’s through B2B so we’ll see if that company is as efficient and easy to work with as Olympia Trust!

    Cheers,
    Dave

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