I get asked this question a lot, and I always thought the answer was no. Apparently the answer is yes but why would you? The rules are strict and basically there is no big advantage over going to the bank. You have to qualify just like a regular mortgage, and you need CMHC insurance.
An alternative is to borrow someone else’s RRSP. We recently put a 2nd mortgage on a couple of our properties by way of an RRSP mortgage. Olympia Trust will transact the loan up to 100% of the value of your property. The mortgage document has to be done up with a lawyer and your property has to be appraised first.
Using the Arm’s Length Mortgage
It is important to understand that an arm’s length mortgage is simply a loan secured by real estate. It is really no different than any typical mortgage where you lend money and in return have that mortgage registered on title. If the borrower fails to make his payments or return your money, you can sue and go after the property to recover your money. However, what distinguishes an arm’s length mortgage is that it’s registered against property that is owned by someone who is at arm’s length to you. It has to be intended to be an independent, third-party mortgage, and not a financial transaction between two parties that are somehow related.
According to the CRA, someone is arm’s length to you if they’re not related to you by blood, marriage or adoption. So, you would not be considered at arm’s length from your parents, your siblings or your children. You would not be considered arm’s length from your spouse, or common-law partner or his or her parents of children.
Recognizing the Benefits to the Lender
Let’s look at how this strategy will benefit a person who has $30,000, $50,000 or $100,000 or more in his or her RRSP account. First, the investment is secured by a hard asset – real estate. It is not like putting your RRSP’s into the stock market and hoping and praying that the stocks go up. The benefit to using RRSP’s in lending on arm’s length mortgages is that you’re getting a defined interest rate, with a hard asset backing it up.
Another benefit is that generally the borrower pays all the fees associated with setting up the loan.
Benefit #3 is the return. Typically such a 2nd mortgage will pay 10 to 12% returns into your RRSP. We’re talking net returns after all expenses too.
If one of your concerns is that you don’t want to have your money lent out for an extended period of time because you may need your funds, you can solve that challenge by setting a shorter loan term of 6 months or a year. When you see how to do this simple transaction properly, you’ll realize that it is a fantastic strategy to get you the best of both worlds: high interest and low risk.
If you’d like to learn more about this strategy I highly recommend reading Greg Habstritt’s book called “The RRSP Secret”.
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