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RRSP Mortgage Basics – Part 2: A 5-Step How To Guide

by Andrew C. MacDonald on December 15, 2010

In this second piece on RRSP Mortgages, I will cover the 5 steps involved in setting up a mortgage within your Registered Retirement Savings Plan, which banks you can select as your administrator, and a word of caution to help you steer clear of the most common pitfall when putting this strategy to work. If you haven’t heard of RRSP Mortgages yet, see RRSP Mortgage Basics – Part 1: Pros and Cons to learn why this can be such a great strategy for building long-term wealth.

5 Steps to Setup Your RRSP Mortgage

  1. Create a self-directed RRSP account
    Using a Canadian trust company, you’ll want to set up a self-directed RRSP account where you’ll place your funds to be loaned out. I’ve outlined a few trust companies below which can serve as the administrator for your loan.
  2. Find a borrower
    Most people find this step to be the toughest part of setting up an RRSP mortgage. How do you find a trustworthy party to lend your RRSP funds to? You can advertise in your local newspaper or online, but the best way is through networking. Start by attending your local real estate investment club and you’ll be sure to find plenty of investors looking for money. Make friends with the other members and you’ll be able to get a good handle on who is reputable and who to stay away from. From here you just need to find an investor whose capital requirements match the amount you’d like to loan.
  3. Do your due diligence
    If you’re going to be the bank, then you shouldn’t skip any of the steps that go along with being the bank. After finding a suitable borrower, you’ll need to complete due diligence on both the borrower and the deal. When it comes to the borrower you’ll certainly want to check their credit, run a background check and verify their personal and real estate income just as the bank would. With respect to the deal, you need to verify all of the facts and will want to see documentation of any existing mortgages, leases or other agreements that are in place, check yourself that the property is in a good area and get an appraisal to determine fair market value.
  4. Structure the deal
    Since you are playing the role of the bank, you get more say in what the terms of your deal will be. The loan amount, term, amortization period, interest rate, fixed or variable decision and any other details like upfront fees or prepayment penalties are all yours to determine. Work with your borrower to structure a win-win deal that will make sense for both of you. Remember, the higher the LTV, the higher the interest rate and fees you can charge.
  5. Fund the deal
    Once you’ve setup your self-directed account, found the right borrower, and agreed upon your terms, it’s time to fund the deal. At this point your lawyer and administrator will handle the closing details. Be sure to move the required funds to your self-directed account in advance of closing so they will be ready on the agreed upon date.

Once your deal is funded, your RRSP mortgage investment becomes fairly passive. If a payment is missed, you’ll be notified and may need to get involved. Otherwise, you get to sit back and earn your return while your borrower makes payments to the trust company and decide how to invest the returns that begin to trickle through to your self-directed account.

5 RRSP Mortgage Administrators

The following is a list of trust companies in Canada that will administer RRSP mortgages:

Some companies will also allow for non-arms length borrowers, but this process comes with additional hoops and hurdles as well as increased fees and is generally not worth the hassle.

A Word of Caution

Regardless of which side of the RRSP Mortgage coin you find yourself, due diligence is of utmost importance. The most common pitfall with this strategy is that conflicts can arise when the goals of the two parties are misaligned.

As a real estate investor, you must do your due diligence on the lender, and be sure to disclose everything. By presenting your lender with all of the facts, you allow them to make an informed decision and start your relationship off on the right foot. As long as you are completely honest and make your payments, many lenders will be interested in funding your future deals.

As a lender, you must do your due diligence on both the borrower and property. With all of the facts in hand, price your funds according to the risk. Don’t skimp on checking the facts when it comes to lending your hard earned money, and above all, trust your gut feel on which borrower and property are right for you to work with.

Creative Commons License photo credit: LadyDragonflyCC – Tinsel Time!!!!

Source: 5 Steps to Create Registered Retirement Savings Plan (RRSP) by Julie Broad

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{ 4 comments… read them below or add one }

Riz Jamal September 23, 2011 at 6:13 pm

Hey Andrew this is a great article

I totally appreciate the time you took to write it and the due dilligence part cudo’s
now you know mortgage brokers and investment planners can work together to make this an effortless transaction for investors/lenders they can cut through the red tape by using a reputable and honest mortgage broker who they trust to find potential customers/borrowers and the investment specialist can make it all come together

what are your thoughts on the subject?????

Kind Regards

Riz Jamal

Andrew C. MacDonald September 28, 2011 at 11:43 am

Hi Riz,

Whether with RRSP 2nd mortgages, rent to own investments, or many other strategies, there are countless ways for mortgage brokers to work with investment planners (and investors themselves).

When you find trustworthy professionals to work with, dead deals come to life and everyone wins.

Cheers,
Andrew

Warren July 27, 2012 at 11:22 am

Thank-you for the excellent article Andrew!

I’m currently looking for information about using my locked-in RRSP for financing an income property. The property will be entirely financed by the RRSP.

My understanding is that this would provide a steady fixed income instrument for my RRSP (the mortgage) plus it also allows me to build equity in a income property. This also means:

- the mortgage interest paid to myself is income tax deductible
- as the RRSP mortgage is paid back and equity builds in the property I may use that equity for further investment.

So long term I would be generating a fixed income for my RRSP and purchasing a home through rental. That seems like relatively risk-free investment with decent rate of return.

This almost sounds too good to be true. Am I missing something?

Cheers,

-Warren

Andrew C. MacDonald July 27, 2012 at 2:47 pm

Hi Warren,

What you propose sounds great in theory and if it worked that way I think everyone would be doing it.

However, there are 2 things to note:
1) There are additional obstacles for non-arms length RRSP mortgages
2) I am pretty sure you can’t issue yourself an RRSP mortgage

Best bet is to speak with some of the RRSP mortgage administrators I’ve listed above and see exactly what their guidelines are. As a side note, TD stopped new RRSP 2nd mortgages earlier this year.

Cheers,
Andrew

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