Arm’s-Length Mortgages & Finding Your Approval
When it comes obtaining a mortgage, the down payment is paramount. Most banks and traditional lenders require a down payment of at least 5%. A down payment of 20% is generally required to avoid Mortgage Loan Insurance. In some cases, having 20% or more still is not enough for the banks. In such cases, an Arm’s-Length Mortgage is required. Other more creative options may only require 10% down payment, and perhaps less with adequate collateral security.
Below are 3 ways to Find Your Approval
Option 1 – Arm’s Length Mortgage. This is when a unrelated person provides a mortgage to facilitate the transaction. The person doing the funding can use Registered Funds (RRSPs, LIRA, etc.), Personal Savings, Corporate Monies to fund the mortgage. The two parties frequently never even meet. A broker facilitates the entire process.
Option 3 – Inter-Alia (blanket mortgage). Must already own real estate with significant equity. Additional property is used as security to offset risk and/or lack of down payment. This is a special kind of Arm’s Length Mortgage.
Option 4 – Non-Arm’s Length Loan. This is when a person related to you by blood or marriage is providing you the funds to cover the down payment shortfall. It is highly recommended that you seek Independent Legal Advice and consult with your an accountant before agreeing to this.
Other ways to use your RRSPs
You can also fund an entire mortgage using your RRSP. However, there are some rules that you have to follow when the mortgage is non-arm’s length.
- First, the RRSP(s) in question must have enough available cash to fund the entire mortgage and all closing costs.
- The property has to be owner-occupied primary or vacation residence in Canada.
- The loan-to-value ratio can’t be higher than 90 percent
- The term and rate of the mortgage must fall within 1 percent of a 1-5 year fixed rate that is taken from what Canadian Chartered banks offer.
- Payments must be pre-authorized from a bank account and combine principal and interest within each month.
- If the mortgage needs to be 1st position and fully insured by CHMC.
One benefit of funding your entire mortgage this way is that there is no penalty for prepayment.
If you have had trouble with your bank, get in touch with us. Allow us to review your situation to find your approval.