RRSP Mortgage Rules

RRSP Mortgage Rules

Using your RRSP to Invest in Mortgages

One complaint that many Canadians have about their Registered Retirement Savings Plans (RRSPs) is the low returns on their investment. Many portfolios are heavily invested in vehicles that are backed by the government or that have guaranteed returns, which means that the risk — and the rate of income — are both low.

Self directed rrsp mortgage

One way in which you can boost those returns without exposing your portfolio to the whims of the stock and commodities markets is to use your self directed RRSP portfolio to place funds in private mortgages that use real estate as their security.

Using RRSP to Invest in Mortgages
One complaint that many people have about their Registered Retirement Savings Plan (RRSP) portfolios is the relatively low rate of return. One strategy that many are considering is using self-directed funds from RRSP to invest in mortgages. These are private loaned with Canadian real estate serving as the collateral.

RRSP Mortgage Investment Property

Real estate is one of the more secure forms of investment out there, and RRSP investments in mortgage funds allow you to diversify your risk so that your returns stay well above average.

How do RRSP Mortgage Investments work?

When you have a self-directed RRSP account, the plan is the actual mortgage holder. This means that you’re not sitting there with the paper if the borrower(s) default. Instead of you funding one mortgage, you invest in a fund that funds many mortgages, spreading the risk out more evenly. Every month, your RRSP gets a fixed payment, tax-free. As long as you direct all of your payments back to your self-directed account, your whole profit remains tax-free. This means that you have a reliable source of income for reinvestment without having to remove from your savings or risk a tax liability. When you are eligible to collect RRSP funds, your tax bracket is likely to be much lower, which means that when you are taxed on your distributions, your tax bill will be much lower at that time. Only a trustee with National Housing Act approval has permission to administer a mortgage for RRSP funds.

RRSP mortgage canada

Today, Olympia Trust, Canadian Western Trust, Td Waterhouse, and B2B Trust are among the firms in Western Canada who have that authorization. Make sure that you form a relationship with the right trustee to get your account set up properly. Amansad Financial has the necessary contacts in those agencies to help the process run smoothly.

Are RRSP funds the only way I can invest in this opportunity?

The same rules work for Locked in Retirement Accounts (LIRAs), Registered Retirement Income Funds (RRIFs) and many other registered plans. Call Amansad Financial today, or email one of our staff, to get more information about your own particular situation.

What other rrsp rules apply to this sort of investment?

Any mortgage or interest related to real property in Canada qualifies as trust plan investment. It can be a first, second or third mortgage, as long as the holder of the plan receives a registrable interest.

What is the difference between Arm’s Length and Non-Arm’s Length?

These terms refer to the relationship between the borrower and the lender. An Arm’s Length mortgage permits RRSP holders to place their self-directed RRSP funds into a mortgage for a third party who is not a blood, adoptive or marital relation. This sort of mortgage does not have an insurance requirement, and the rates have significant latitude as far as flexibility. For a Non-Arm’s Length Mortgage, the borrower is, for all intents and purposes, the annuitant. For this to serve as a self-directed RRSP investment, insurance is a requirement, and the loan’s interest rate must be in line with rates available to that level of borrower on the market at the time of the loan.

What happens if the mortgage goes into default?

As with any mortgage, if the borrower loses the ability to make monthly payments on the mortgage loan, the lending institution handling the loan will put the mortgage into default. At that point, it begins the process of trying to collect its losses from a power of sale. However, that is not the only available solution. Give Amansad Financial a call to find out more information about the solutions available.

Is a first or second mortgage safer than a third mortgage?

The number in front of the mortgage refers to the priority of that loan at the point of sale, whether it is a real estate transaction or a foreclosure proceeding. A first mortgage is fulfilled first from the proceeds, making a second mortgage more risky by definition. This means that interest is higher on a second mortgage. As an investor, this means that your rate of return is higher, but you are accepting some more risk.

Overall, investing in mortgages is a fairly sound practice, with less risk than stocks or mutual funds. You also get a chance to join the real estate market without having the maintenance and management issues associated with life as a landlord. You receive a passive income stream that remains tax sheltered. If you are interested in this as an investment vehicle, contact Amansad Financial today!

Using rrsp for mortgage – Rrsp Withdrawal Rules

When you have a self directed account, the RRSP plan itself serves as the holder of the mortgage. On a monthly basis, a fixed payment enters your RRSP account, free of any taxes. As long as you direct all payments to that self directed account, you will have no taxes on any of the profits. This will give you a regular funding source that you may elect to reinvest without having to dip into other savings. When you reach the point in time when you collect that RRSP, it is likely that you will be in one of the lower tax brackets, which means that your income tax liability will be much lower. Understanding the rules that govern the use of RRSPs to fund mortgages, though, is crucial so that you do not see some of your gains eaten up by penalties.

Using RRSP For Down Payment

For a lot of people, RRSP For Down Payment makes sense as finding enough cash to put together a down payment is the major obstacle keeping them from buying the house of their dreams. They have great credit scores and a solid income history, but they simply haven’t been able to save up enough to have enough of a down payment to make the banks happy, and so getting approval for that loan simply is not going to happen.

RRSP Mortgage Loan
The Canadian government has recognized this roadblock between far too many Canadians and home ownership, and so they established the Home Buyers’ Plan. For first-time home buyers, this means that you can take as much as $25,000 from an RRSP (Registered Retirement Savings Plan) without any tax penalty and use it as a your down payment for that new home that you want. However, there are some RRSP Mortgage rules that you should be aware of before beginning the process.

The RRSP Mortgage Rules
1. Unless you’re the owner of the RRSP, you can’t withdraw the funds to use rrsp for down payment. If you have more than one RRSP, though, you can withdraw from as many of them as you want, but you can’t go over $25,000 in total withdrawals from all of your RRSPs.

2. Remember that the maximum total withdrawal is $25,000. If you are married or are buying the property with someone else who is also a first-time buyer, you can each withdraw $25,000 from your own accounts for a total of $50,000.

3. If you have a locked-in RRSP, you most likely will not be able to use those funds for a down payment.

4. The money has to have been in your RRSP for at least 90 days before you withdraw it for use for a down payment.

5. You can’t withdraw the money from your RRSP without penalty unless you have a written agreement establishing that your intent for the money is to make a home purchase. One example of this would be a purchase contract from the seller or builder that lists you as the purchaser of the home.

6. You have to complete the purchase (or finish construction) of your property before October 1 in the year after the year you take the withdrawal. If you take out RRSP funds in February 2014, you have to build or buy the property before October 1, 2015.

7. If you are buying a property using RRSP funds as the down payment, then you have to occupy it as the owner. There is one exception, which would be a purchase for a relative of yours who is disabled. If the property you are purchasing can be demonstrated to be more suitable to your relative needs than the place where your relative lives now, then it can qualify. If you are disabled and already own a home, you can use RRSP funds through the Home Buyers’ Plan to purchase a home that is more accessible or to make renovations to your home to improve accessibility.

8. You cannot use this funding to purchase property that you plan to rent out or use as an investment.

9. Once you take the funds out of your RRSP, you have two years to start paying yourself back. You must pay back the total amount of withdrawal within 15 years, and each year you have to pay back at least 1/15 of the amount you took out. If you do not make that minimum repayment, that 1/15 will be treated as taxable income for that year.

10. You are allowed to set up your RRSP using borrowed funds. This can give you a sizable tax refund, which could increase the size of your down payment even more.

11. You can take part in the Home Buyer’s Plan on multiple occasions, but you have to have paid the withdrawn balance back completely from the first transaction before you can apply for a second time.

Using rrsp down payment
Putting together a down payment does not have to be as difficult as it sounds. If you don’t have an RRSP account that is large enough to give you the full $25,000 or you still find yourself a bit short of what the bank wants, Amansad Financial can suggest some other ideas to help you structure the deal and get the house of your dreams. Give one of our mortgage specialists a call today, and we will take a look at your financial situation and make a recommendation that is tailored to your needs and the home that you want. Amansad Financial has relationships with lenders who will offer mortgages for mobile home purchases. If you think that this is the right step for you, give one of our specialists a call. We can refer you to the right lender for your needs and help you with alternative financing arrangements if necessary.

Can any bank connect me with an RRSP mortgage?
No, the National Housing Act indicated a list of approved trustees for an RRSP mortgage. B2B Trust, Td Waterhouse, Olympia Trust and Canadian Western Trust are on that list, and discussing your current situation with those companies, or with a broker such as Amansad Financial, can help you choose the right trustee for your situation.

What sort of real estate qualifies?
You can use your RRSP funds to provide loans for commercial real estate, multi family property or single family dwellings.

Can more than one RRSP account fund the same mortgage?
It is permissible for more than one RRSP to combine to fund a mortgage. So if your account is not large enough to fund a request, you can split the mortgage between your account(s) and those that belong to other RRSP account owners.

In what way do CRA regulations affect this process?
Any mortgage or related interest that is backed by Canadian real property qualifies as an investment for this type of trust plan. It can be the first, second or third lien on a property, so long as the plan holder receives an interest that is registrable.

What else can fund mortgages beside cash?
Registered Retirement Income Funds (RRIF), Locked in Retirement Accounts (LIRA) and other similar plans all qualify.

Are there any other types of funds investments that the CRA permits me to hold within a registered account?

Obviously, your accounts can hold mutual funds or stocks, but they can also hold equity linked notes, silver and gold certificates, warrants, rights, term deposits, debentures, bonds, puts, long calls, covered calls and LEAPS — in addition to mortgages.

What does the term “arm’s length” mean?
The CRA uses the term to express the closeness of the relationship between the lender and the borrower. CRA regulations allow both arm’s length and non arm’s length loans as qualified RRSP plan investments, but the rules for the two types of loans are different.

What are the rules with an arm’s length mortgage?
An arm’s length mortgage is one that you extend to someone who is not your relative through adoption, marriage or blood. You do not have to insure this mortgage, and you have considerable flexibility when it comes to the interest rate and loan term.

What are the rules with a non arm’s length mortgage?
In this case, the borrower is a relative of the lender, in terms of adoption, blood or marriage. To provide additional protection with this sort of loan, it has to be insured, and the terms and interest rate have to be consistent with general commercial practices.

If you have other questions about how you can put your RRSP funds to work for you within a private mortgage, give one of our mortgage specialists at Amansad Financial a call today. We will analyze your personal situation and make recommendations tailored to maximize your profits while protecting your retirement funds.

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