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Mortgage Articles

While thousands of Canadians have financed down payments on their homes using money from registered retirement savings plans (RRSPs), a growing number are discovering that mortgages are a solid vehicle to boost the value of their long-term investment portfolio.

Using a self-directed RRSP, funds may be loaned to home buyers, earning greater returns than traditional investments, especially when other markets aren't performing, said York Polk, senior mortgage consultant for Invis Financial.

"When you talk about doing things like this, it's important to get a real good handle on the value of the property, the credibility of the client, the repayability of the loan, and how you can get out of it in the event there is a problem," he explained. "But, it's a good vehicle."

While the returns are favourable, one of the largest problems is that many banks hesitate to offer the service to their clients. This type of loan takes money out of lower-interest bank accounts, reducing the cash pool available for the financial institution to lend and, in the end, it cuts banks out of mortgages, which costs them both business and cash.

Another hurdle is the cost of setting up the self-directed RRSP. The set-up fees and annual administration charges cut into the profits, so making the vehicle work requires a large amount of RRSP cash -- say $20,000 -- on hand.

"Because of the cost involved in doing it -- you wouldn't want to go in with $3,000," said Mr. Polk. Establishing the self-directed account costs between $200 and $500, while the annual fees paid to the financial institution are roughly $250 to
$300 per mortgage. There are usually additional legal fees and appraisal costs related to the buying transactions.

Mortgage lending through an RRSP is different from the federal government's Home Buyers' Plan (HBP), which allows the use of retirement money to fund up to $20,000 of a house purchase. The HBP is only available to first-time buyers and the cash must be returned to the RRSP within 15 years, with payments beginning three years after the withdrawal.

When buyers take cash out of RRSPs under the HBP, they lose years of interest profits during the time it takes to replenish the fund.

In RRSP mortgage loans, the lender earns interest as the borrower repays the principal, which keeps the cash working even as it's being paid back.

RRSP loans to finance mortgages have no limitations, except that the cash must be administered through an officially registered self-directed fund.

It gets better for home buyers with significant retirement portfolios because they can lend money to themselves, which leads to a slew of benefits.
Lenders financing part of their own mortgage can pay tax-free interest to their own retirement account and get a better return than a regular retirement account while also saving some cash on mortgage interest.

"There are two schools of thought," Mr. Polk explained. "You might want to give yourself more than your RRSP would make out of the markets, but you also may want to give yourself a better rate than you'd get from a bank."

In many cases, it's possible to pass along interest savings at one end of the equation while earning a higher return to the RRSP on the other. Lending regulations stipulate that there can't be more than a two-per-cent drop between the posted rate and the interest charged on an self-funded RRSP loan. So, people can't lend themselves a mortgage at
one per cent if the best five-year rate is six per cent. Nevertheless, the two- point spread does work to the lender/borrower's advantage.

For example, a five-year, $20,000-loan at three per cent, compounded annually earns $3,185 in interest, while the same amount at today's best rate of about five per cent costs $5,526. On the other hand, the $20,000 cash in an RRSP account gets about two per cent annually, which adds $2,082 in interest after five years.

Assuming rate stability, the loan at two per cent below the market rate would add $1,103 more to the RRSP than the regular savings account over the five years and would also bring interest savings of $2,341 on the loan payments. The self-lender comes out $3,444 ahead after five years. If
the interest savings is also added to the RRSP, additional savings in income tax may also increase the overall savings. While self-lending has its benefits, investors looking for higher returns might want to pay a little more attention to the For Sale signs in their neighbourhood. When RRSP lenders finance third-party loans, the returns may hit as high as 15 per cent, mostly because these loans are risky and are not insured by the Canada Mortgage and Housing Corp. (CMHC).

While self-funded RRSP mortgages must be insured against default by CMHC, a self-to-self RRSP mortgage loan does not allow the lender/borrower to let payments slip.

"When lending yourself money through your RRSP, you can't skip a payment even though you are borrowing your own money," Mr. Polk stressed.  "The RRSP can take power of sale over the property, so people have to be aware of the fact that they have to make all their payments."

While thousands of Canadians have financed down payments on their homes using money from registered retirement savings plans (RRSPs), a growing number are discovering that mortgages are a solid vehicle to boost the value of their long-term investment portfolio.

Using a self-directed RRSP, funds may be loaned to home buyers, earning greater returns than traditional investments, especially when other markets aren't performing, said York Polk, senior mortgage consultant for Invis Financial.

"When you talk about doing things like this, it's important to get a real good handle on the value of the property, the credibility of the client, the repayability of the loan, and how you can get out of it in the event there is a problem," he explained. "But, it's a good vehicle."

While the returns are favourable, one of the largest problems is that many banks hesitate to offer the service to their clients. This type of loan takes money out of lower-interest bank accounts, reducing the cash pool available for the financial institution to lend and, in the end, it cuts banks out of mortgages, which costs them both business and cash.

Another hurdle is the cost of setting up the self-directed RRSP. The set-up fees and annual administration charges cut into the profits, so making the vehicle work requires a large amount of RRSP cash -- say $20,000 -- on hand.

"Because of the cost involved in doing it -- you wouldn't want to go in with $3,000," said Mr. Polk. Establishing the self-directed account costs between $200 and $500, while the annual fees paid to the financial institution are roughly $250 to
$300 per mortgage. There are usually additional legal fees and appraisal costs related to the buying transactions.

Mortgage lending through an RRSP is different from the federal government's Home Buyers' Plan (HBP), which allows the use of retirement money to fund up to $20,000 of a house purchase. The HBP is only available to first-time buyers and the cash must be returned to the RRSP within 15 years, with payments beginning three years after the withdrawal.

When buyers take cash out of RRSPs under the HBP, they lose years of interest profits during the time it takes to replenish the fund.

In RRSP mortgage loans, the lender earns interest as the borrower repays the principal, which keeps the cash working even as it's being paid back.

RRSP loans to finance mortgages have no limitations, except that the cash must be administered through an officially registered self-directed fund.

It gets better for home buyers with significant retirement portfolios because they can lend money to themselves, which leads to a slew of benefits.
Lenders financing part of their own mortgage can pay tax-free interest to their own retirement account and get a better return than a regular retirement account while also saving some cash on mortgage interest.

"There are two schools of thought," Mr. Polk explained. "You might want to give yourself more than your RRSP would make out of the markets, but you also may want to give yourself a better rate than you'd get from a bank."

In many cases, it's possible to pass along interest savings at one end of the equation while earning a higher return to the RRSP on the other. Lending regulations stipulate that there can't be more than a two-per-cent drop between the posted rate and the interest charged on an self-funded RRSP loan. So, people can't lend themselves a mortgage at
one per cent if the best five-year rate is six per cent. Nevertheless, the two- point spread does work to the lender/borrower's advantage.

For example, a five-year, $20,000-loan at three per cent, compounded annually earns $3,185 in interest, while the same amount at today's best rate of about five per cent costs $5,526. On the other hand, the $20,000 cash in an RRSP account gets about two per cent annually, which adds $2,082 in interest after five years.

Assuming rate stability, the loan at two per cent below the market rate would add $1,103 more to the RRSP than the regular savings account over the five years and would also bring interest savings of $2,341 on the loan payments. The self-lender comes out $3,444 ahead after five years. If
the interest savings is also added to the RRSP, additional savings in income tax may also increase the overall savings. While self-lending has its benefits, investors looking for higher returns might want to pay a little more attention to the For Sale signs in their neighbourhood. When RRSP lenders finance third-party loans, the returns may hit as high as 15 per cent, mostly because these loans are risky and are not insured by the Canada Mortgage and Housing Corp. (CMHC).

While self-funded RRSP mortgages must be insured against default by CMHC, a self-to-self RRSP mortgage loan does not allow the lender/borrower to let payments slip.

"When lending yourself money through your RRSP, you can't skip a payment even though you are borrowing your own money," Mr. Polk stressed.  "The RRSP can take power of sale over the property, so people have to be aware of the fact that they have to make all their payments."

While thousands of Canadians have financed down payments on their homes using money from registered retirement savings plans (RRSPs), a growing number are discovering that mortgages are a solid vehicle to boost the value of their long-term investment portfolio.

Using a self-directed RRSP, funds may be loaned to home buyers, earning greater returns than traditional investments, especially when other markets aren't performing, said York Polk, senior mortgage consultant for Invis Financial.

"When you talk about doing things like this, it's important to get a real good handle on the value of the property, the credibility of the client, the repayability of the loan, and how you can get out of it in the event there is a problem," he explained. "But, it's a good vehicle."

While the returns are favourable, one of the largest problems is that many banks hesitate to offer the service to their clients. This type of loan takes money out of lower-interest bank accounts, reducing the cash pool available for the financial institution to lend and, in the end, it cuts banks out of mortgages, which costs them both business and cash.

Another hurdle is the cost of setting up the self-directed RRSP. The set-up fees and annual administration charges cut into the profits, so making the vehicle work requires a large amount of RRSP cash -- say $20,000 -- on hand.

"Because of the cost involved in doing it -- you wouldn't want to go in with $3,000," said Mr. Polk. Establishing the self-directed account costs between $200 and $500, while the annual fees paid to the financial institution are roughly $250 to
$300 per mortgage. There are usually additional legal fees and appraisal costs related to the buying transactions.

Mortgage lending through an RRSP is different from the federal government's Home Buyers' Plan (HBP), which allows the use of retirement money to fund up to $20,000 of a house purchase. The HBP is only available to first-time buyers and the cash must be returned to the RRSP within 15 years, with payments beginning three years after the withdrawal.

When buyers take cash out of RRSPs under the HBP, they lose years of interest profits during the time it takes to replenish the fund.

In RRSP mortgage loans, the lender earns interest as the borrower repays the principal, which keeps the cash working even as it's being paid back.

RRSP loans to finance mortgages have no limitations, except that the cash must be administered through an officially registered self-directed fund.

It gets better for home buyers with significant retirement portfolios because they can lend money to themselves, which leads to a slew of benefits.
Lenders financing part of their own mortgage can pay tax-free interest to their own retirement account and get a better return than a regular retirement account while also saving some cash on mortgage interest.

"There are two schools of thought," Mr. Polk explained. "You might want to give yourself more than your RRSP would make out of the markets, but you also may want to give yourself a better rate than you'd get from a bank."

In many cases, it's possible to pass along interest savings at one end of the equation while earning a higher return to the RRSP on the other. Lending regulations stipulate that there can't be more than a two-per-cent drop between the posted rate and the interest charged on an self-funded RRSP loan. So, people can't lend themselves a mortgage at
one per cent if the best five-year rate is six per cent. Nevertheless, the two- point spread does work to the lender/borrower's advantage.

For example, a five-year, $20,000-loan at three per cent, compounded annually earns $3,185 in interest, while the same amount at today's best rate of about five per cent costs $5,526. On the other hand, the $20,000 cash in an RRSP account gets about two per cent annually, which adds $2,082 in interest after five years.

Assuming rate stability, the loan at two per cent below the market rate would add $1,103 more to the RRSP than the regular savings account over the five years and would also bring interest savings of $2,341 on the loan payments. The self-lender comes out $3,444 ahead after five years. If
the interest savings is also added to the RRSP, additional savings in income tax may also increase the overall savings. While self-lending has its benefits, investors looking for higher returns might want to pay a little more attention to the For Sale signs in their neighbourhood. When RRSP lenders finance third-party loans, the returns may hit as high as 15 per cent, mostly because these loans are risky and are not insured by the Canada Mortgage and Housing Corp. (CMHC).

While self-funded RRSP mortgages must be insured against default by CMHC, a self-to-self RRSP mortgage loan does not allow the lender/borrower to let payments slip.

"When lending yourself money through your RRSP, you can't skip a payment even though you are borrowing your own money," Mr. Polk stressed.  "The RRSP can take power of sale over the property, so people have to be aware of the fact that they have to make all their payments..