With an RRSP Mortgage,
Can You Really Have Your Cake & Eat It Too?
Well, there’s still some things to consider about my previous post regarding Jamie Golombek’s column on RRSP mortgages in the National Post. It’s new for the Canada Revenue Agency (CRA) to recognize that interest is deductible in the circumstances as set out in the article, so this bears a bit more analysis. My last kick at the cat is as follows:
Self-directed non-arm’s-length mortgages to yourself seem always to be discussed by banks and trust companies in the context of buying a personal residence.
That is how I have always thought of them. The Golombek column confirms you can lend to yourself for investment purposes as long as you follow the usual non-arm’s-length lending rules.
If you know about the possibilities, you can analyze whether you personally have any circumstances where this strategy might work.
Another tool in your toolbox, but no particular strategy fits for everyone. This strategy may only work for a small number of people. But, if you don’t know about it, you can’t use it.
In my previous post I talked about replacing an existing investment mortgage on one of your properties with a mortgage from your RRSP. But you need to have a lot of money in your RRSP to replace almost any mortgage; the National Housing Act (CMHC) requirements are onerous and some comments were unsympathetic to holders of a self-directed RRSP containing under performing assets such as expensive mutual funds. All valid comments, and they serve to show and illustrate that there are a great variety of personal circumstances. As I said above, this strategy isn’t for everyone, but it could fit in certain circumstances.
An RRSP mortgage to yourself could work when an existing mortgage comes to term, but isn’t renewable.
The circumstance that comes to mind relates to the crash in real estate prices that commenced in 2007. Some of my clients who bought property pre-2007 and had mortgages coming due after the crash got their usual mortgage renewal notice in the mail from their lender as their current mortgage term was expiring. Except it wasn’t a renewal notice, it was a notice that the lender was calling the loan and exiting the mortgage business! Exceed Mortgage comes to mind as one lender who did this. If you can’t get new financing from a replacement lender, maybe your self-directed RRSP could help.
And, lastly, using RRSP money in any way, for any reason, takes time to figure out, learn, and get comfortable with.
It’s no different than any other real estate strategy that any of us employ. All strategies take time to learn, usually through multiple deals employing the same strategy. Some strategies are relatively simple, such as buying a single-family home with a conventional 80% loan-to-value mortgage. You might get pretty good at employing this strategy after only 2-3 deals.
On the other hand, lease-options or rent-to-own as they are often referred, is a more complicated strategy. It takes a lot more time just to get comfortable with the details of rent to own even before implementing. Then, my view is that it takes 1-2 years to complete at least 5-6 deals, that actually close with your tenant buyer completing their purchase, before you could say you are familiar and comfortable with the rent to own strategy.
Cautionary Note: self-directed RRSP mortgages, whether arm’s-length or non-arm’s-length, are tricky and time-consuming.
Why? My experience is that when you have a lender (the RRSP holder) who has no experience in lending, a borrower who has no experience in setting up a loan because they usually have a mortgage broker helping him or her, and a Trustee (Olympia Trust or Canadian Western Trust or…) who really only want to do their jobs as trustee and not give much assistance to either the RRSP holder or the borrower and who change their policies without telling anybody, then, these mortgages are tricky and time-consuming.
Having said that, I have one client borrower who organizes all of the RRSP paperwork and requirements themselves with barely any assistance from us lawyers. It makes me nervous but this client is experienced at getting it done after having completed several deals with lots of legal assistance.
RRSP mortgages are on the more complicated side. It’s all about education and really understanding how we invest, no matter what strategy we use.
Contact Barry now for expert legal assistance with all types of Alberta mortgages.
“Tax” image by Phillip Ingham on Flickr. Used under Creative Commons Attribution-NoDerivs 2.0