Lending Yourself Your Own RRSP Money
Some years back, while working as a Branch Manager for a Canadian Trust Company, I was given an opportunity to gain experience in the area of using your own RRSP to fund a “Non Arm’s Length” Mortgage. Proceeding to then give several seminars on the topic, I went a long way to establish myself as somewhat of a local expert. Recently however, while having coffee with a close friend, it came to my attention that to this date the general public still knows very little about what is required in order to lend your own RRSP funds as a mortgage. Over coffee, my friend claimed that he had just finished a long discussion with a client who was 100% convinced, after listening to a local radio talk show, that he could borrow from his RRSP without being required to even have the funds in his RRSP. Something had been definitely lost in translation.
Just to set the record straight, yes, you have to have the funds in your RRSP in order to fund the mortgage. What you will also find out is that due to the “Non Arm’s Length” relationship between the Mortgagee (your RRSP) and the Mortgagor (yourself), the mortgage will have to be insured by Canada Mortgage & Housing Corporation in order to become a qualified asset for your RRSP to hold. The main focus of all the administrative rules and conditions that apply is to insure that both you and your RRSP are not gaining an advantage or being put at a disadvantage when compared to rates and terms available in the “open mortgage market”. In addition, your RRSP funds would have to be transferred to a self directed RRSP (SDRRSP) account administrated by a Trustee who is an approved National Housing Act lender and who is also willing to administrate this type of RRSP asset. You will quickly find that not every SDRRSP Trustee wants to undertake the task of administrating this type of asset.
When doing your research you will soon become very aware of the many costs and fees. There are one-time set up costs plus ongoing annual SDRRSP Trustee administrative fees. For some clients, once a careful review of the costs is done, lending RRSP funds to yourself can make sense. Prior to 1984, it was commonly thought that Canadians could not use their RRSP funds for such a transaction. In 1984, a tax lawyer based in Toronto obtained a tax ruling establishing that, provided a mortgage met the strict lending guidelines established for an RRSP “Non Arm’s Length” transaction, it could qualify as an asset held in a SDRRSP plan.
Based on my calculations and due to the many costs and fees involved, I found that it was important to have a minimum mortgage amount of at least $50,000.00 available in your RRSP plus a minimum of a 6 – 7 year time horizon before even considering any economic or emotional benefits that might be derived from lending yourself your own RRSP money. The first SDRRSP funded mortgage that I helped set up was in 1984 for a client who was an accountant. Years later, I had the opportunity to ask this client if, in his opinion, it had been worth all the effort and expense. After a long pause, his answer was simply, “It sure just felt good to be paying myself”.
Paul E. Croy
Should I Purchase Mortgage Life Insurance?
I recently read an article by Talbot Boggs of the Canadian Press (June 30, 2010). Though I agreed with most points made in the article, I disagree with the suggestion that a borrower should purchase mortgage insurance as an option if offered by the lender.
Firstly, the mortgage balance will be declining but the insurance premium will remain consistent, hence over time, the borrower will be receiving less. Secondly, if you decide to port (move) your mortgage to another lender when the term is up, the insurance will not be transferable.
I propose that if a borrower wishes to have the additional security offered by insurance (and I totally agree) then an insurance policy outside of the mortgage contract should be considered. This insurance can be a fixed term or whole life policy.
There are several advantages to this strategy:
Firstly, the policy is with the borrower and stays with the borrower no matter who holds the mortgage.
Secondly, the borrower can pick an amount that is appropriate to their situation. He or she does not have to purchase an amount to pay off the full mortgage.
Thirdly, the amount of payout from the “life” insurance remains consistent.
Finally, and probably most importantly, in the event of the demise (death) of the borrower, cash from the policy will go to the beneficiary. The beneficiary, who often is the spouse, will have money to make mortgage payments, pay utility bills, buy food, etc. for the family while they get their life adjusted to the new situation.
It makes no sense to have a debt free house if the hydro, water, gas and telephone are disconnected. This is a morbid subject, but it needs to be considered by all borrowers.
P.S. Be sure to obtain competitive quotes from a few life insurance agents before committing.
Jeffery Moses
Benefits of a Broker
Just like a travel agent, searching for the best fares, seat sales and connections to get you to your destination, a mortgage broker searches for the best interest rates and terms to complete your purchase transaction.
These are the benefits of using a mortgage broker:
- DISCUSS – I will discuss your mortgages needs with you and prepare your application for presentation to lenders.
- EXPLAIN – I will explain the mortgage approval process. I will obtain a mortgage commitment, lock-in the best rates and terms, and provide you with a pre-approval so you can confidently look for your new home.
- INFORM – I will inform you about the costs associated with arranging a mortgage. These may include: appraisal and survey fees, property transfer taxes, municipal tax adjustments, and, if applicable, CMHC premiums.
- RESEARCH – I will research the market for the best interest rates and terms available. This includes special discounts and rates, available only through mortgage brokers.
- PRESENT – I will present your application to the lenders most likely to approve your deal. I will highlight the strengths of your application in a manner that will be favorably viewed by lenders.
- NEGOTIATE – I will negotiate on your behalf. I work for you, not the lender.
- ADVISE – I will advise you about the terms, rates and details of each mortgage lender’s offer, in order to help you make the most suitable financing choice.
Financial institutions will only offer you their own mortgage product. A mortgage broker is able to mix and match different products from a variety of institutions in order to meet your particular mortgage requirements.
Financial Institutions offer lower rates, special discounts and a wider variety of mortgage products through mortgage brokers. Mortgage Brokers are a better way for banks and other major lenders to deliver their products to new customers and lower retail banking costs. The savings are then passed along to you.
Mortgage brokers are motivated to get the job done for you. We get paid only when you’re satisfied and your mortgage is funded. Last but not least, in the case of most residential mortgages, the lender/bank pays our fee.
Chris Pahl
Investing in Real Estate
There are several issues and considerations when investing in real estate.
#1- Residence
Purchasing a home tends to be the largest capital investment most people make. It also tends to be the best investment most people make.
Rents go up but mortgage payments remain constant. So with time, the cost of mortgaging remains constant while rents rise with inflation. (There are interest rate fluctuations both up and down but I am assuming a constant interest rate for this example.)
It may seem a long way off at the beginning, but mortgages do get paid off and any capital appreciation from your own house is non-taxable. Equity in property also provides the ability to access funds for other investment opportunities.
#2- Investment Properties
There are several types of investment properties:
A – Revenue Investment (Residential, Commercial, Industrial revenue properties)
I do not have a pension other than CPP so I need to plan for my retirement by creating an income stream that is indexed so that inflation doesn’t erode my standard of living. Buying a rental property can be an effective method to satisfy this goal.
When looking for revenue property to meet this goal, you need to consider how soon the property’s income will cover all of its expenses including debt servicing, management, maintenance, repairs and of course, the various taxes. This may mean that you will need to cover a shortfall at the beginning, but when you have reached the breakeven level time becomes your ally and the property will start paying you an indexed cash flow.
B – Speculative Investment
This investment is to attract a capital gain by selling a property for a higher price than you paid. This investment is quite popular when the market is increasing or expanding. An example of speculative investment would be buying a piece of land that is not yet developed but is in an area where development is approaching. When development does reach your property then there will be an increase in its value. This type of investment is higher risk than rental property (time is not your ally) but it does not require as much ongoing work and can be very lucrative. This investment is more interested in the market and not in revenue.
There are several investments that are part revenue and part speculative. One example is an underdeveloped property that does not have cash flow to pay all costs but can offset some of the costs.
Housing is something that we all need. It has proven to be a stable and manageable investment that one can control or at least influence. Talk to your realtor, lawyer, accountant, mortgage broker, neighbour etc. Everyone has something to say about real estate and some of them can give you good advice, but remember that it is your choice. Be bold and you should be rewarded.
Rory Campbell
A Shoe Short Story
My wife truly loves a good pair of shoes. Over the years she has built a fine collection of well over 100 shoes; I’m sure that there are much larger collections hidden away in other people’s home closets! The interesting point is that as much as she may love the look of shoes, her daily choice selection is normally based on comfort.
For most people, getting into a mortgage is much easier than getting out of it if they find that they have made the wrong choice. Making the wrong choice can be a source of stress with potentially large financial and emotional costs to be paid. The mortgage you select should be comfortable and flexible, fitting with your lifestyle expectations. It is very important that your mortgage leaves some financial room for you to still be able to enjoy the things in life that are important to you. Feeling ‘mortgage poor’ can be somewhat like being forced to walk a long distance in the wrong pair of shoes.
It is important to spend time up front looking at the economic realities of your cash flow prior signing your mortgage documents.
What I would recommend for many clients is to try living within a budget based on the proposed mortgage payment prior to committing to it.
Paul Croy
Interest Rates on the Rise?
The Bank of Canada has signaled that they do not expect to hold present interest rate levels past the end of June…..
See the March 11, 2010, Business Week article, Canada January New Home Prices Rise 0.4%, Seventh Straight Gain
We are presently enjoying the lowest interest rates seen since the Korean War, and the only thing we can absolutely count on is that rates will inevitably rise. The ‘experts’ cannot seem to agree on when or by how much, but the varied opinions range upwards to an increase of 2.0% – 2.5% by the end of 2011.
I believe that now is the time to become pro-active and ensure that you take advantage of the present interest rate environment. Do you wish to explore the possibility of ‘renegotiating’ an existing mortgage? Would you like to ‘lock-in’ an interest rate for an upcoming purchase? Does your mortgage ‘mature’ in the next few months? Fixed rate vs. variable rate?
Our mortgage professionals are your best source for mortgage advice and can explain all your available options.
Walt Neufeld
What term mortgage should I choose?
Historically, the shortest term mortgage (ie. 6 month terms for 25 years) has been the least expensive route when financing your home.
Floating has been less expensive than fixed mortgages as institutions do not have to build in a hedge to offset interest fluctuations.
Longer terms provide stability against interest fate fluctuations as well as not having to deal with the paperwork and the stress of numerous renewals.
Here are some questions that you should consider:
1) Are you able to tolerate interest rate fluctuations and do you have the temperament to not worry about them?
2) What do you think interest rates are going to do?
3) What are your personal plans? Do you have a growing family and need more space? Are the kids leaving home and you want a smaller place? Is there a chance you can be transferred? (ie. I think I will be transferred in 3 years so I want a 3 year mortgage.)
My advice is to take a mortgage that fits your needs. Talk to your banker, accountant, lawyer, mortgage broker, etc. There is wisdom in much counsel.
Rory Campbell
Changes to Lending Guidelines for Insured Products
Jim Flaherty, Canada’s Minister of Finance, announced new lending guidelines for Canadian Mortgage and Housing Corporation (CMHC) backed mortgage loans in a recent announcement.
The new rules are as follows:
1. All borrowers must qualify for a mortgage using the five year fixed rate regardless of the term chosen.
2. When refinancing a home, Canadians will only be able to refinance up to 90% of the value instead of the previous 95%.
3. If you want to purchase revenue property CMHC will no longer insure you. You’ll need to put 20% down to take out a conventional mortgage.
These changes will take effect April 19, 2010.
What does this mean to the consumer who is presently trying to qualify for the maximum mortgage amount? I would recommend putting your plans in motion for purchase or refinance before the rapidly approaching deadline.
See the Government of Canada Department of Finance website for more details
Chris Pahl
Balance in the Canadian Housing Market?
There was an interesting article written by The Canadian Press (posted February 17, 2010) regarding the Canadian real estate market. Victoria, Vancouver Island & BC are different ‘cups of tea’, but I certainly think that our market IS becoming more balanced and that anticipated, and coming, changes in ‘qualification criteria’ for ‘insured’ mortgages will actually assist in stabilizing our market.
The HST will certainly impact sales of homes priced at the mid – high end of our marketplace, but should not slow ‘entry level’ sales. Entry level sales inevitably drive the rest of the market so….. I am cautiously optimistic regarding our real estate market!
My thoughts on when / how higher interest rates will affect us is another matter… for another day.
TGIF… Go Canada!
Walt
