If you are considering what to do with your RRSP funds, one thing to consider is the real estate market. As a private mortgage lender, you’ll make more interest than a bank would, because you’re lending to someone who represents a higher credit risk. However, the fact that people will pay their mortgages first and neglect other bills instead means that, even if your borrower runs into a financial situation that is negative, you will still get your money. The interest rates from government secured investments are much lower than what you can expect from a mortgage as well. Here are some key fact that you need to know before entering the mortgage market, though.
The Beauty of RRSP Arm’s Length Mortgages
1. Should you join a syndicated or non-syndicated mortgage?
A syndicated mortgage has multiple investors putting money into one loan. In other words, the property only has one mortgage listed, but there are several investors or lenders taking part in that loan. Consider the example of a developer who needs $4 million to start building a new development. However, the developer has exhausted his lending limits at his bank. To invest in the project, twenty people combine funds to make a loan to the developer. None of the twenty had the $4 million that the developer needed, but when they pooled their funds they had it.
A non-syndicated mortgage only has one lender. If you are the only lender in a non-syndicated mortgage, you receive all of the profit. Your investment is higher, but you are also not running the risks that are often a part of investing in larger real estate projects, particularly those that are under construction. When you’re dealing with a single family dwelling, there are a lot fewer potential pitfalls than there are if you invest in a larger development, that may not get finished on time or may not even get enough tenants to reach an occupancy level to turn a profit. This is why so many RRSP lenders turn toward a non-syndicated product.
2. Should you stay at “arm’s length” in your mortgage?
If you’ve done any reading about RRSP mortgages, the terms “arm’s length” and “non-arm’s length” mortgages have likely popped up. This has to do with your relationship with the borrower. If you have a familial relationship with the borrower (it’s your child, your sibling, your parent or another close relation), then it’s not considered an “arm’s length” mortgage. If it is someone who does not have that close relationship with you, then it is considered an “arm’s length” loan.
3. Can you use more than one RRSP account to fund the same loan?
You can fund mortgages totally or in part from your RRSP accounts. If you have multiple RRSP accounts but none is large enough to fund the loan completely, you can combine funds from multiple accounts.
4. What happens if the borrower defaults?
This is where the “risk” factor enters the equation. If a borrower can’t make monthly payments, the default process begins, and then the financial institution in charge of the mortgage will institute the foreclosure process. If a sale is enforced, you would get your payment at that point, although there are other remedies available as well. In addition, as a private lender, interest will still continue to incur and the legal costs associated with default are the responsibility of the borrower.
5. Should you insist on a first or second loan?
The term “first” loan means that the loan is the one that will be satisfied first when the property sells. If you have 1st position priority, the interest rate is lower due to a lower risk factor as compared to being a second position priority lender. The more risk you are willing to accept, the more flexible you can be about loan position.
If you are curious about investing your RRSP funds into a mortgage, give a professional at Amansad Financial a call today. We have assisted numerous investors become private mortgage lenders, and we look forward to helping you as well! Stop letting your nest egg dwindle away in government secured investments.
DISCLOSURE: Amansad Financial is not dispensing advice about what represents a quality investment but instead providing access to opportunities for our readers to evaluate for themselves. It is the lender’s comfort — and the lender’s choice.