How to Use Registered Funds to Become a Mortgage Investor
If you have money in such accounts as an RRSP, LIRA, LIF, RRIF, RESP or TFSA, then you have registered funds that you could put towards a mortgage investment – and any income that you would make from your investment would be tax sheltered.
It is worth noting that, should you need to take money out of the registered investment, it can be subject to taxation at the current rate, which is 49 percent in the highest bracket. If you use a non-registered investment to make money via capital gains, the tax rate is half that of personal income.
The difference in tax rates means that it is vital to understand what you are doing when you choose the funds that you use for a particular investment. The purpose of this article is to provide you with information about different types of registered funds that are eligible for use in a mortgage investment. This article does not constitute specific professional advice for your own portfolio but instead serves as a general overview, for informational purposes only.
Types of registered funds that are eligible for use in mortgage investing
This is a Registered Retirement Savings Plan, which in Canada allows you to deposit savings as well as investment assets. Income that your RRSP makes is generally tax-exempt as long as you leave the money in the plan; you only pay taxes on the money that you withdraw. The funds in this account can be used for a mortgage investment.
A Locked-In Retirement Account is basically a locked-in version of an RRSP, and it holds funds that you transfer in from a registered pension plan (RPP). The member of the RPP cannot receive these funds until they are transferred to another LIRA to give the member income during retirement. If the money stays in the LIRA, the money has to stay there and will purchase a life annuity once the member reaches retirement. However, you can use the money in this fund to invest in a mortgage; the proceeds simply have to stay in the LIRA as well.
A Life Income Fund is a destination account for pension funds or funds from a LIRA. The funds in this account can go to invest in a mortgage.
A Registered Retirement Income Fund is a retirement plan in Canada under which taxes are deferred. People use an RRIF to turn their savings into income. You can move funds from your RRSP, a pooled registered pension plan (PRPP, an RPP or another RRIF, and the provider pays you. These funds can also go toward mortgage investment.
A Registered Education Savings Plan is an account that parents set up to sock money away for their children’s education expenses after high school. The individual and the organization set up a contract whereby the individual deposits funds in the RESP and makes money off investments that the organization makes. These give users access to the Canada Education Savings Grant (CESG), and you can invest money from one of these accounts in mortgages.
A Tax-Free Savings Account gives all Canadians 18 years of age and above the opportunity to stow away money without tax liability throughout their lifetime. The maximum for this, as of 2014, was $5,500, so you would want to check this before setting this up. All withdrawals and income earned from this sort of account are tax-free, and this account does not jeopardize access to federal credits and benefits. Money from this sort of fund can go toward a mortgage investment.
Why would you want to invest money in mortgages?
There is a balance between risk and reward that is important to negotiate when you are planning your financial future. If you put all of your money in accounts that are secured by the government, your interest income will not keep up with the increases in the cost of living, because there is no risk to those investments. Certificates of Deposit offer slightly higher rates, but you are tying up your funds for, potentially, years at a time, and with returns that do not justify them, at least as far as tying up your whole investment portfolio.
You also do not want to put all of your investment money in stocks and bonds, though. The returns can be significantly higher, but when the market hits a downturn, there is nothing stopping your market value from going down, and if your investment time-frame is short- or medium-term, the oscillations of the market can be more than you can put up with.
The risk of mortgage investment is slightly higher than the risk of investing in a savings account or a CD. It is possible that the borrower could default. Life happens – people go through divorce, job loss, or serious illness or injury, and their financial pictures fall apart. However, in the vast majority of cases, borrower pay their mortgages and, in the rare instances when default looms as a possibility, they sell their homes, and if you have invested in a syndicate that keeps loan-to-value (LTV) ratios conservative, you will get your investment back.
Mortgage Investing Opportunities
Opportunities to invest in mortgages exist all over Canada. Banks are dealing with tight regulations about which borrowers are creditworthy and which are not, which means that there are many Canadians with the means to pay for a mortgage – but who cannot qualify with banks or credit unions. So investing in a mortgage is a chance to take part in a win-win: profits for your investment, as well as a chance for a borrower to move from the rent cycle to home ownership. In the long run, both of you benefit, and as your investment profits build from mortgage investments, you can take part in multiple loans or fund larger percentages of loans. Given that home ownership is a dream for so many Canadians, the opportunities for you to invest are almost limitless. Sign up as an Investor Partner to be part of the Amansad Direct Lending Group and learn more about how we can work with your investment portfolio and make it grow!