# Non-arms Length RRSP Mortgage



## shinkansen (Feb 27, 2010)

I am considering investing my RRSP into non-arms length mortgages. I want to loan someone funds from my RRSP, with my investment being secured against a property the borrower already owns.

If they default on the payments, I foreclose on their property.

From the rules I read I can’t loan to anyone related by blood, marriage or adoption.

That all seems straight forward enough, so here is my question.

I make a loan to Steve of $100,000 @ 10% interest (I have no relation to Steve).

Does that then preclude Steve from doing the opposite transaction?

Can I take a loan from Steve’s RRSP for $100,000 @ 10% interest?

I guess the question really is; does my loan to Steve then make him ‘arms length’ away from me?

The two transactions essentially cancel each other out, with both parties benefiting from the 10% interest payments they are receiving on their RRSP.


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## Spudd (Oct 11, 2011)

With a quick Google, I can't see any reason why not. But one thing I did see is that the mortgage must be insured by CMHC or a private insurer like Genworth - so you will have to pay insurance premiums if you do this plan, which may make it not worth your while.


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## shinkansen (Feb 27, 2010)

Thanks for the feedback, I think I used the incorrect term. I want to do an arms-length mortgage - meaning I have no relation to the borrower. In this case the mortgage is backed by a property and I have not been able to find any information that insurance is required.

I found a few articles about it, but I don't know the rules of this forum so I am not going to post them here.


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## shinkansen (Feb 27, 2010)

I found it. I found an article put out by Olympia Trust Company who does the management of Arms-Length RRSP mortgages, it states:

_Olympia will not accept Mortgages where two parties lend to each other with the same Mortgage terms at the same time._

So you could an probably still do it, but just not at the same time and with different rates/terms should make it OK. Guess I will give them a call.


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## TomB19 (Sep 24, 2015)

shinkansen said:


> I am considering investing my RRSP into non-arms length mortgages. I want to loan someone funds from my RRSP, with my investment being secured against a property the borrower already owns.
> 
> If they default on the payments, I foreclose on their property.
> 
> ...


The rules you read are incorrect. An RRSP loan can be arms length or non-arm's length.

The offsetting mortgages is doable. I don't know if there is a rule against it but I know there is 0% chance of them catching it, if they aren't told. It only shows up as a mortgage on the borrower's side so a credit check won't catch it.

I don't know where you live but TD will only do non-arms length mortgages. They used to do both but now they only do non-arms length and they are grumpy about that. The initial charges are ridiculous.

Don't forget, an RRSP mortgage requires 100% insurance coverage. With a regular mortgage, you are only required to purchase CMHC insurance on the mortgage portion over 80% of property value.

For arms length mortgages, Canadian Western Trust is a good place to start (also Olympia Trust and B2B Trust). CWT does non-arms length, also. Their fees are lower than TD but still high.

One of the things about getting an RRSP mortgage with TD is they will call the borrower repeatedly and encourage them to move over to a regular bank mortgage. That will start within the first 60 days.

Quite some years ago, I had offsetting loans with a guy I used to work with. He moved over to a TD underwritten mortgage after a few months. He said they called and he figured it might be a good idea. When the money showed up in my account, I converted my mortgage with him to a non-arms length mortgage from my own RRSP. Here's where it gets good. We gave each other mortgages at 2.8%. He switched to a TD mortgage at 3.6% (A good rate, at the time). ... and the punch line is... this guy has an MBA. lol!

With an arms length mortgage, you can write up any terms you wish. At least, that's how it used to be. With non-arms length mortgages, they will only do it at the posted rate. You can adjust the rate by adjusting the term. If you want a lot of money flowing into your RRSP, select a 5 year open.

Before you jack that interest and payment to the moon, think about this. You are making those mortgage payments with after tax dollars. The money that is going into your RRSP will eventually be taxed again when you withdraw it. For that reason, I go with 1 year closed terms and I don't have that much of my capital tied up in mortgages, anymore. It's just a way to get cheap money from yourself. If having cash outside your RRSP provides a strong opportunity to make money, go for it. That's how it is with me. I make more from real estate than I do from any of my investments. If you have a strong investing program, I would stay away from the RRSP mortgage. Rates look to stay low for a long time so I don't see a lot of risk in just pulling a bank mortgage.

I would certainly carry an RRSP mortgage instead of bonds, though.

Oh yeah... as to the foreclosure, keep in mind it will be on you. The bank will not foreclose for you. They will send you a letter stating the mortgage is in a liability condition and that's the last they'll concern themselves with it. They will also send you a letter if the property does not have proper fire insurance.


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## TomB19 (Sep 24, 2015)

shinkansen said:


> _Olympia will not accept Mortgages where two parties lend to each other with the same Mortgage terms at the same time._


As far as I can tell, if you go into a bank or trust company and tell them you want to do something unusual, no matter what it is, they will shut you down. It's none of their business. If you've decided on RRSP mortgages, go in and cut an RRSP mortgage. Then, go to another institution and cut the complimentary mortgage. Done.


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## shinkansen (Feb 27, 2010)

Nice to hear from someone who has done it, and your terminology is correct. Offsetting mortgages, that is exactly what I was looking at but I did not have a term for it.

I have not yet read anywhere that a RRSP mortgage backed by a property requires CMHC insurance. Do you happen to know a URL where that is documented?


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## shinkansen (Feb 27, 2010)

I think TD no longer manages these types of mortgages, looks like they suspended the service in 2012.


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## james4beach (Nov 15, 2012)

Isn't this a lot of effort for not very much gain? You have to deal with weird rules, insurance, fees, lawyers, you have to evaluate the borrower's credit risk, and you end up with an illiquid investment.

Is the interest rate really worth the fees and effort you pump into it?

Also I presume this gives you an unusually large exposure to one investment, unless you have millions and this is still part of a diversified portfolio.


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## TomB19 (Sep 24, 2015)

shinkansen said:


> I think TD no longer manages these types of mortgages, looks like they suspended the service in 2012.


Arms length mortgages ended in 2012.  Non-arms length mortgages continue.

For arms length mortgages, the insurance does not have to be CMHC carried. It will end up being GE Capital, if you go with TD, but the only requirement is the mortgage be insured, not from a particular vendor.

I could find some links for you but I'm sure your Google access is as good as mine. Do some leg work with your fingers.

As for effort, it should take about 5 more minutes to cut an RRSP mortgage as compared to a regular mortgage at TD. It will take longer because the person cutting the mortgage will have to call people for help on every detail, but it shouldn't be too bad.

Keep in mind that everyone will discourage you from doing it. They will tell you things that are simply incorrect, instead of revealing they have no idea at all. I've literally never met anyone who understood it or why it is good. You have to be forceful or it will not happen.

My payments are made from a TD account to my RRSP. If I lost my job and could not find another, I could literally transfer the automatic mortgage payments from my TD DI RRSP back to the TD account and let them be drawn down again by the payments. Of course, I wouldn't do that until the tax year following a job loss. That enables being payment free (more or less) and still carry more real estate than would be possible without the RRSP. Between that and some passive income, I could survive at a low level indefinitely, regardless of interest rates, and I'm in my 40s so I have a way to go until retirement. If I could find another job or my business remained viable, I would not pull money out of the RRSP until the planned date. The RRSP mortgage is a risk mitigator for a SHTF type situation. Nothing more.

My RRSP has become large and my passive income has gone up so the need for an RRSP mortgage has gone away. In fact, for me, it has probably gone away entirely by now but I'm someone who wants to build a basement in his bomb shelter so I have somewhere to go if the bomb shelter becomes unlivable.

If you look at the RRSP mortgage as a way to build up a huge RRSP with high payments, I suggest you reconsider. Run some numbers and see what's what. RRSP mortgages are not about making money. When I ran the numbers, I could see there isn't much use in building the RRSP beyond a certain level because of the double taxation. RRSPs are mostly good if you can contribute with pre-tax dollars and for the money to grow tax free with investments that outstrip inflation (which isn't the RRSP mortgage). The situation is completely different for RRSP funds gained from contributions and market mechanisms. That money was made pre-tax so there is no limit to how much is beneficial.

Don't pay attention to the endless stream of people who don't understand it but will explain why it's a bad idea. Create a spreadsheet and model every scenario you can think of with your own numbers. Include the tax savings and disaster scenarios. I've put thousands of hours into this type of effort, over the years, to handsome benefit. Once you know exactly how it works, the tax benefits and liabilities, what the results would be both with and without RRSP mortgages in various scenarios, you'll be able to engage in the process with full confidence you're doing the right thing in the face of endless uninformed discouragement. You are also likely to learn it is not what you originally thought and there is a good chance you will learn it is not appropriate for you. Whatever the case, you'll be better off.

I look at the current low markets and am considering moving an RRSP mortgage to First National. My payment would go down and I could bring significant money into what might be a low market.

One of the discouraging factors of an RRSP mortgage is this: If you find yourself with a few thousand dollars coming into your RRSP each month, you will need to learn how to invest that cash flow. The issue is, if you are a good investor, you'd be better off with a bank mortgage in the first place. I'll still take an RRSP mortgage and real estate investment over the markets because I trust real estate more. Real estate has been extremely good to me but there are plenty of outspoken folks here who clearly have the opposite opinion. For them, an RRSP mortgage would undoubtedly be a significant mistake.

I do think an RRSP mortgage is an excellent RRSP stabilizer. If you feel the markets are not going to improve or want to mitigate the risk, this may be a good time but it would make more sense when you feel the markets are high and likely to go down to move your money into a mortgage.


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## TomB19 (Sep 24, 2015)

This may be something others find doing a search so I will add one more item.

TD will not place a non-arms length mortgage in the second position. It will have to be first position.

CWT will do an arms length mortgage in the second position. I'm not sure about third (hopefully, they wouldn't do that).

I find myself wondering if the OP thinks he can make 10% with an RRSP mortgage? You can't, of course. You can only replace the cash you took out of your RRSP with interest. What arrives in your RRSP is removed from your bank account. It would be a zero sum game, if you could remove money from your RRSP tax free but you can't so there is a tax loss to account for.

In the case of giving a mortgage to someone else, it's the other guy who pays the interest so, in that sense, you would be earning the interest. With offsetting mortgages, you would be paying him as much as he would be paying you so that negates the benefit.

RRSP mortgages aren't about that. The real question is this: If you use this as an opportunity to pull money out of your RRSP, what are you going to do with that money? If you have a great opportunity for an investment that is not RRSP eligible, you have a decent RRSP, and you are mortgage free, an RRSP mortgage might be ideal.


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## shinkansen (Feb 27, 2010)

Thanks for all the comments on this post, I contacted Olympia Trust to verify a few points that I suspected were inaccurate in this thread (also, sorry, I messed up the subject. I am talking about arms-length RRSP mortgages here).

1) Does the Arms-Length RRSP Mortage require CMHC insurance?

Answer: CMHC insurance is not required as this is technically considered a private mortgage between two parties.

2) What is the minimum and maximum allowed interest levels that the two parties would agree to pay on the mortgage?

Answer: The interest rate has to be a minimum or 3% and up to a maximum yield of 30%.

3) Olympia Trust has the following statement in their general info about Arms-Length Mortgages: _Olympia will not accept Mortgages where two parties lend to each other with the same Mortgage terms at the same time._ I asked them if it was a law, or a rule at Olympia Trust.

Answer: It is our rule that you can’t lender to another person for the exact same terms, and principal amount as that would be considered a swap mortgage.


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## shinkansen (Feb 27, 2010)

TomB19 said:


> I find myself wondering if the OP thinks he can make 10% with an RRSP mortgage?


Yea, that is exactly what I am thinking. Take the following situation and point out the issues you see here, as I am trying to learn.


-------------------

Lets say we have two investors, both have a number of rental properties - all owned free and clear. Each generate $100,000 of rental income from their properties per year.

They setup a pair of offsetting mortgages, using $200,000 from each of their RRSP's to loan to each other. The mortgages are setup with the legal maximum 30% interest and are interest only. They take the $200,000 cash that they get from the mortgage and just sit it in a GIC and collect a bit of interest.

The payment would be $5000 per month or $60,000 per year. Would the $60,000 in mortgage interest payments they are making every year not reduce the taxable rental income of $100,000?

Essentially $60,000 of the rental income from the tenants would be going directly into their RRSP, tax free.

Each investor would be earning 30% on their RRSP mortgage that they have loaned to the other party.

The loan never ends because it is interest only but over 25 years you would be moving 1.5 million of your rental income into your RRSP. Of course your 1.5 million does not benefit from compounding interest so you still need to find another investment vehicle for that 1.5 million (poor guy).

Am I totally out to lunch here, or does this theoretically work?


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## TomB19 (Sep 24, 2015)

shinkansen said:


> 2) What is the minimum and maximum allowed interest levels that the two parties would agree to pay on the mortgage?
> 
> Answer: The interest rate has to be a minimum or 3% and up to a maximum yield of 30%.


In 2013, CWT told me there were no rate limits so you may wish to check them out, as well.


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## Just a Guy (Mar 27, 2012)

One thing to consider, in this age of overpriced housing is which province you are in. Most provinces have recourse mortgages but some, like Alberta, don't. 

I just read an article about how "jingle mail" has already started up again. Jingle mail is where the value of a house has dropped so much that the property is underwater, so people just mail the keys back to the bank. They can kiss their credit rating goodbye for 7 years, but they aren't on the hook for the difference. If it's an rrsp mortgage, and you don't report the default properly (and how many of us know how to register credit issues), they may not even take a credit hit. 

Other provinces have recourse mortgages which means you're still on the hook for the difference even if you try to walk away. 

Getting the title may not be all that advantageous if the value of the home is less than the mortgage due to market correction. Your "sure thing" has some inherent risks that you may have missed.


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## 0xCC (Jan 5, 2012)

shinkansen said:


> Am I totally out to lunch here, or does this theoretically work?


I am not 100% sure but I think it works until you convert the RRSP into an RRIF. In general RRSPs don't allow you to eliminate taxes, they just allow you to defer taxes. You will pay when you have to withdraw.

That might work out well (if you are in a lower tax bracket when you make the withdrawals) or it might not (if you are forced into a higher tax bracket when you make the withdrawals).


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## TomB19 (Sep 24, 2015)

By the way:

Arm's length = no mortgage insurance required by the bank but the lender can choose to require it.
Non-arm's length = mortgage insurance required by the bank.

This is how it's always been.


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## shinkansen (Feb 27, 2010)

0xCC said:


> I am not 100% sure but I think it works until you convert the RRSP into an RRIF. In general RRSPs don't allow you to eliminate taxes, they just allow you to defer taxes. You will pay when you have to withdraw.
> 
> That might work out well (if you are in a lower tax bracket when you make the withdrawals) or it might not (if you are forced into a higher tax bracket when you make the withdrawals).



That is certainly true, the government is going to get their tax. With the RRSP you are delaying the inevitable, my mother is complaining about her RRSP now for exactly the reasons you describe above.


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