Using your RRSP as a vehicle to hold a mortgage can be a great investment, and is one of the most stable ways to see big returns on that mortgage. It works very much like a mortgage would with a traditional lender, with the exception that instead of payments being made to that lender, they are paid to you and you collect interest along with that payment. While this is a great tool, it’s one that many don’t know about. And when they hear about it, they sometimes misunderstand what’s required of them.
Investing in an RRSP mortgage is not an option for everyone. While the tidy $30,000 or even $150,000 that you have in your RRSP may seem like a nice bundle (and it in fact, is) in order to invest in an RRSP mortgage you’re going to need to have at least twice that much. The typical investor usually holds anywhere from $100,00 – $300,000 in their RRSP.
The type of RRSP you choose is of the utmost importance, as only self-directed RRSPs are capable of investing in a mortgage RRSP. These can be opened with a brokerage, which is the most common route, due to the fact that this can reduce investment costs, give the investor the best returns, and because they have plenty of investment options.
Another misunderstood aspect of investing in mortgage RRSPs that’s very misunderstood is that many people think they need to be arms-length mortgages, meaning that the borrower cannot be someone the RRSP holder is related to by blood, marriage, or adoption. That’s not the case; RRSP mortgages can be “arm’s length,” there are just certain conditions you’ll need to follow if they are.
One is that the mortgage will need to be administered by an approved lender under the National Housing Act, and that the mortgage interest rate needs to be comparable to what you would find on the market. The mortgage must also be insured by a private mortgage insurer, or CMHC.
But a bigger problem, even more than people misunderstanding this type of investment, is that many people simply don’t know about it; and as such, they’re missing out on a great investment opportunity.
“Most people just don’t know about this option,” says Dave Ablett, director of tax and retirement planning with Investors Group Inc. “It is definitely a niche product for certain people.”
If you have a bit of money in your RRSP, and you’re just wondering what type of investment to put it in, speak to an investment advisor who can tell you more about the stability and security of RRSP mortgages.