Reza Ghazi is CEO of GreenFlow Financial Corp., overseeing the company’s operations and growth strategies.
Registered retirement savings plans (RRSPs) can be an excellent vehicle to invest in high-yielding private mortgages, thereby growing your balance faster. This strategy has become increasingly popular among Canadians.
As a mortgage broker specializing in private mortgages, I have sourced funds by working with individual investors who use their self-directed RRSPs. I see firsthand how this strategy can benefit both parties to the transaction. Borrowers benefit from flexible lending solutions when traditional financing isn’t the right fit, and investors benefit from a secured, income-producing investment.
Private mortgages help clients who face challenges with traditional lending, such as self-employed buyers or borrowers who can’t meet qualification criteria. These borrowers qualify based on the equity they have accumulated in their properties and on their “nontraditional” ability to service the mortgage’s financial obligations, provided they meet the mortgage suitability requirements set by the Financial Services Regulatory Authority (FSRA).
Investing In Private Mortgages With RRSP Funds
By investing in private mortgages, your funds are used to lend money to home buyers, with the mortgage secured by the underlying property. While most people think of RRSPs as a way to invest in stocks, bonds or mutual funds, using RRSP funds to invest in private mortgages is an option that can round out your portfolio and offer the potential to generate higher-than-average returns compared to traditional bonds and REITS.
Furthermore, Canada has experienced significant real estate market growth over the last few decades, as real assets like housing provided a hedge against inflation and economic instability.
How Does It Work?
Like a standard loan, the investment generates consistent monthly or periodic income to help fund your retirement savings, and there are a few ways to structure the deal.
Within a self-directed RRSP, you can choose private mortgage investments or use a mortgage broker to connect you with reputable borrowers.
You can also choose a mortgage investment corporation (MIC), which pools funds from several investors and lends the money on your behalf. The MIC handles day-to-day management, which is helpful if you prefer a hands-off approach.
Eligibility Requirements
Qualified private mortgages adhere to the following criteria:
Legal Investment: The mortgage must be a valid and legally enforceable agreement between the borrower and the lender.
Arm’s Length Transactions: The investment cannot involve a related party, such as a family member or business associate, unless it’s done at arm’s length. This ensures that the investment is not structured for tax avoidance or illegal purposes.
Qualified Mortgage: The mortgage must be secured by a piece of real estate and have clear terms regarding repayment, interest and maturity dates.
Private Mortgage Investment Pros
Higher Potential Returns: Private mortgages can offer higher interest rates that outperform similar public-market investments.
Steady Income: Private mortgages provide consistent interest payments.
Diversification: Private mortgages help diversify your portfolio because they typically have a low correlation with the stock market.
Secured Claim: Your investment is backed by a tangible asset, adding a layer of security compared to other types of investments.
Private Mortgage Investment Cons
As with any investment, there’s always a risk that the borrower may default on the loan. If the borrower doesn’t repay, it could result in a financial loss. It is vital to ensure that the loan is underwritten by a professional who can pinpoint the level of risks associated with the borrower’s profile and the underlying security (being a real estate property), establish a clear exit strategy and ensure the borrower meets the suitability requirements and has the capacity to cover the financial obligations of the loan. A well-structured mortgage with strong security and a borrower profile can help reduce risk exposure.
In addition, private mortgages are illiquid investments, meaning they cannot be easily sold or converted to cash. This may be a concern if you need to access your principal quickly.
Conclusion
RRSP investors tend to benefit from consistent returns, and borrowers obtain tailored mortgage financing. When combined with traditional investments, properly underwritten RRSP-funded mortgage investments can play a valuable role in leveraging your retirement savings to achieve long-term retirement growth.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?