Most people think of a mortgage as something they pay. With private mortgage investing, you’re on the other side of the transaction: you provide the funds and earn interest from the borrower.
In some cases, Canadians can hold eligible private mortgages within a self-directed RRSP or TFSA, allowing investment returns to grow within a registered account. There are specific rules and risks to understand before considering this strategy.
Read on or watch my video to learn more!
What Is Private Mortgage Investing?
A private mortgage is a loan secured against real estate that comes from an individual or private lender rather than a traditional bank.
Borrowers may use private financing when they don’t qualify with a traditional lender. This can happen because of credit issues, unusual income, or a short-term real estate project such as renovating and reselling a property.
The private lender provides the mortgage funds and receives interest payments from the borrower.
Can You Hold A Mortgage In An RRSP Or TFSA?
Certain mortgages can be held as qualified investments within self-directed registered accounts, subject to Canada Revenue Agency rules.
This requires working with a financial institution that offers self-directed registered accounts capable of holding mortgages. There are also rules around the mortgage itself, including restrictions that may apply depending on your relationship with the borrower.
Because the tax and investment rules can be complex, it’s important to confirm that the mortgage qualifies before proceeding.
How Private Mortgage Investing Works
The basic process starts with a borrower who needs financing. A mortgage broker can help connect that borrower with a potential private lender or mortgage investment company.
If an individual investor funds the mortgage through an eligible self-directed RRSP or TFSA, the mortgage is held within that registered account. Interest and principal payments are then directed back into the account.
Understand The Risks of Investing in a Mortgage
Private mortgages often offer higher interest rates because they come with higher risk. A higher potential return doesn’t guarantee that you’ll receive it.
Before investing, it’s important to consider the property value, loan-to-value ratio, borrower, mortgage position, exit strategy, fees, and what could happen if the borrower stops making payments.
Private mortgage investing isn’t right for everyone, but it can be an option worth exploring for investors who understand the risks and have the right registered account structure.
Whether you are preparing to buy your first home or your fifth, if you’re looking to get pre-approved for a mortgage in Edmonton, fill out my online application. I’m here to help you every step of the way.
About Jason Scott, Edmonton Mortgage Broker
Looking for a personalized mortgage solution? As an Edmonton Mortgage Associate, I’m trusted partner who will help you get the right mortgage for your home or investment property. I’m Jason Scott, and I’ll be your Mortgage Broker in Edmonton.
