For most Canadians, buying a home is the biggest investment they will ever make. And as such, they want to make sure they get the best mortgage deal possible. Self-directed mortgages are becoming increasingly popular as they offer more control over the terms of the loan.
What is a Self-Directed Mortgage?
A self-directed mortgage is a type of mortgage that allows borrowers to customize their loan terms to meet their unique needs. With a self-directed mortgage, borrowers have more control over the interest rate, payment schedule, and length of the loan. This type of mortgage is different from a traditional mortgage, where the lender sets the terms, and the borrower has limited input.
There are generally 2 types of Self Directed Mortgages
RRSP
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- A Registered Retirement Savings Plan (RRSP) is a retirement saving and investing vehicle for employees and the self-employed in Canada. Pre-tax money is placed into an RRSP and grows tax-free until withdrawal, at which time it is taxed at the marginal rate.
TFSA
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- A Tax-Free Savings Account (TFSA) is a registered investment or savings account that allows for tax-free gains. The amount of money that can be contributed to a TFSA is limited each year. A TFSA can be used for any savings goal and withdrawals can be made free of tax.
How Does It Work?
With a self-directed mortgage, borrowers work with a lender who offers this type of mortgage. The borrower and lender negotiate the terms of the loan, including the interest rate, payment schedule, and length of the loan. The borrower may also be able to choose the type of mortgage, such as a fixed or variable rate.
There are currently two trust companies that offer Self Directed Mortgages, and Mortgage Suite assists with both mortgage management and general account upkeep.
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C.W.T.
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Olympia Trust
Once the loan terms are agreed upon, the lender will provide the funds for the mortgage. The borrower will then make monthly payments based on the agreed-upon schedule. With a self-directed mortgage, the borrower may have more flexibility with their payments, such as the option to make extra payments or pay off the loan early without penalty.
How to Obtain a Self-Directed Mortgage
Step #1: Open up an account with the trust company
The two most popular trust companies in Canada are CWT and Olympia Trust. These companies specialize in self-directed mortgages and will act as a third-party administrator for your mortgage. To open an account, you will need to provide personal information, such as your name, address, and social insurance number. You will also need to choose the type of account you want to open.
Step #2: Transfer your investment “in-kind”
Once your account is open, you will need to transfer your investment “in-kind” to the trust company. This means you will be transferring your existing investments, such as stocks or mutual funds, to the trust company. This will allow you to use these investments as collateral for your self-directed mortgage.
To transfer your investment, you will need to fill out a T-2033 form for your RRSP or a TFSA transfer form. You can also set up direct deposits to contribute monthly.
Step #3: Sign the Account rep form with your Broker and register as a lender with the brokerage.
Before lending money, it is important to learn about lending money and how to do it smartly. You can learn more about this by taking a course or working with a financial advisor.
After transferring your investment, you will need to sign an account rep form with your broker and register as a lender with the brokerage. This will allow you to lend money to other borrowers who are seeking a mortgage.
To register as a lender through Mortgage Suite Powered By: DLC FC Funding click here.
Step #4: Begin to invest in Mortgages and make better returns than your investments.
Once you have completed the registration process, you can begin to invest in mortgages and possibly make better returns than your investments. This means you will be lending money to other borrowers who are seeking a mortgage. In return, you will receive interest payments, which will be higher than the returns you were getting on your existing investments.
To invest in mortgages, you will need to work with a mortgage broker who specializes in self-directed mortgages. They will help you find borrowers who are seeking a mortgage and will help you set the terms of the loan.
Obtaining a self-directed mortgage in Canada can be a profitable investment strategy. By following these four steps, you can open an account with a trust company, transfer your investment “in-kind,” sign an account rep form with your broker and begin to invest in mortgages. It is important to remember, however, that lending money comes with risks, and it is important to do your due diligence before investing.
To begin, please email info@mortgagesuite.ca so we can walk you through the process of investing and transferring.
