What Is An – Arm’s Length Mortgage?

The term “arm’s length” is used by CRA to refer to how close or distant the borrower/property owner and the lender are in relation to each other.  According to the Income Tax Act, you are NOT considered to have an “arm’s length” relationship to a third party that is directly related to you through blood, marriage, or adoption. For example, Friends, Strangers, Uncles, Cousins are not considered to be related under the Act.

An “Arm’s Length Mortgage” therefore means a mortgage provided to any person or entity that is considered arm’s length to the lender.

Terms and Conditions

Just like most things in real estate the terms and conditions really comes down to what you can negotiate with the RRSP lender. this relates to the length of the term the interest ratethe payment structure. You could even structure upfront and or balloon payment that covered the entire amount of the interest on the RRSP mortgage.

There are however some minimum and maximums that you do need to follow.

  • 2% minimum and 30% maximum interest
  • maximum 35 year amortization
  • maximum 90% loan to value
  • maximum 10 year term

When you find a potential investor who is interested in using their RRSPs to help you with financing really need to consider the amount of time and effort that you need to go through in order to get and maintain these funds. As a general rule of fun trying to utilize RRSPs that have less than $25,000 in them does not seem to work out well.  This comes down to the appraisal, legal, setup  and administrative costs to set up this type of mortgage.  These costs are often paid by the borrower, which can push up the annual cost of using this financing option.

What this really means is that you are giving them a fixed return on their  money in the RRSP over a set period of time.  The loan to value is going to be one of the things that will be important to the RRSP mortgage vender.  For example, if the property you own is worth $200,000 and you have a loan of $120,000 then a lender may only give you 75 to 80% loan to value. If you were to get 80% loan to value with the mortgage and $40,000 RRSP second mortgage.  The higher the loan-to-value the higher the risk to the lender. In most cases RRSP mortgages are second mortgages but if you are to get a first mortgage it would offer more flexibility to you as the borrower then some higher cost financing options like professional lenders.