Newbie question for RRSP 2nd mortgage

[JesseLee]

Fogive me for asking this question may appear so obvious, but I`m just not discoverng it yet.

I read through a few threads for this topic and I understand if you lend your RRSP money to some arm lengths investors you can earn a big fat return say 14% annually, at minimum risk level. How nice it is.

But what`s the win for the borrowers? why not they just find a conventional mortgage and pay the rate of 5 or 6% only?

Jesse

 

[Anonymous]

QUOTE (JesseLee @ Mar 17 2008, 02:00 PM) Fogive me for asking this question may appear so obvious, but I`m just not discoverng it yet.

I read through a few threads for this topic and I understand if you lend your RRSP money to some arm lengths investors you can earn a big fat return say 14% annually, at minimum risk level. How nice it is.

But what`s the win for the borrowers? why not they just find a conventional mortgage and pay the rate of 5 or 6% only?

Jesse

Hi Jesse,

the Win for the Borrower is that they can bring the Loan to Value up to 85% or 90%. Typical conventional lenders will not loan that high on rental property. As such, it is a great way to reduce the investment capital required.

Second, if you lend an RRSP 2nd mortgage, you may also become a JV Partner in the future.

Hope that helps.

 

[JesseLee]

QUOTE (MarkGarrett @ Mar 17 2008, 04:09 PM) Hi Jesse,

the Win for the Borrower is that they can bring the Loan to Value up to 85% or 90%. Typical conventional lenders will not loan that high on rental property. As such, it is a great way to reduce the investment capital required.

Second, if you lend an RRSP 2nd mortgage, you may also become a JV Partner in the future.

Hope that helps.

thanks, that makes sense.

Well, I should say it answers my question, and meanwhile brings up more question as well.

Since it`s going to be the 2nd mortage and will be used by borrowers to match up to 90% LTV, it becomes more sensitive, or I should say more vulnerable to the market fluctruation. What happens if the property price drops and then enters into a foreclosure or power of sale scenario? in that case the lend may lose the principal. The money seems not low risk any more.

Also, from a borrower`s perspective, using a money at the cost of 14% rate will significally crush the breathing room as far as cash flow concerned. This scheme may work like a charm when it works, and may become a nightmare when it doesn`t work.

Coorect me if I`m wrong...actually, I wish I was wrong.

Jesse