RSP loan...need some enlightenment please

[olddog]

hi guys,
i just got wind of rsp loans for the very first time via my sister. And am trying to see if i can use it to my advantage.
However, I plan on purchasing a house in the very near future and want to avoid any credit hits on my score (curently 701).
few questions on rsp loans?
Are credit checks done when applying for a RSP loan?
Does a rsp loan have to be put directly towards one's rrsp or can it be used for other invetments without query from the bank?
If credit checks ae not done, what are the factors which banks consider in deciding the amount to give in a rsp loan?
I heard they hold your RSPs as collateal, how do they do that?

Thanks

olddog

[sslinn]

They will do a credit check, bit it will not affect your score enough tp worry about.

The bank will want you to use their RRSP investments.

An RRSP loan can't be held as collateral.

[YYZFA]

hi guys,
i just got wind of rsp loans for the very first time via my sister. And am trying to see if i can use it to my advantage.
However, I plan on purchasing a house in the very near future and want to avoid any credit hits on my score (curently 701).
few questions on rsp loans?
Are credit checks done when applying for a RSP loan?
Does a rsp loan have to be put directly towards one's rrsp or can it be used for other invetments without query from the bank?
If credit checks ae not done, what are the factors which banks consider in deciding the amount to give in a rsp loan?
I heard they hold your RSPs as collateal, how do they do that?

Thanks

olddog

Get an RRSP loan only if you are interested in buying an RRSP. Calculate your tax savings versus cost of the loan, and decide if it's right for you.

Of course RRSP loans must be used to purchase RRSPs. You will also need to buy an RRSP product from the bank that you got the loan from.

Stop worrying about your credit score, and the extremely minor adverse affect a credit hit will do to it. It is very small. It is getting crazy that people are afraid to apply for a loan or a credit card because of their fear of what the credit check will do to their credit score. It's silly. Why have good credit if you can't use it to your advantage?

[dcaron9999]

If you were in a really high tax bracket last year and hadn’t done any RRSP saving, then go ahead and get an RRSP loan, make your maximum contribution, get your tax back (or don’t pay the tax you would have to). Then pay off the loan within i6-12 months. If you can’t do that, don’t do it at all.

If you’re thinking of taking out a whopping loan to catch up on unused RRSP contribution room, think again. Instead of paying interest on a loan, simply make the payments you would have made on your loan directly to your RRSP as contributions. You’ll be caught up in no time, and you won’t have paid a penny in interest.

If you’re trying to figure out how to make a bigger RRSP contribution when you barely have enough to get to the end of the month — and you already have a third job — try this: when you get your tax refund from making your RRSP contribution (and whatever else you’ve done to minimize your taxes), add that refund to your next RRSP contribution. There. You’ve increased your RRSP savings and it hasn’t cost you a cent more from your cash flow.

If you haven’t made an RRSP contribution for 2008, let 2009 be the year you put inertia to work for you. Go to your financial institution today and set up an automatic savings plan. However much you choose, have it deducted from your main account and automatically contributed to an RRSP.

[brunes]

RSP loans are rarely a good idea for anyone... it's basically a big scam on the part of the big 5 banks.

IE - if you don't have enough money on hand to max your RSP, then so be it. Taking out a loan to do that is foolishness - you will now have to pay back that loan + interest over the course of this year, and will be no further ahead next year than you would be if you had just paid your RSP instead.

[tamper]

The only situation I can think of that an RSP loan is a great idea is something like if you had a business; it is February 15th and you have unexpected positive cash flow, invoicing a client for $10k due in 30 days; you want to maximize your tax return for last year; and have a large amount of contribution room accumulated. I'd consider using a LoC to borrow the money for a month if I were in this situation.

This is just so I could get a tax return of about $2k in 3 months as opposed to 15 months in the future.This costs $50 in interest so having the $2000 a year sooner is worth it your think money depreciates a more than 2.5% per year due to inflation. I'm of course ignoring what happens to your money in the RSP in this case because its only a month difference in the contribution date.

In most cases where you have steady cash flow its just better to start contributing going forward and save the interest.

[wesboag]

RSP loans are rarely a good idea for anyone... it's basically a big scam on the part of the big 5 banks.

IE - if you don't have enough money on hand to max your RSP, then so be it. Taking out a loan to do that is foolishness - you will now have to pay back that loan + interest over the course of this year, and will be no further ahead next year than you would be if you had just paid your RSP instead.

Actually it can be a great idea, but you have to understand how to do it. Bank rep's rarely have the know-how to suggest something like this.
There are ways to delay interest payments so the client can essentially pay nothing in interest, or a minimal amount. This is based on the date and interest schedule. The strategy goes like this. It is called an RRSP top-up.

If for example the client has a 33.3% marginal tax rate.
He/She contributes $6000 to his RRSP.
by contributing $6000, he will have a $2000 refund come tax time.
Taking an RSP loan for $3000 ($1000 refund) and adding that to the original $6000 = $9000 accumulating within.

taking the $2000 refund plus the $1000 refund from the loan = $3000.
So the refund of $3000 can be used to pay back the RSP loan of $3000 prior to incurring minimal or no interest payments (once again based on how the interest payments were structured and if the delayed interest structure was used)

So essentially you have borrowed money to invest for free and instead of $6000 accumulating in the RRSP, you now have $9000, which in the end is paid off.

It can be done, but one has to make sure his/her advisor/planner knows exactlyt what they are doing.

This strategy can be used with anyone who does not have the funds to maximize their contributions.

PM if you have any questions

[YYC27]

Actually it can be a great idea, but you have to understand how to do it. Bank rep's rarely have the know-how to suggest something like this.
There are ways to delay interest payments so the client can essentially pay nothing in interest, or a minimal amount. This is based on the date and interest schedule. The strategy goes like this. It is called an RRSP top-up.

If for example the client has a 33.3% marginal tax rate.
He/She contributes $6000 to his RRSP.
by contributing $6000, he will have a $2000 refund come tax time.
Taking an RSP loan for $3000 ($1000 refund) and adding that to the original $6000 = $9000 accumulating within.

taking the $2000 refund plus the $1000 refund from the loan = $3000.
So the refund of $3000 can be used to pay back the RSP loan of $3000 prior to incurring minimal or no interest payments (once again based on how the interest payments were structured and if the delayed interest structure was used)

So essentially you have borrowed money to invest for free and instead of $6000 accumulating in the RRSP, you now have $9000, which in the end is paid off.

It can be done, but one has to make sure his/her advisor/planner knows exactlyt what they are doing.

This strategy can be used with anyone who does not have the funds to maximize their contributions.

PM if you have any questions

As far as I'm aware, interest payments are delayed on an RRSP loan for a period of time (until after the expected tax refund, presumably). That doesn't mean that interest isn't accruing, though. You still have to pay the accrued interest when you pay off the loan.

All you're really doing with your strategy is borrowing your expected refund so you can invest it sooner. It would be more efficient to contribute through payroll deductions where you can avoid having the tax withheld in the first place.

[wesboag]

As far as I'm aware, interest payments are delayed on an RRSP loan for a period of time (until after the expected tax refund, presumably). That doesn't mean that interest isn't accruing, though. You still have to pay the accrued interest when you pay off the loan.

All you're really doing with your strategy is borrowing your expected refund so you can invest it sooner. It would be more efficient to contribute through payroll deductions where you can avoid having the tax withheld in the first place.

Yes, but what does borrowing sooner mean? more time for compounding on your investment! By payrol deductions, it negates the whole idea behind an RSP top up because that will affectively reduce your cash flow. Yes there will be minimal interest as I suggested, but you are effectively contributing another 1/3 of your original contribution which can have dramatic affects over the long-term.

[YYC27]

Yes, but what does borrowing sooner mean? more time for compounding on your investment! By payrol deductions, it negates the whole idea behind an RSP top up because that will affectively reduce your cash flow. Yes there will be minimal interest as I suggested, but you are effectively contributing another 1/3 of your original contribution which can have dramatic affects over the long-term.

Contributing with each paycheque will get you much further ahead than waiting until the RRSP deadline and doing a lump sum. Maybe it does reduce your cashflow, but so will saving up for your lump sum.

[wesboag]

Contributing with each paycheque will get you much further ahead than waiting until the RRSP deadline and doing a lump sum. Maybe it does reduce your cashflow, but so will saving up for your lump sum.

nobody said you have to wait until the RRSP dead line, in fact that is what you want to avoid. That would also go against the entire purpose.
You can get up to 6 months delayed interest on an RSP loan. At 3% (as my firm loans at) the borrowing rate is insanely low and returns can be much higher. The strategy works, but it must be done correctly. I have done several with clients with nothing but good-great results. This is not a short term strategy, but a long one.

[YYC27]

nobody said you have to wait until the RRSP dead line, in fact that is what you want to avoid. That would also go against the entire purpose.
You can get up to 6 months delayed interest on an RSP loan. At 3% (as my firm loans at) the borrowing rate is insanely low and returns can be much higher. The strategy works, but it must be done correctly. I have done several with clients with nothing but good-great results. This is not a short term strategy, but a long one.

If you're already contributing throughout the year, then absoluetely the best strategy is to get your tax savings throughout the year by either contributing through payroll deduction, or through a pre-auth plan and filing a T1213. That way you can bump up your contributions right away for the same out-of-pocket cost.

[Wing Nut]

RSP loans are rarely a good idea for anyone... it's basically a big scam on the part of the big 5 banks.

IE - if you don't have enough money on hand to max your RSP, then so be it. Taking out a loan to do that is foolishness - you will now have to pay back that loan + interest over the course of this year, and will be no further ahead next year than you would be if you had just paid your RSP instead.

I disagree 100%. If someone is in a high tax bracket and has lots of RRSP room, loans can make great sense.

[olddog]

thanks for all the input guys.
a little insight to why i inquired about this so as to get more advice from you guys.
I make roughly about $50,000 per year. I used to contrubute $550 evey 2 weeks but started last month to do $1000 every 2 weeks.
I curently have $15000 in there but my goal is to have $25,000 so as to take advantage of the HBP (home buyers plan by at most april next year).
i dont mind skipping the rsp loan and simply getting my $25000 by my continuous payroll deduction but i found out that HBP requires funds to be in one's rrsp for at least 3months prior to withdrawal.
So, i figured if i can get a $10000 rsp loan to maximize what i can use for the HBP ($25000), i can use my $1000 deductions to pay back the $10000 rsp loan in less than a year. (in about 4 months to be exact(I have other things generating funds also).

So my goals in regards to the rsp loan are;
-Having the $25000 ready in case i find a property sonner than expected. Maybe even this year.
-Having a higher refund this year ($8000 from the $15000 currently sitting in my rrsp to date was put in this year and am guessing with a $10000 rsp loan , my total contribution will be about $18000-$20000 this year). If i dont get the $10000 rsp loan, then my current manner of contibution, my rrsp for the year will be about the same being that Jan-march are counted as part of the previous year. In other words, if i simply go with payroll deductions, i will have another $10000 in my rrsp from October to march next year with a contribution of $2000 per month. $1000 bi-weekly).

So the main goal it seems of the loan is just to have my HBP maxed and ready at $25000 just in case i find a property i like sooner than expected (which seems to be what might happen).

overall, Do you think this is a sensible idea?
Do you think i can get approved for a $10000 rsp loan?
Also, how does one find out what tax bracket one is in?
I just checked my CRA account and found that my 2009 RRSP deduction limit is $19,256. ( i carried over a lot from my schools days).
So from this and based on my current income and whatnot, is it sensible to max this rrsp limit i have?
also,based on my income and whatnot, any estimate on what kind of return i should expect if i infact make a $19000-$20000 contribution to my rsp as planned above?
i have never gotten more than $1500 before. if the return might justify the rsp loan (even though i plan on paying it off way ahead of whenever it is supposed to be paid off).

Thanks for taking the tme to read thorugh and applying any input whatsoever.


olddog

[dcaron9999]

The plan you have just exposed is good, as long as you have the discipline to pay back the RSP loan agressively within a year or less, while handling all closing and startup costs of a new house.

Determine your tax rate here: http://www.walterharder.ca/MarginalT...alculator.html

According to you figures and location, your tax rate is about 19%, so you would get back $3800 out of your $20,000 contribution. You can use that $3800 as a lump sum to pay back your loan, assuming it is an open loan.