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Does an RRSP loan make sense?
In most cases, borrowing to contribute to an RRSP remains a valid strategy. Loans are still very affordable by historical standards, and RRSP loans are often available at special rates.
The Education Credit Union offers RRSP loans with the following features:
- Interest rate as low as prime for investments with ECU
- Terms of up to 5 years
- 1st payment deferral of up to 90 days
- Life and disabiltiy insurance available
Long-term benefit, short-term cost
To illustrate the benefit of borrowing for an RRSP, let's use a $5,000 example. You borrow $5,000 at 6%, to contribute to your RRSP. If that $5,000 generates a modest investment return of just 5% compounded annually, it will increase the value of your RRSP by $8,144 after 10 years. After 25 years, the increase is almost $17,000.
What's the cost? If you pay the loan back over 12 months, your total interest cost will be just $163.99.
If you can pay the loan back sooner, your interest costs will be even less. One of the most effective ways to do this is to put the tax savings created by the RRSP contribution towards repaying the debt. Many financial institutions offer repayment schedules at this time of year that allow sufficient time to report the contribution for taxation year and realize the tax savings before you have to start making payments on the loan.
Professional advice can help you determine the optimal amount to borrow, and possibly uncover contribution sources that you have overlooked.
| Contact Us |
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| Lending Services |
Education Centre
519-742-3500 |
TechTown
Branch 519-772-3050 |
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