The RRSP deadline is on Monday, and so you are probably thinking about the best way to top up your contributions. With the recession ravaging finances, and the debt hangover from the holidays likely still dogging you, you might be tempted to borrow money for your RRSPs. Some people take out a line of credit to do this; others are thinking that since mortgage rates are so low, it might be better to take the money from your home’s equity.
Image: Voobie / Flickr
In general, many financial advisors are against borrowing for your investments. Borrowing incurs you greater fees and you’ll also have to pay interest payments. But if you are going to borrow, make sure you do it wisely.
Chris Gordon, a financial advisor at Edward Jones puts it this way: “If you look at the additional costs of, let’s say, a $10,000 RRSP loan repaid within a year, it’s probably only going to cost you a few hundred dollars in interest charges. If you took that same $10,000 and added it to a traditional mortgage with a 25-year amortization, it may add thousands of dollars in additional interest costs over the life of the mortgage.”
Also note that the interest on loans that are made for registered investment products like RRSP cannot be deducted at tax time.
It’s also good to remember that your RRSP contribution space will not go away. So if you can’t make the deadline this year, it might be wiser to just slowly make regular contributions over the coming year. One great benefit of this is that if you run into any financial problems, you can miss one of the savings deposits one month. If you have added the cost of your RRSPs to your mortgage, missing a mortgage payment will cause you some problems.
As Mr Gordon says, “If you default on a mortgage [payment] that’s a serious thing. If your circumstances change and you need to adjust your savings plan, you can do that in a flexible manner.”
The only time you should consider using your mortgage as a way to secure space for your RRSPs is if you have already built up a lot of equity in your home, and you need to catch up on your RRSP contributions. If you make an RRSP contribution like this, it will get you a big tax refund, and then you can reapply it to your mortgage. However, there is definitely some risk in this method.
The best way to save for your RRSPs – but perhaps not the sexiest way – is to spend less than you earn and sock away the leftover.
Heleen Jacobsen
Broker of Record with InfoMarket Group GMAC Real Estate
www.infomarketgroup.com
No related posts found
Morgan Franey
bonjour, i wanted to stop and say thanks for that read this is one of the best pages ive found in a long time.