Options available to borrow with interest-free loans
Purchasing a first home or going back to school is often a necessary and costly step for many. Luckily, as Canadians, we have the option to borrow an interest-free loan from our Registered Retirement Savings Plan (RRSP) to make both these choices easier and more affordable.
This is made possible under the government’s Home Buyers Plan and Lifelong Learning Plan programs.
But according to Patricia Lovett-Reid, senior vice-president at TD Waterhouse Canada Inc., there are a few stipulations to be aware of. First, the funds you withdraw from your RRSPs under the two plans must have been in the account for at least 90 days. Next, the funds must be repaid in 15 years from the date of withdrawal, with the first payment due two years from when you withdraw. Last, if the money is used for a home, it must be a principal residence, and you must move in within a year.
“You have to think: Can I afford my property taxes, my mortgage payment, my heating costs and the Home Buyers Plan?” says Lovett-Reid.
If you will be borrowing under the Lifelong Learning Plan, you can take up to $10,000 a year, up to a maximum of $20,000 over four years, says Lovett-Reid. You must be considered a full-time student, she says, and the course has to be three consecutive months in length. The money must be paid back over 10 years, with the first payment due five years after the withdrawal. Lovett-Reid says if you miss a payment, it turns into taxable income.
The disadvantage to taking money out of your RRSP, Lovett-Reid says, is you lose the compounding. In some cases, she says, losing the compounded interest on an RRSP will be more than a higher interest rate that you would be paying on a higher mortgage. If the equity markets are doing very well, says Lovett-Reid, you might be losing eight per cent interest on an RRSP versus paying five per cent on a mortgage.
But she offers a tip for young investors who might use their RRSP to further their education in the future: Invest early.
“The program is there to encourage us to go back to school if we need to or want to,” she says, adding you need to take into consideration how much you will lose in RRSP growth.