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Interest-free Loans
Two special programs let certain people take interest-free loans from their RSPs:
- Homebuyers’ Plan (HBP): You can borrow up to $20,000 to buy a principal residence if neither you nor your spouse owned one in the past five years. Your spouse can also borrow up to $20,000 from his or her RSP. The money must be repaid within 15 years starting two years after the withdrawal.
- Lifelong Learning Plan (LLP): You can tap your RSP or your spouse’s if enrolling full-time in a recognized educational program of at least three months. You can borrow up to $20,000 over four years, taking no more than $10,000 in any one year. The RSP must be repaid within 10 years starting five years after the first withdrawal.
The disabled get special eligibility concessions.
Each program requires a minimum annual repayment. If you miss any, the amount is considered an RSP withdrawal. It’s then taxed as income for that year and can’t go back into your plan.
An HBP loan can be useful if you need just a bit more cash to avoid a costly second mortgage or expensive default insurance. The LLP is better than the straightforward RSP withdrawals done by many students because LLP withdrawals are not taxed and go back into your plan. Otherwise, think very carefully before using these programs; this is not free money. Your cost is the growth your RSP gives up while the loan is outstanding – plus all future compounding on those earnings. The younger you are, the greater the potential cost. If repayment takes the full 10 or 15 years, decades of lost compounding could easily make this far more expensive than a conventional loan. Your cost will be even higher if the repayments – which are not tax-deductible – take so much cash that you can’t afford full RSP contributions in future years.
Note that, to prevent quick flips, you lose the tax deduction on RSP contributions made within 90 days of an HBP or LLP withdrawal.
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