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I've a credit line that charges a 2% fee to borrow money and no interest charges for 8 months. I've used this facility before for high value purchases and have not occurred any hidden fees / payments (since I repay it all before end of interest-free term).

Does it make sense to borrow money from this facility to invest in my RRSP account?

That RRSP account is a self-directed RSP and I usually end up going long on ETF / mutual funds.

If It does make sense, What are the factors I should consider to make this a sound investment?

I also do have enough contribution room in my RRSP and probably will look at taking out approximately $5000.

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    Presumably, since RRSP is a retirement plan, you won't be taking the money back out to repay the loan... instead, are you asking: does it make sense to borrow $5,000 (+$100 fee) to load your RRSP "upfront" and then repay 8 x $637.50 from salary (as an alternative to saving $625 per month into the RRSP, for the same net $5,000 in the RRSP, but spread out over a number of months, and therefore with a reduced chance to grow)? – TripeHound Feb 7 at 16:08
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    Yes, I don't plan on taking money out of the RRSP until retirement. I would replay the loan from my regular salary. – Viv Feb 7 at 16:16
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Scenario 1: Lump Sum from Loan

Borrow $5,000 (with a $100 fee) and contribute $5,000 in one lump sum to your RRSP. Repay the loan at $637.50 over the next eight months (assuming the fee is added to the loan amount and not paid up-front).

Total contribution to RRSP: $5,000.
Total cost to you: $5,100.

Scenario 2: Monthly Contributions

Over the course of eight months, contribute $625/month to your RRSP.

Total contribution to RRSP: $5,000.
Total cost to you: $5,000.

Comparison

At first glance, at the end of eight months you will be in the same position regarding the RRSP (savings increased by $5,000) but the first scenario will have cost an extra $100 to get there.

However, assuming your investments in the RRSP are rising in value over the eight months in question, then in the first case you would have had all the $5,000 benefiting from the rise in value from day one. In the second case, because you are paying monthly – and only hit $5,000 in the last month – the gains you make will be roughly equivalent to having only had $2,500 invested from day one.

If your investments were to grow at 8% per year, then – by my rough calculations – the first scenario should net a gain of around $266, whereas the second would gain $133. This would be an overall benefit of $133, slightly beating the $100 extra it cost to take out the loan.

Conversely, if your investments were to fall over those eight months, you would be slightly better off with monthly contributions (the $625 in the final months will buy more "units" because their price has fallen and – assuming values rise in the future – you will be better off).

So: you have to decide what are the chances of the stock market rising over the eight months concerned? Does the (modest, in most cases) potential extra gain outweigh the risk that "something happens" and you have difficulty in repaying the loan and possibly incurring interest charges? What are the chances that your investment will lose value, and make the lump-sum option worse?

  • Also contributing to my RRSP would reduce by taxes and I would be getting more money back from the government. – Viv Feb 7 at 18:07
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    I don't know specifically RRSP rules, but would there be a tax difference between contributing a lump sum and eight monthly contributions? For the purpose of this question, I'm more or less assuming you're doing one or the other. – TripeHound Feb 7 at 18:17
  • As far as I know there is no difference between lump sum / monthly contributions, We do have till end of Feb to contribute to RRSP for the 2018 (previous) tax year. – Viv Feb 7 at 18:23

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