It’s either the best year in recent memory to promote loans for RRSP contributions, or the worst.

But, behind the mantle of market despair, low interest rates and a wide offering of RRSP loans from AGF Trust Co., B2B Trust, Manulife Bank, Dundee Bank of Canada and MRS Trust Co. may make borrowing attractive to clients who are staying focused on the longer term.

“It always comes down to the individual client’s comfort level,” says Talbot Stevens, a consultant in London, Ont., who has written widely about leveraged investment strategies as vehicles that force people to save money.

“The most important thing is getting the magnitude of the loan right,” he says. “I’d say, for most Canadians, the sweet spot is about 20% to 30% of borrowing capacity. Conservative is anything under 50%.”

The idea is that clients borrow to top up their RRSP contributions. The resulting tax refund is then used to pay the loan down or off, and the client benefits by having more money tucked away.

But your clients may have question about this strategy, given current market turbulence. Stevens points out that this is the first year, since Bank of Nova Scotiaintroduced the concept of the RRSP catch-up loan in 1996, in which retail investors are digesting the implications of a full-scale market correction.

Last year, market turbulence during RRSP season meant that twice as many people admitted to leaving contributions to the last minute, according to a survey by Bank of Montreal and Leger Marketing. This year, even more people are likely to question whether to invest in RRSPs, let alone whether they should borrow to do it.

But history suggests clients should borrow to top their RRSP contributions this year, says Stevens. If you look at the six market downturns since 1957 in which the Toronto Stock Exchange’s composite index dropped by more than 40%, in every case, Stevens argues, the market rebounded by 40% within 12 months. And since no one can say when that will happen, it is best to be in the marketplace now than take a chance of missing the uptick.

Of course, your clients don’t have to put their RRSP contributions into equities vehicles. If they are more comfortable, they can put guaranteed investment certificates, bonds and bond equivalents into their RRSPs and wait until the market is more stable before moving a portion into equities.

“The focus should be on picking the highest-quality investments that will prevail in the long run, regardless of market volatility,” argues Keith Greenard of the Greenard Group, which operates under the ScotiaMcLeod Inc. umbrella in Victoria. “If the energy is focused on picking the best investments and the best advisor, then an RRSP loan may make sense.”

But clients must have the discipline to use their tax refunds to cover the loans: “The real benefit of a forced savings approach using loans is behavioural,” Stevens argues, “because it locks in a higher level of commitment to savings. But it can also be a behavioural bomb. People may be tempted to make the minimum payment and not pay down the principal.”

“The general rule,” adds Greenard, “is that the quicker you pay back the RRSP loan, the more advantageous it is. Short-term loans of less than a year may have minimal interest costs and may assist those with fluctuating income. The more difficult question is when do larger, longer-term loans — often used to catch up on a significant amount of unused contribution room — make sense.”

Author and commentator Gordon Pape has long said that RRSP loans make sense only as part of an integrated investment plan: “A decision of this magnitude needs to be part of an overall plan, not a one-off.”

The fact that an RRSP loan is not tax-deductible is a crucial consideration, Pape warns. He also tells people to consider the time frame before their planned retirement dates.

Here is a sampling of what companies are offering in terms of RRSP loans for advisors :

> AGF Trust Co. , owned by Toronto-based AGF Management Ltd. , offers a range of loans with a preferred rate if the client is purchasing AGF mutual funds, Harmony pools or AGF Trust GICs. The loan is also discounted if the client holds a self-directed RRSP at AGF’s strategic partner, Canadian Western Trust Co.

@page_break@Rates vary, depending on the term of the loan. For example, a “contribution loan,” designed for clients who don’t have the money for the current year’s contribution, can be obtained for a preferential rate of prime minus 1% on a minimum amount of $1,000 with a term of one to two years.

The regular rate on a “multi-fund” loan is prime. Rates float with prime and AGF’s current prime rate is 4.5%.

AGF adds a 1% premium for paper applications to encourage online transactions.

The next largest loan is a top-up loan, with a minimum of $2,500 and a three- to five-year term, available at a preferential rate of prime plus 1% or a “multi-fund” rate of prime plus 1.5%.

For bigger borrowers, there is the “maximizer loan” with a minimum amount of $5,000 and a term of six to 10 years. The preferential rate is the same as the multi-fund rate at prime plus 2.5%. Loan payments can be deferred for up to 180 days, but interest begins accruing immediately.

AGF does not pay a commission to advisors on the loans, but the advisor will make the usual commission on any products purchased by the client.

> B2B Trust, owned by Montreal-based Laurentian Bank of Canada, offers a choice of fixed or variable rates for RRSP loans of one- to two-year terms. Clients who are worried about rate increases can choose the fixed-rate loan and lock it in.

The variable rate on one-year loans is prime, currently 4% at B2B, while the fixed rate is prime plus 1%.

Two-year loans, likewise, are available at a variable rate of prime or a fixed rate of prime plus 1.5%.

Three- to five-year loans are available only at a variable rate of prime plus 1.5%.

Six- to 10-year loans have a variable rate of prime plus 2.5%.

B2B does not manage mutual funds or segregated funds so there are no preferential rates.

Other financial institutions offering similar loans and programs through the advisor channel include MRS Trust, owned by Mackenzie Financial Corp.,Manulife Bank, owned by Toronto-based Manulife Financial Corp. and Dundee Bank, part of Bank of Nova Scotia. IE