With rrsp contribution limits rising every year, it can be difficult for clients to scrounge enough money to make the most of their RRSP room. Even if they do “max out” this year, many still have unused room from previous years.

In some cases, borrowing can make a lot of sense. And RRSP loans at attractive rates are available to Canadians through the advisor network as well as banks.

Advisors can help clients obtain loans directly from a handful of suppliers. Although loans to individuals are available through all the chartered banks, many advisors prefer to help their clients negotiate loans through financial institutions that specifically serve the advisor channel, including: AGF Trust Co. , owned by Toronto-based AGF Fund Management Ltd.; MRS Trust Co. , owned by Toronto-based Mackenzie Financial Corp.; B2B Trust, owned by Montreal-based Laurentian Bank of Canada; and Manulife Bank, owned by Toronto-based Manulife Financial Corp.

The advantage is that the advisor can help the client manage both the asset and liability side of his or her personal balance sheet, rather than sending the client off to a bank to borrow money for an RRSP — and possibly losing the client to bank products outside of the advisor’s purview.

“The advisor is able to add value by helping clients through our online application system,” says John Bennett, executive vice president of AGF Trust. “Essentially, we help advisors to be a one-stop financial source. It’s a value-added service when the advisor can recommend investment products for an RRSP, and help arrange a loan as well.”

AGF Trust guarantees that all clients can negotiate a minimum loan of $2,500, no matter what turns up in their credit checks. That way, the client can re-establish a credit history if necessary and the advisor is able to offer at least a partial solution, even if the client can’t borrow as much as he or she would like. Proof of income, such as an income tax return or letter from an employer, is seldom required for loans less than $50,000 at AGF Trust. Most loans are for less than $10,000, but some people borrow $100,000 or more for RRSPs.

AGF’s interest rates depend on the term of the loan and whether it is “preferential.” The preferential rate is available only if the loan is invested in an RRSP at AGF or in a self-directed RRSP at an AGF-approved dealer.

A “contribution loan” intended to finance the current year’s RRSP contribution can be obtained for a preferential rate of prime minus 1% on a minimum of $1,000 with a term of one to two years.

Otherwise, the rate on a regular “multi-fund” RRSP loan is prime. Rates float with prime, and a 1% premium is added for applications made on paper rather than online, AGF says.

The prime rate was recently 4.75%, making a preferential RRSP loan of 3.75% an attractive proposition, particularly if it is paid off in the first year. The client doesn’t need to take a whole lot of investment risk to generate a return that will cover the cost of the loan.

Lots of loan potential

The next step up at AGF Trust is a “top-up” loan — a minimum loan of $2,500 with a three- to five-year term — which is available at a preferential rate of prime plus 1%. Finally, there’s the “maximizer loan,” with a minimum of $5,000 and a term of six to 10 years. The preferential rate on this loan is prime plus 2.5%.

Regular multi-fund loans in these two categories cost half a percentage point more than the preferential rates. With all AGF loans, the borrower can defer repayment for up to 180 days, but interest will accrue. However, delaying often allows the borrower to pay back a big chunk of the loan with an income tax refund.

“Loans can be quite large, and some people are catching up on a lot of unused RRSP room,” says Bennett. “The longer the time period required to pay the loan back, the greater the risk to the lending institution and the higher the rate.”

Manulife Bank has been offering RRSP loans through its own advisor network, as well as independent financial planning firms, since 1994. Jane Strong, assistant vice president of product and marketing services, views any loan as part of an overall financial plan, and says advisors can play an important role in helping clients decide when borrowing makes sense and then in making appropriate investments. Manulife Bank offers RRSP loans of $1,000-$16,500. Loans of this size can be approved immediately through the online application process, while larger loans require more information and more time. Repayment can begin immediately or after 90 days, Strong says.

@page_break@Laurentian Bank’s B2B Trust specializes in products offered through the advisor channel or product manufacturers such as fund-management companies that participate in B2B’s Distribution Alliance program. The minimum loan is $2,500, and loans are available at both fixed and floating rates. The first monthly payment can be delayed for up to six months, but interest accrues from the date of the loan. Amortization starts at the end of the deferral period.

“The advisor can assess the client’s entire financial picture and determine if an RRSP loan is the right strategy for building savings,” says Tricia Barry, Toronto-based B2B’s vice president of marketing.

At B2B, the floating-rate loan charges the prime rate if it is amortized over two years or less. The rates rise to prime plus 1.5% for a three- to five-year loan, and to prime plus 2.5% for a six- to 10-year loan. There is no maximum for these loans, which means investors have access to “top up” floating loans at prime, says Barry. Selected participants in the B2B Trust RRSP Loan Distribution Alliance program would have access to preferred rates for longer terms. Specifically, three- to five-year terms are offered through this program at prime plus 1%, and loans for six to 10 years are offered at prime plus 2%.

For fixed-rate loans, the maximum is $16,500. If the loan repayment is amortized over a year, the rate is prime plus 1%; if two years, it is prime plus 1.5%.

With only 8% of Canadians maximizing their RRSP room, there is a lot of borrowing potential out there from clients who want to make up unused contributions room. According to Statistics Canada, at the end of 2004, some 18 million Canadians had accumulated $377 billion in unused RRSP room. IE