Repay HBP or pay down mortgage?

by Mike Holman

This post is a continuation of Monday’s post which concluded that making an extra rrsp contribution is better than making an extra HBP repayment. Today’s issue is whether it’s better to make an extra HBP repayment or pay down the mortgage.

This one is not as clear cut as the rrsp vs HBP issue. If you put money into the rrsp then you could potentially make a better rate of return compared to the interest on your mortgage, on the other hand, paying down the mortgage gives the guaranteed return of your interest rate.

I would say that for a typical example of someone who owes a lot more on their mortgage than they do on their HBP, the deciding factor is interest rate risk. This is something which I’ve talked about previously and basically it refers to the risk involved if interest rates go up. One great feature of the HBP is that there is no interest rate risk because there is no interest paid. Regardless of what the prime rate is, or mortgage rates are, the amount you owe on the HBP is constant. Your mortgage however, has no such benefit since the interest charged will go up or down with the mortgage rates.

If you have extra money and you make an extra HBP repayment, then your interest rate risk will not change. If you instead make an extra payment to your mortgage, then your interest rate risk will decrease.

Bottom line then is that you should consider making extra mortgage payments and rrsp contributions before paying extra HBP payments. In my case I plan to completely pay off my mortgage and max out my rrsp and only then will I consider making extra payments to the HBP.

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