Repay Home Buyers Plan or Contribute to RRSP?

by Mike Holman

I had a discussion last year with my wife where we talked about whether to give our home buyers plan debt priority over rrsp contributions.

Although it initially seemed like a good idea to pay the HBP back as soon as possible since it was a smaller amount (about 30k combined), it occurred to me that if you have any rrsp contribution room then you are much better off just paying the minimum HBP repayment amount each year and use any extra money that you want to put into the rrsp for a contribution.

The reason behind this is that whether you are paying back HBP or making an rrsp contribution, the amount that gets added to the rrsp is the same so since the rrsp contribution will give a tax rebate, that is generally the better choice.

For example, lets say if I have $5000 that I want to put into my rrsp and my minimum annual HBP payment is $1333 and my marginal tax rate is 40%.

If I were to make the minimum HBP payment and contribute the remaining $3667 into my rrsp then my rrsp would have an extra $5000 in it and I would get a tax rebate of $1466.80.

If I were to put the entire $5000 into a HBP repayment then my rrsp would have an extra $5000 in it and I would not get any tax rebate. I would however owe less money to the HBP and future minimum payments will be smaller.

So its pretty clear to me that if you have the choice between contributing to your rrsp or extra repayments into your HBP the rrsp is the winner.

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{ 15 comments… read them below or add one }

1 TheFinancialBlogger

In fact, if you really want to increase your HBP payment, you can always use your next year tax rebate from this year’s RRSP contribution. However, I think that you are simly better off increasing your RRSP contribution and do the HBP miminum payment over 15 years.

2 MillionDollarJourney

Mike, I would do the same. Max out your RRSP, pay the required amount on the HBP. And if you have any cash left over, perhaps dump it into your HBP.

3 Mr. Cheap

I’d definitely do what you’re doing for people in a 40% tax bracket. If someone was earning low income and expected to be making more income in the future, they MAY be better off paying back the HBP and “banking” the RRSP contribution (or I suppose they could just contribute and defer the credit).

4 FourPillars

That’s a good point Mr. Cheap – in my example I’m assuming that you are working and contributing at a higher tax bracket. If the income is lower that year for some reason then that might be an exception where they may not be much difference between the two options.

Mike

5 nice

One more good reason to max RRSP instead of HBP: the money in your RRSP account could be as a high interest emergency saving – still can be used for you anytime; the HBP, as the lowest interest borrowing possibly have, once you payed, you lost access.

You never know when you need emergency money and the risk is always there.

thanks for all of the posting.

6 investor

It sounds good, but what if down the road you want to use the HBP again, the sooner you pay it back the sooner you can use the money again. How long after paying back the HBP can it then be used again? Does anyone know?

7 Marlin

Can I use my existing RRSP to transfer money to my wifes HBP without penalty?

8 Matt

@investor:

I’m pretty sure the HBP can only be used to buy your first home. So you can only use it once.

I think there are some exemptions for people with disabilities or people caring for people with disabilities, but for most people it’s one time only.

9 Money Smarts Blog

Actually, you can use the HBP more than once. They consider “first time home buyer” as anyone who hasn’t owned a home in the past 4 years.

http://www.moneysmartsblog.com/first-time-home-buyers-loan-rrsp-hbp/

10 XSF

I’m not saying either way is better, but another consideration to pay down HBP first is, if you anticipate making more (ie: will be in a higher tax bracket) in future. Your later RRSP contributions will give you more returns in that case. Someone who recently finished school and is starting a career for example, would be in a favourable situation where, to me, it would make more sense to save those RRSP contributions for later.

11 Mike Holman

@XSF – That’s a good point which I hadn’t thought of.

12 Launa

For 10 years now I have been paying back my HBP. When it is paid off, what happens to it, as I no longer have an RRSP account, but I still have GIC’s? Do I even get it back? If I decided to pay it back sooner, who do I pay it to?

13 Ghassan

Would like to clarify one point as it seems a lot of who has posted already confused . Whether you contribute to your rrsp or pay what you owe to you HBP it goes in the same account which an rrsp account , but whichever amount claimed on your income tax return as repayment of HBP will not give you income reduction . Moreover, the fund in the rrsp whether considered as rrsp contribution or HBP contribution get. Invested based in your choice kept either till you retire and have lower income then star withdrawing it or you can take it all or partially at any time , but you will have to add it to your income for the year it has been withdrawn.

14 YSk

Where I repay HBP payments, CRA or bank where my rrsp was?

15 Bob

Hi there, enjoyed flipping through your site after finding it on google while looking up a question that no one seems to have an answer for.

Scenario:
Your RRSP contribution for 2017 is $5,000.
You start the year with $5,000 and contribute $5,000, and now have $10,000.
After 90 days you withdraw that $10,000 for a HPB first time home purchase.

Can you contribute money back into the RRSP to either begin repaying the withdrawal (even though it’s not required until the 2nd year after the purchase), or at least contribute back some of the money withdrawn, or do you have to wait until the next year to begin contributing again, now that your contribution room has gone down to 0 with that $5,000 contribution that reached you to your annual limit?

Basically I’m almost at my annual limit in May, and we’re buying a home. I have to withdraw some of the funds (not anything I’ve put in, in the last 90 days), to help me get to a higher down payment (20% instead of 15%). However, I’m not in a mortgage yet and have a little bit of monthly income (I put in $200 off of every pay check automatically deducted and given to my RRSP holder). Once I hit my limit, I’d have to shut off contributions, unless I could continue contributing due to the withdrawal (would it open up that space again or do I have to wait until 2018)?

Thanks for your help,
Greg

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