I had a discussion last year with my wife where we talked about whether to give our home buyer’s 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, let’s 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 it’s 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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