# Should I use RRSP HBP if I already have 20% down payment?



## sillywabbit (Apr 27, 2016)

Hi all, question on what I should do.Is it worth dipping into my RRSP First Time Home Buyers plan if I have over 20% for downpayment?

I am looking at purchasing a home for $415 000

I have $125 000 as a downpayment, and $75000 in RRSP. My income is 100k a year.

I am looking at a few options.

Option 1: Use the HBP for $25 000 to have $150 000 downpayment. I know that I have to repay it over 15 years.

Option 2: Leave my RRSP alone as is, and put $25 000 of my downpayment to RRSP and then use that as my RRSP HBP so therefore I will still have $125 000 downpayment but I will have a $25 000 tax deferral from this year? I know that I will still then have to repay $25 000 to my RRSP over 15 years.

Option 3: Do not use HBP and just leave everything as is and use $125 000 as a downpayment.


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## mordko (Jan 23, 2016)

It depends on your expected return vs mortgage interest rates.

Personally I would go for option 3 and then pay off my mortgage in preference to adding to the RRSP until >>50% of the value has been paid off.


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## sillywabbit (Apr 27, 2016)

My mortgage rate is 2.19%

I am not really getting much from my RRSP it seems (stupid mutual funds)


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## fretwire (Apr 13, 2016)

How about option 2 then take then cash you get back from taxes and put it towards your principal next year?


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## sillywabbit (Apr 27, 2016)

*139*

That is exactly what I am thinking. Option 2 looks most appealing to me so I wanted to hear what anyone else has to say about it that I may not know of. Seems like a good idea to me.


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## sillywabbit (Apr 27, 2016)

The only downfall I see is that I would have to repay it back to RRSP over 15 years...


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## fretwire (Apr 13, 2016)

25k over 15 years is just under $140 per month which should be easy with 100k income. Even if the wheels get wobbly and your income drops in the future you're likely to be able to swing that. If you have a financial shock within the next 15 years that makes $140/mo difficult your mortgage payments will probably be the bigger concern anyways.

If you use lower fee mutual funds you're very likely to average more than 2.19% per year return after fees over 15 years. Even with the higher fee funds you'll probably average more than 2.19% a year.

You can also pay back the 25k in less than 15 years (at least I think you can!) so you're effectively increasing your RRSP contribution room.


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## sillywabbit (Apr 27, 2016)

Yes, I agree with everything you say.

The only downfall I guess is that since I have to pay back the $25 000, technically that will eventually be $25 000 less towards the mortgage anyway in the end? Well, I guess I will get a tax deduction of about $10 000 so I guess you can say I will be paying $15 000 back in the end.


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## fretwire (Apr 13, 2016)

True that, but I see it more as a 135k downpayment (granted, 10k delayed to next year) plus some RRSP contribution room. Down the road you can direct more towards the mortgage as appropriate and as your income increases (which is likely, generally speaking).

Because being mortgage free is such a weight off the shoulders I always tend towards paying down the mortgage where possible. The only exception is retirement savings which go before the mortgage.

That might not be 'classic' financial advice but at the end of the day if you have no mortgage as well as retirement savings, what else do you really need?


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## Afp (Mar 19, 2013)

Dear sillywallbit,

As someone who was in similar situation as you are today. I took your option 1 and I have regretted dearly about it. It was March 2009, the first year HBP was increased from $20,000 to $25,000 by the Conservative government to help boosting the economy that was tanking fast. 

Fast forward to today, mortgage is gone but the HBP debt is still there as I am only paying the minimum 1,666 per annual tax year. 

Your option 1 that I took seems to be the most prudent choice, so what went wrong? What I did not plan for is I am making more and more each year and I am in way higher income tax bracket now than I used to be when I took that HBP. Every year when the tax time comes and I have to enter that $1,666 of my RRSP but getting back zero , it reminds me damn... This is the 40cent on a dollar tax break of my current money I am paying for the 20cent on a dollar tax break that I borrowed. Stupid me!

Knowing what I know today, If I could go back in time, I would not use that HBP. That $25,000 is less than a year of saving for your income and you save yourself 15 years of hurt unless your future plan is not making a lot more than you are earning today.

It may sound funny but that is just exactly what I will do: FIRE - stop working, retire early and will pay off the remaining balance right on the first year that I could report a fat zero as my income.


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## sillywabbit (Apr 27, 2016)

Afp said:


> Dear sillywallbit,
> 
> As someone who was in similar situation as you are today. I took your option 1 and I have regretted dearly about it. It was March 2009, the first year HBP was increased from $20,000 to $25,000 by the Conservative government to help boosting the economy that was tanking fast.
> 
> ...


Thank you for your input. I feel as if I were to regret option 1 as well if I did it.

I am leaning towards option 2 in this case but the thought of having to pay back 1666 a year is not appealing. I understand using the HBP is like getting an interest free loan of $25 000 for 15 years. 

I did the calculations and if I do take option 2 and put $25 000 towards my RRSP, and then take it out as HBP, I will save $6000 in interest over 20 years (assuming I make the minimum monthly mortgage payments which I doubt I will). I don't know if the small savings are worth doing that and then having to pay $1666 a year to repay it for 15 years. The nice thing would be that it would lower my income this year by $25 000 and I would get approximately a $10 000 tax break/refund on it come income tax time. But also means an additional $15 000 over 15 years has to go back to my HBP.


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## OptsyEagle (Nov 29, 2009)

sillywabbit said:


> I did the calculations and if I do take option 2 and put $25 000 towards my RRSP, and then take it out as HBP, I will save $6000 in interest over 20 years (assuming I make the minimum monthly mortgage payments which I doubt I will). I don't know if the small savings are worth doing that and then having to pay $1666 a year to repay it for 15 years. The nice thing would be that it would lower my income this year by $25 000 and I would get approximately a $10 000 tax break/refund on it come income tax time. But also means an additional $15 000 over 15 years has to go back to my HBP.


You are not saving any interest because in your other option you are still putting the $25,000 on the mortgage and therefore the mortgage interest is saved in either case.

This whole calculation comes down to getting a $10,000 refund compared to having to pay back $1,666 per year for 15 years AND having an extra $25,000 in your RRSP at retirement (since you paid it back) when it is all done.

Those are the calculating variables, as I see it.

Since you tend to need a little extra spending money when you just buy a house (you do need to furnish it), that $10,000 right now might be worth a little more to you then the $1,666 each year over 15 years, keeping in mind that money now always feels better then money later ... until it is later. That being said, I bet you will like that extra $25,000 in your RRSP when you are retired, as well, but it is hard to value it right now...but it still has value.


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## sillywabbit (Apr 27, 2016)

OptsyEagle said:


> You are not saving any interest because in your other option you are still putting the $25,000 on the mortgage and therefore the mortgage interest is saved in either case.
> 
> This whole calculation comes down to getting a $10,000 refund compared to having to pay back $1,666 per year for 15 years AND having an extra $25,000 in your RRSP at retirement (since you paid it back) when it is all done.
> 
> ...



Excellent point! I should add that I am 29 years old. What would you do in this case?


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## hboy43 (May 10, 2009)

2 or 3% is a crappy long term return that I would not commit myself to getting in my Rrsp, a by definition long term investing vehicle. Better to leave that return to some external party and shoot for the predicted (by some) future stock returns of 6% PA.


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## OptsyEagle (Nov 29, 2009)

sillywabbit said:


> Excellent point! I should add that I am 29 years old. What would you do in this case?


I would flow it through the RRSP and take the tax refund. Use the HBP for your house.


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## fretwire (Apr 13, 2016)

For what it's worth I was the exact same age as you when I bought my place. I took 16500 out of my RRSP as part of the HBP and never regretted it. I had repay at a minimum rate of 1100 a year which was a lot of money at the time but felt like nothing 10 years later.

It easily passes the "would I do it again" test - I would absolutely go the same route and would probably take out more if I were back in the same situation.


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## sillywabbit (Apr 27, 2016)

fretwire said:


> For what it's worth I was the exact same age as you when I bought my place. I took 16500 out of my RRSP as part of the HBP and never regretted it. I had repay at a minimum rate of 1100 a year which was a lot of money at the time but felt like nothing 10 years later.
> 
> It easily passes the "would I do it again" test - I would absolutely go the same route and would probably take out more if I were back in the same situation.


Ok awesome. That makes me feel better. 

Now the question is do I just use $25 000 from my HBP or do I put in $25 000 from my initial $125 000 downpayment and then withdraw that as the HBP. It seems I should put in the $25 000 from my downpayment and then use that as my HBP so I can reap the tax benefit.

If I do it this way, I will only have $125 000 downpayment though. However, if I keep my downpayment as is with $125 000 and use $25 000 from RRSP, I will then put $150 000 as a downpayment.

Im just trying to see which option is best for me and appreciate everyones input!


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## Spudd (Oct 11, 2011)

Remember you will also need money for closing costs, furniture, buying a lawnmower/hose/etc. Don't put all your spare change in the downpayment.

Do you have enough RRSP room for the extra 25k?


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## TomB19 (Sep 24, 2015)

If you are younger than 40, tax savings from RRSP contributions are essentially free money. I'd hit the RRSP as hard as you can but there are a couple of things to consider.

- Make sure you have 25% down on the house. At that point, you will have a lower interest rate and no CMHC cost (assuming it is your primary residence).
- I wouldn't borrow more than I had to from the HBP if I already had 25% down plus a solid RRSP contribution. Pull as much as you need to from the HBP to max the RRSP contribution but no more.
- Fix your RRSP. Start learning how to invest because mutual funds are not the answer. It sounds to me like you will have no trouble doing much better than you do. I did pretty well in 2015 where most people didn't and I'm no money man. I'm just an IT guy who has made it my business to learn what I can.
- The problem with the HBP is the annual repayment. It sucks and will cramp your finances on an annual basis.


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## Spudd (Oct 11, 2011)

I don't really get why everyone is saying the annual repayment is such a hardship. Assuming you plan to contribute at least as much as the annual repayment to your RRSP annually, that's your annual repayment right there. $1666 annually is only $139 a month, so for someone making 100k it shouldn't be an issue to contribute that to the RRSP. Then any additional monies contributed to the RRSP will start to act as tax breaks. 

And worst case scenario, you've had a rough year and haven't contributed anything to your RRSP. OK, so now you need to pay tax on $1666 in extra income. So maybe it costs you $800 at the most in tax if you weren't able to do any contributions at all. It's not the end of the world. But if the reason you couldn't contribute to your RRSP was you were laid off, then it will cost way less than $800 in taxes because your income will be in a lower tax bracket.


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## Afp (Mar 19, 2013)

Spudd said:


> I don't really get why everyone is saying the annual repayment is such a hardship. Assuming you plan to contribute at least as much as the annual repayment to your RRSP annually, that's your annual repayment right there. $1666 annually is only $139 a month, so for someone making 100k it shouldn't be an issue to contribute that to the RRSP. Then any additional monies contributed to the RRSP will start to act as tax breaks.
> 
> And worst case scenario, you've had a rough year and haven't contributed anything to your RRSP. OK, so now you need to pay tax on $1666 in extra income. So maybe it costs you $800 at the most in tax if you weren't able to do any contributions at all. It's not the end of the world. But if the reason you couldn't contribute to your RRSP was you were laid off, then it will cost way less than $800 in taxes because your income will be in a lower tax bracket.



You are right and I agree with everything you say above. It should not be such a hardship paying back this $1666 annual repayment but let's look at this example:


_ A young man in the early years of his career, his income tax is only at 20%. He has $100 in his RRSP and he borrows it all for HBP. This $100 today comes at $20 tax refund.

_ Move few years fast forward, he is in prime years of his career and making a lot more than what he used to when he started out so his income tax bracket is 45%. Of course he has no problem with the $100 repayment because he has been recently contributing at least $20,000 toward his RRSP annually. Just for curiosity he does the math, the $100 he is paying back now costs him $45 in tax refund.


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## fretwire (Apr 13, 2016)

Given that I'm biased towards taking advantage of the HBP and that your down payment is already enough to sidestep CMHC without drawing from your RRSP, I'd filter 25k of your existing DP through your RRSP rather than drawing an additional 25k from the RRSP. Going that route means you're taking advantage of the contribution room *and* the HBP.

Then you get about 10k when you file your taxes next year (which is almost like finding 10k under your couch cushions). Allocate the 10k back towards the house either in improvements (if needed) or by paying it towards the principal.

There's upsides and downsides to everything but in my opinion the up outweighs the down in this case.


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## TomB19 (Sep 24, 2015)

Spudd said:


> I don't really get why everyone is saying the annual repayment is such a hardship. Assuming you plan to contribute at least as much as the annual repayment to your RRSP annually, that's your annual repayment right there. $1666 annually is only $139 a month, so for someone making 100k it shouldn't be an issue to contribute that to the RRSP. Then any additional monies contributed to the RRSP will start to act as tax breaks.
> 
> And worst case scenario, you've had a rough year and haven't contributed anything to your RRSP. OK, so now you need to pay tax on $1666 in extra income. So maybe it costs you $800 at the most in tax if you weren't able to do any contributions at all. It's not the end of the world. But if the reason you couldn't contribute to your RRSP was you were laid off, then it will cost way less than $800 in taxes because your income will be in a lower tax bracket.


If you are young and don't take advantage of RRSP deductions, you are leaving money on the table. Particularly if you are single, RRSP is one of the few deductions available.

Personally, I'd far rather max out my RRSP each year so I can get a deduction than make payments on money spent long ago.


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## sillywabbit (Apr 27, 2016)

fretwire said:


> Given that I'm biased towards taking advantage of the HBP and that your down payment is already enough to sidestep CMHC without drawing from your RRSP, I'd filter 25k of your existing DP through your RRSP rather than drawing an additional 25k from the RRSP. Going that route means you're taking advantage of the contribution room *and* the HBP.
> 
> Then you get about 10k when you file your taxes next year (which is almost like finding 10k under your couch cushions). Allocate the 10k back towards the house either in improvements (if needed) or by paying it towards the principal.
> 
> There's upsides and downsides to everything but in my opinion the up outweighs the down in this case.


That is what I think I am going to do. The only crappy part is having to repay it...and I don't mean it in the sense that I will have a hard time repaying it. It will be no problem to repay it over 15 years. I just hope I am not funneling too much money into my RRSP. If I put another 25k into RRSP, it will be at $100k and I am only 29 years old.


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