# Should I pay off my HBP loan as quickly as possible?



## AlexD (Feb 1, 2010)

I'm trying to figure out if it makes sense to just pay off my Home Buyer's Plan (HBP) loan from my RRSP. I have another $10,000 to pay off from my HBP from five years ago. Is there any tax benefit to paying it off right now, or should I continue to pay off the minimum every year?

I've maxed out my RRSPs and TFSA and have no mortgage, so I would just put the money into an unregistered investment otherwise. 

- A


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## HaroldCrump (Jun 10, 2009)

Paying it off into your RRSP sooner rather than later will give the money more time to compound/grow.
Sounds like your situation is very stable.
I see no reason not to pay it off ASAP, after all, it is an obligation that you have towards the Govt.


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## MoneyGal (Apr 24, 2009)

There's no tax benefit to paying it off, period. You already got the deduction once.  Paying it off more quickly just returns that withdrawn $$ to your account faster.


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## AlexD (Feb 1, 2010)

Either way, I'll benefit from compounding interest, whether it is registered or not.

If I pay off the HBP now, I'll have more money in my RRSP. When I retire, I'll be taxed on those withdrawals (although I'll be in a lower tax bracket then).

If I put the money into a corporate class investment today and take my time in paying off the HBP, the return will be taxed at a capital gains when I cash out the investment.

In running through the numbers, if I had $10k to put in for the first year, and $1k for the following subsequent years, assuming a 5% return and a marginal retirement tax rate of 30%, paying off my HBP would cost me $440 more in taxes.

That's how I figure it, anyway. Do you think I'm right?

- A


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## high octane (Jul 21, 2009)

MoneyGal said:


> There's no tax benefit to paying it off, period. You already got the deduction once.  Paying it off more quickly just returns that withdrawn $$ to your account faster.


There is a tax benefit to pay it off faster in my case

My RRSP/TFSA is maxed and I intended to invest more money anyways. I ended up paying a few k before required for the interest free growth

I would put the money towards TFSA, unused contribution, a vehicle etc first though


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## houska (Feb 6, 2010)

The fact that it is a HBP "loan" is misleading in this case. From where you stand now, it means that you have an extra $10k contribution room in your RRSP (which, incidentally, the gov't will force you to slowly use up in the next few years, but that's neither here nor there for your decision now).

With this perspective, treat the decision just like all these RRSP vs TFSA vs other stuff decisions. If you've got more than enough cash to max out both TFSA and RRSP (including the HBP repayment), then it definitely makes sense to pay it back. If you've only got the cash for one, then read all those threads on which one is better - it will boil down essentially to your expectation of your marginal tax rate at retirement versus now. If you have consumer debt or might need the cash anytime soon, then probably don't pay it back since you'd have a hard time getting it out again if you needed it.


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## Ben (Apr 3, 2009)

I still carry my HBP liability. I've never noodled up with a good reason to pay it back quickly.


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## Canadian Finance (Apr 3, 2009)

I contribute to my RRSP up until I've negated my highest tax bracket. Then anything further that I've added throughout the year goes to my HBP.


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## larry81 (Nov 22, 2010)

high octane said:


> There is a tax benefit to pay it off faster in my case
> 
> My RRSP/TFSA is maxed and I intended to invest more money anyways. I ended up paying a few k before required for the interest free growth
> 
> I would put the money towards TFSA, unused contribution, a vehicle etc first though


Whats the benefit of putting money towards TFSA vs HBP ???

I dont see any, in both case its after-tax money and there is no tax refund.


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## the-royal-mail (Dec 11, 2009)

Wow larry, you've managed to dig up a year-old thread. 

The benefit of paying off the HBP first is that you rid yourself of a monthly liability of cash leaving your bank account. Or of a liability on your books. TFSA allowances will always be there, but you need to pay off debts as soon as possible. HBP is a debt, a liability.

<rant>
You need to prevent this type of liability from occuring in the first place. For this reason, I am not in favour of HBP. That money has to be repaid, and while it's tied up on your house and on your books, it isn't growing like it would in your invested RRSP or TFSA.

Once again, we come back to the old concept: if you want something, save for it FIRST. When you have the money saved, THEN buy. For houses and cars this obviously applies to the downpayment (and not the purchase price) but for most other things that is the way I direct myself. I recommend others do the same. It's amazing how much money you can save when your paycheques aren't being eaten away by recurring pmts for a bunch of un-necessary things.
</rant>


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## MoneyGal (Apr 24, 2009)

It's more than that: if you do not repay 1/15th of the HBP per year until the full amount is repaid, that 1/15th is added to your taxable income for the year. 

So, while there is no tax benefit from making the required HBP repayments, there is a tax hit associated with *not* making the repayments (IF you have taxable income for that year. If you do not have taxable income for that year, there is no tax cost associated with not repaying the required amount. This is a form of tax arbitrage.)


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## larry81 (Nov 22, 2010)

the-royal-mail said:


> Wow larry, you've managed to dig up a year-old thread.
> 
> The benefit of paying off the HBP first is that you rid yourself of a monthly liability of cash leaving your bank account. Or of a liability on your books. TFSA allowances will always be there, but you need to pay off debts as soon as possible. HBP is a debt, a liability.
> 
> ...


Agree 100%,

However my question was much more about the fiscal impact. Consider the next two scenarios:

RRSP maxed, nothing in TFSA, have 15k sitting in cash

Scenario 1 - Pay off HBP right away
Scenario 2 - Put the money in the TFSA

The way i see it, the only advantage of scenario 2 is that the money is more 'accessible'. From a tax point of view they are the same since both scenario use after-tax money.


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## the-royal-mail (Dec 11, 2009)

Well of course. But since tax is neither here nor there (except for what MG points out above), I don't see why anyone would want to leave themselves in debt while having money saved in their TFSA. Operate on a clean-slate principle, in case of adversity, then at least your liabilities will be minimized.


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## GeniusBoy27 (Jun 11, 2010)

the-royal-mail said:


> Well of course. But since tax is neither here nor there (except for what MG points out above), I don't see why anyone would want to leave themselves in debt while having money saved in their TFSA. Operate on a clean-slate principle, in case of adversity, then at least your liabilities will be minimized.


That makes no sense to me. If it's in your TFSA and it's accessible, you can always take out the money from your TFSA to pay your HBP (at any point in time).

Maybe liabilities are a stress, and you want to get rid of them. But to me, it's a simple paper transaction. I have no problems having liabilities to increase investment (e.g. the Smith Manoeuvre). But to make a blanket statement that liability reduction is the only way to go isn't correct. Many of us are in different circumstances and can afford to take different risks.


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## Four Pillars (Apr 5, 2009)

GeniusBoy27 said:


> That makes no sense to me. If it's in your TFSA and it's accessible, you can always take out the money from your TFSA to pay your HBP (at any point in time).
> 
> Maybe liabilities are a stress, and you want to get rid of them. But to me, it's a simple paper transaction. I have no problems having liabilities to increase investment (e.g. the Smith Manoeuvre). But to make a blanket statement that liability reduction is the only way to go isn't correct. Many of us are in different circumstances and can afford to take different risks.


I tend to agree with you if the money is invested conservatively. However if that money is invested in equities, some of it might not be there when you want to use it to pay the HBP.

On the other hand, if you pay off your HBP early, then you might miss out on a future tax arbitrage scenario if you should end up with very low income one or more years. In that case, not paying the HBP that year will result in more taxable income - but if your income is low enough - there won't be any tax to pay.

*Conclusion*

The HBP amount is never big enough to warrant the kind of analysis happening here. Do whatever you want with it.


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## GeniusBoy27 (Jun 11, 2010)

Four Pillars said:


> I tend to agree with you if the money is invested conservatively. However if that money is invested in equities, some of it might not be there when you want to use it to pay the HBP.
> 
> On the other hand, if you pay off your HBP early, then you might miss out on a future tax arbitrage scenario if you should end up with very low income one or more years. In that case, not paying the HBP that year will result in more taxable income - but if your income is low enough - there won't be any tax to pay.
> 
> ...


*laughing* ... +1


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## m3s (Apr 3, 2010)

high octane said:


> There is a tax benefit to pay it off faster in my case
> 
> My RRSP/TFSA is maxed and I intended to invest more money anyways. I ended up paying a few k before required for the interest free growth
> 
> I would put the money towards TFSA, unused contribution, a vehicle etc first though





larry81 said:


> Whats the benefit of putting money towards TFSA vs HBP ???
> 
> I dont see any, in both case its after-tax money and there is no tax refund.


I would put money in the TFSA before HBP for several reasons.

The TFSA growth also grows the contribution room, the growth is not taxed on withdrawal, the TFSA will not claw back any benefits, the TFSA will not be subject to higher income taxes, the TFSA is more flexible and can be withdrawn without tax implication at any time just to name a few off the top of my head

But yes, they are pretty close and the HBP has to be repaid eventually. The only advantage I can think of for paying the HBP is to invest in US stocks that are subject to withholding tax in the TFSA



the-royal-mail said:


> Wow larry, you've managed to dig up a year-old thread.
> 
> The benefit of paying off the HBP first is that you rid yourself of a monthly liability of cash leaving your bank account. Or of a liability on your books. TFSA allowances will always be there, but you need to pay off debts as soon as possible. HBP is a debt, a liability.
> 
> ...


That's a nice rant and all, Royal Mail, but the HBP is not a liability; it can save and make you money. In fact a financial advisor told me the same thing "the HBP is only for people who can't save money" but this is when I realized this particular FA had no mental capacity or inclination to think about my personal situation

I do agree with you in general as I only pay for cars in cash, but I don't think the concept applies to using a HBP for a down payment on an appreciating asset. Using the HBP allowed me to make max RRSP contributions in Quebec (highest taxes) and buy a house sooner while avoiding CMHC $$$ fees. This particular house will be sold for a profit that made it a better choice than renting, and in my situation, a better choice than investing in TFSA or RRSP.

If I'd listened to that FA, I'd have a bunch of tanking mutual funds in my RRSP and a much bigger mortgage. I think the HBP is great and I think the TFSA is even better


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## Pigzfly (Dec 2, 2010)

larry81 said:


> Whats the benefit of putting money towards TFSA vs HBP ???
> 
> I dont see any, in both case its after-tax money and there is no tax refund.


Correct in the present tense, incorrect in the future. RRSP withdrawals will be taxed in the future, whereas TFSA gains will not. So, it will depend upon your time value of money and debt-aversion levels, in part. There is no tax benefit to paying the HBP sooner, of which I am aware. There is a returns benefit to putting money towards the TFSA sooner, as you can realize the gains, withdraw at any time and not pay tax.


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## Four Pillars (Apr 5, 2009)

Pigzfly said:


> Correct in the present tense, incorrect in the future. RRSP withdrawals will be taxed in the future, whereas TFSA gains will not. So, it will depend upon your time value of money and debt-aversion levels, in part. There is no tax benefit to paying the HBP sooner, of which I am aware. There is a returns benefit to putting money towards the TFSA sooner, as you can realize the gains, withdraw at any time and not pay tax.


Hmm...very good. Hadn't thought of that.


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## larry81 (Nov 22, 2010)

Pigzfly said:


> Correct in the present tense, incorrect in the future. RRSP withdrawals will be taxed in the future, whereas TFSA gains will not. So, it will depend upon your time value of money and debt-aversion levels, in part. There is no tax benefit to paying the HBP sooner, of which I am aware. There is a returns benefit to putting money towards the TFSA sooner, as you can realize the gains, withdraw at any time and not pay tax.


you nailed it ! thanks for the clear and concise answer


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