# Bought House: RRSP for HBP - Should we or Shouldn't we?



## jtc (Oct 1, 2011)

Hello everyone,

Just wondering your opinions. My wife and I bought a new construction scheduled to be finished in Feb 2013. We are first time home buyers. Basically, my question is related to whether it makes sense or not to throw money into RRSP's to take advantage of the Home buyers plan? Is the initial tax rebate worth having to repay another 50k(_which seems a little daunting at the present time_) over the next 17 years? What would you do? 

Our financial info follows:

*Age: *
30 (both of us)

*Income:*
Wife - 75k (Teacher)
Me - 58K (IT in private company)


*Total Savings: 114K (Breakdown follows)*
Combined Savings: 98K Cash 
Wife's RRSP contributions: 13k
My RRSP contributions: 3K


*Outstanding Mortgage on house:* 
438k (Total price was ~484k. We've put 45,750 down so far which is not included in our total savings listed above)


*Question:*
Should we pop 34k(Wife 12k, Myself 22K) into RRSP's to max out our HBP? Any advantages? Disadvantages? What would you do in our situation? Why? Hard numbers & figures are very much welcome!


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## MoneyGal (Apr 24, 2009)

How much interest would you save (by having a larger downpayment)? That's the main question you need to resolve. 

Also, you do realize you are not required to repay the withdrawals, right? If you do not repay the withdrawn amount, the required repayment amount (generally 1/15th of the withdrawn amount, if I recall correctly) will be added to your taxable income for the year.


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## CanadianCapitalist (Mar 31, 2009)

In your situation, I would contribute to the RSP and take out a HBP loan. I would also repay the HBP loan over time. You need to figure out the interest you'll pay on the mortgage, the rate of return you'll earn within your RRSP account, future tax rates etc. to estimate which option is better.


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## Sampson (Apr 3, 2009)

Nothing further I can add to the great comments above, but only want to ask do you have that much RRSP contribution room?


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## Four Pillars (Apr 5, 2009)

I'm a big fan of the hbp.

One of the benefits in my mind is that it helps mitigate interest rate risks. Your mortgage payment will always be at the mercy of the current interest rates at renewal times, whereas your annual hbp repayment will always stay the same (or decrease if you pay extra).

You also have the option (as MG said) of not repaying the HBP in any given year and just paying the resulting taxes. This could be useful in a low income year.

You mention having to pay an "extra" $50k. This isn't the case - your mortgage will be lessened by the amount that you borrow from the RRSP, so your total debt amount won't change as a result of the hbp.

Make sure you understand the 90 day rule.

Also - I would look at the tax brackets, especially for you since contributing $22k in one year will lower your income to a fairly low tax bracket. You don't have to claim all $22k in one year, so that is something to think about.


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## peterk (May 16, 2010)

For sure do it! I don't like the HBP "loan" mentality that causes one to feel frightened about paying it back.

The reality is: You have money in an RRSP account, which is a somewhat restrictive retirement vessel. The HBP ALLOWS you to remove money from your RRSP, without penalty, and even recontribute at the ridiculously low rate of 1/15 the withdrawl, without losing contribution room! 

The only reason not to use the HBP as prescribed is if you have a wildly fluctuating income and can take advantage to reduce taxes. But that's a very complicated, personal, and unpredictable calculation.


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## MoneyGal (Apr 24, 2009)

peterk said:


> *The only reason not to use the HBP as prescribed is if you have a wildly fluctuating income and can take advantage to reduce taxes*. But that's a very complicated, personal, and unpredictable calculation.


But! This is actually a reason TO use the HBP (assuming you are contributing in higher-income years). Here's how: contribute in higher-earning years and get a tax refund of (let's say) 34%. Then skip making the repayment in a low-income year and get taxed at a low(er) rate (say, 21%). Ta da - painless, effortless tax arbitrage. This is the entire rationale for the RRSP system AND you are getting it pre-retirement.


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## m3s (Apr 3, 2010)

jtc said:


> *Question:*
> Should we pop 34k(Wife 12k, Myself 22K) into RRSP's to max out our HBP? Any advantages? Disadvantages? What would you do in our situation? Why? Hard numbers & figures are very much welcome!


You've put 10% down according to those numbers (your loan-to-value rate is 90%) so you pay a one time CMHC insurance fee of 2% iirc. With the additional 34k+tax refund you could potentially save a % (or more) in CMHC insurance fees (1% of $484k is like $5000) If it hasn't been settled already.. Avoiding CMHC fees is the biggest value of the HBP imo

Otherwise it's a guaranteed savings of your mortgage rate (tax free) vs the potential growth of the RRSP (taxed as income eventually) Considering the RRSP investment would compound tax free, it's more or less a wash unless you know the future mortgage rates and investment growth. IMO the ideal situation is really a mix of RRSP and mortgage payment, *but that CMHC insurance fee is pure money lit on fire!!*

That $5000 saved today, on CMHC ins, lowers your mortgage by $5000 for the life of the mortgage (so really you save $5000 PLUS the interest cost of $5000 loan for 20, 30 years...). That's why I used the HBP, even though my big bank financial adviser and mortgage broker were both very adamantly against it. (My mortgage broker even said she would give the same advice to her son)


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## KaeJS (Sep 28, 2010)

I have nothing to add, other than you should go with the HBP. 

I will be using the HBP within the next month or so and I believe it is a great option. Why wouldnt you use it? There is (almost) no disadvantage to using it.

Oh.... and this:



mode3sour said:


> *but that CMHC insurance fee is pure money lit on fire!!*


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## jtc (Oct 1, 2011)

First of all, I would like to thank everyone who replied to this thread!



MoneyGal said:


> Also, you do realize you are not required to repay the withdrawals, right? If you do not repay the withdrawn amount, the required repayment amount (generally 1/15th of the withdrawn amount, if I recall correctly) will be added to your taxable income for the year.


I did not know this. This would certainly be an interesting option for her should we decide to have children(IE: Her taking a pay cut to stay home with the kids).



Four Pillars said:


> Also - I would look at the tax brackets, especially for you since contributing $22k in one year will lower your income to a fairly low tax bracket. You don't have to claim all $22k in one year, so that is something to think about.


If I understand this correctly - are you saying I'd be able to put the money in 91 days prior, pull all 25k out in February 2013, and still claim it in portions over next couple of years?



mode3sour said:


> IMO the ideal situation is really a mix of RRSP and mortgage payment, *but that CMHC insurance fee is pure money lit on fire!!*


We will certainly be avoiding the CMHC fees. I've actually been forcing us to live as if we are broke for the last four years(And I supposed we are compared to some). $850 rent for a basement appartement(monthly), $80 groceries(weeky), $330 car insurance(we always pay the total upfront), $85 monthly cell phones bills, $400 month gas. Over the last year, we've managed to 4.5k cash on average per month. We are expecting to have 130k cash saved(excluding existing downpayment) by the time we move in. We will probably put down another 80k, while keeping 50k for closing costs, appliances and a rainy day fund. 



KaeJS said:


> Why wouldnt you use it? There is (almost) no disadvantage to using it.


I want to. She's a teacher. Her argument is that she's going to have a very good pension when she retires and has "no use" for RRSP's. She has talked to a few financial advisors(who also happen to be her relatives) and they have advised her against putting any money into RRSP's.



Four Pillars said:


> Make sure you understand the 90 day rule.


Is there any catch to this? IE: Today is November 1st. We close on Feb 13th, 2013. There's 104 days in between. If we put the money in tomorrow, the funds would be considered to be inserted 103 days prior and would be eligible for the withdrawal? Or is there some weird 90 "business day" rule that applies?


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## Four Pillars (Apr 5, 2009)

jtc said:


> If I understand this correctly - are you saying I'd be able to put the money in 91 days prior, pull all 25k out in February 2013, and still claim it in portions over next couple of years?


Yes.



jtc said:


> I want to. She's a teacher. Her argument is that she's going to have a very good pension when she retires and has "no use" for RRSP's. She has talked to a few financial advisors(who also happen to be her relatives) and they have advised her against putting any money into RRSP's.


That's actually a pretty good argument.



jtc said:


> Is there any catch to this? IE: Today is November 1st. We close on Feb 13th, 2013. There's 104 days in between. If we put the money in tomorrow, the funds would be considered to be inserted 103 days prior and would be eligible for the withdrawal? Or is there some weird 90 "business day" rule that applies?


No, there isn't any catch. I just wanted to make sure you knew the rule existed which you obviously do.


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## MoneyGal (Apr 24, 2009)

jtc said:


> I want to. She's a teacher. Her argument is that she's going to have a very good pension when she retires and has "no use" for RRSP's. She has talked to a few financial advisors(who also happen to be her relatives) and they have advised her against putting any money into RRSP's.


This is a fine generic argument ("people with good pensions do not need to save additional funds in RRSPs") but it is not helpful in your specific case. 

The reason you'd (she'd) put money in an RRSP now to withdraw through the HBP is tax arbitrage. 

Forget the fact that the plan is called a "retirement savings plan" and think of it this way: would it be useful for you to get tax discount of $[x] today on a loan you establish to yourself and pay back over 15 years? 

Also, the repaid loan could be withdrawn at any time you have lower-than-normal income, providing a form of emergency funding. 

And even if you keep all the funds in the account until you actually retire, and then pay tax on them, you've effectively moved the tax on that income far far far into the future, providing a significant discount on those tax dollars. 

In fact, even if you participate in the HBP and never even pay the funds back, you've still moved the tax due on that income as much as 15 years into the future. 

No matter how you run the math on this, there's a measureable benefit and by design there is no way for this not to be true. Financial advisors who argue otherwise don't understand either the basic mechanics of RRSPs or basic financial math.


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## jcgd (Oct 30, 2011)

*Puts hand up*

I've got a question on the subject. If I borrow money from my RRSP for the HBP and don't repay it the amount that was supposed to be repaid that year goes on my income. Is that contribution room lost just like if I simply pulled the money from my RRSP outside of the HBP?


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## jtc (Oct 1, 2011)

MoneyGal said:


> No matter how you run the math on this, there's a measureable benefit and by design there is no way for this not to be true. Financial advisors who argue otherwise don't understand either the basic mechanics of RRSPs or basic financial math.


Thanks! This is what I sort of figured. 





Four Pillars said:


> No, there isn't any catch. I just wanted to make sure you knew the rule existed which you obviously do.


Sorry to harp on this again. I've been researching this topic a bit online. Just to be absolutely clear, would it even be possible to deposit funds into an RRSP account *after the closing date * and withdraw it 90 days later, as long as it's in the same calendar year?




Also, should anyone find themselves as clueless regarding this topic as I was, it looks like all we have to is submit the following form to her our RRSP issuers(BMO, TD, ING, etc.):

http://www.cra-arc.gc.ca/E/pbg/tf/t1036/t1036-11e.pdf


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