How quickly should I repay my Home Buyers’ Plan?
I borrowed $35,000 from my RSP to fund the down payment of my first home through the Home Buyers’ Plan. What’s the most effective way of paying it back?
CFP, CIM, FCSI, SENIOR FINANCIAL PLANNER, TD WEALTH
A: First off, congratulations! For many Canadians, a home may be the biggest purchase of their lives and the federal Home Buyers’ Plan is a valuable tool that can help make this huge financial milestone more attainable. However, once you have a hole in your RSP savings the size of a house, you may be wondering what will be the best strategy for paying this money back: Do you throw everything you’ve got at it to pay back the loan quickly? Or would it make more sense to repay gradually, freeing up more money for new RSP contributions — and the tax deductions that come with them?
Let’s cover the basics: Under the current rules, the Home Buyers’ Plan (HBP) allows a first-time home buyer to borrow up to $35,000 from their RSP, tax-free, to fund the purchase of a home. (In the case of two qualifying home buyers — a couple, for instance — each may be able to borrow $35,000 from their respective RSPs for a total of $70,000.) You have 15 years to pay back the loan, starting in the second calendar year after the withdrawal. As such, the minimum you are required to repay each year is one-fifteenth of the amount you borrowed. If you repay less than the required annual minimum, the difference will be considered taxable (RSP) income in the year.
You may of course pay back more. In fact, this could be a wise choice for tax efficiency, should you have the money to do so. The Canada Revenue Agency (CRA) sends an HBP account statement with the total amount owing and the deadline for the next minimum payment, but it’s up to you to report what portion of your annual RSP deposits will be designated as your HBP repayment when filing your annual tax return. Bear in mind that HBP repayments are not considered RSP contributions. They do not affect your annual contribution room, nor are they eligible for any tax deductions come April.
But here’s one reason you might consider paying back your HBP withdrawal as fast as you can. If your career or business is growing and you foresee you’ll have higher income in the future, maximizing your HBP repayments early and foregoing any RSP tax deductions now would give you the ability to maximize income deductions later when your salary is higher.
Here in Canada where we have a progressive tax system, the more you earn, the higher rate you pay. Therefore, deductions later in life may potentially be more valuable than deductions when you are younger and just starting out. Here’s an example of how that can work:
So whether you are repaying your HBP or making a new contribution shouldn’t make a difference to your overall RSP savings. What you may be deciding is whether you would prefer to make use of the tax deduction right now or save the contribution room for later when you may need it more.
By the way, I often tell clients that if you do happen to come across a windfall — such as an inheritance, which is not considered taxable income — this may present a great opportunity to pay back your HBP completely. Then, moving forward, your RSP contributions can continue.
Ryan Lanaus CFP, CIM, FCSI, Senior Financial Planner, TD Wealth, has nearly 20 years experience working in financial services in London, Ontario. In addition to being a Certified Financial Planner, a Chartered Investment Manager (CIM) and Fellow of CSI (FCSI), Ryan also plays drums and recently grabbed a great group of colleagues for a Battle of the Bands that raised almost $4,000 for charity.
- "Canadian income tax rates for individuals – current and previous years," Government of Canada. Accessed on November 19, 2019. www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html↩