Should I repay my Home Buyer's Plan (HBP) RRSP loan early, or over the allowed 15 years?
I used my RRSP to purchase my house. It was tax free because I was first a time home buyer.
I am wondering if it would be beneficial to put the lump sum back in ASAP or take the 15 years to pay it back as I am allowed.
Will I benefit at tax time like I did before I took it out? Do I have to do anything special?
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No, there is no advantage. There may be some peace of mind at no cost if you are already in the lowest tax bracket. Otherwise, it is actually disadvantageous.
Consider the following scenario:
RRSP HBP withdrawal 000 (00/y repayment),
You are required to pay back 00 a year with no tax advantage.
Any additional RRSP payments can be designated as HBP (no tax advantage) or as a regular RRSP contribution Tax = (Taxable Income - contributions) * rate.
So, you are forgoing the tax benefit for no advantage.
You will not benefit at tax time like you did with your initial contributions, because you have already benefited and are simply repaying your withdrawn contributions. However, capital gains are not taxed inside of your RRSP, until you withdraw the money.
Let's say you have ,000 to repay and have all the money now. It makes sense to repay it immediately. Whatever interest or capital gains you make inside of the RRSP are not taxed. However, your ,000 contribution this year will not offer you any deductions on your tax return.
There are exactly two reasons I can see to not immediately repay the full amount, if able. First, you may need the money for an emergency fund, and there are significant implications for removing money from your RRSP in such a case. Second, if you believe you will be in a higher tax bracket when you retire, it may not make sense to put any money into an RRSP right now.
Almost certainly, you want to repay the entire lump sum if able.
If you have (other) high interest debt, say over 8%, pay it back first. Else, you are likely best off paying this loan back and getting the money working for you long term.
Paying this off early is robbing yourself of the extra earning potential for this money. Think of it as an interest free loan from your future self. If you can otherwise use that money to get a better rate of return then you are better off putting it there. Best options would normally be to use it to buy additional regular RRSPs, RESPs, or TFSA because of government benefits but even puting the extra into a GIC for a year is better than paying back home buyers plan early.
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