Power of Advice
The Home Buyers’ Plan dilemma
Many first time homebuyers borrow their down payment from their RRSPs, but does it make sense to pay it back? Bruce Sellery offers his advice.
My husband and I are both in our 30s and we withdrew from our RRSPs under the first-time Home Buyers’ Plan (HBP). Our question is whether it is worth it for us to pay off the HBP loan, which is about $35,000 between us. His parents say that having an RRSP is useless because it only lowers the pension amount that we can get when we retire. My husband has a pension plan as a federal government employee and I have one through my work at a hospital. My husband earns a $60,000 per year, while I earn $39,000. Money is a bit tight right now as we are trying to pay off more of our mortgage every month and I just found out today that I’m four-weeks pregnant. We are so confused about whether to pay more on our mortgage, buy RRSPs, or pay off our HBP loan. Please guide us on what to do.
In-laws are great. They have a never-ending supply of embarrassing stories from your husband’s past, and if they live nearby, perhaps they will provide some childcare for you in the future. (Congrats on the baby news by the way.) But in-laws don’t necessarily provide the best financial advice.
RRSPs won’t affect pension income
Your husband’s parents told you that an RRSP would lower the pension amount you get when you retire. According to Jason Heath, a CFP with Objective Financial Partners in Toronto, that is inaccurate. “Neither of these pensions are means-tested. That is, they have absolutely nothing to do with your other sources of income.”
Perhaps your in-laws were thinking about Old Age Security, which does get clawed back if your income exceeds a certain level. But given how long it will take before you start collecting OAS, it will be impossible to say what the program will actually look like and how much you’ll be able to draw from it 30 years from now. Instead, it makes more sense to focus on things that will provide the best life for you post retirement.
As for the claim that RRSPs are “useless,” I beg to differ. RRSPs are a great way to save for retirement because they allow you to defer income tax into the future. This is less critical to you because you and your husband both have pensions, but it is still a big benefit. Look at it this way: wouldn’t it better to have income—and pay taxes on it—than not have any money coming in? Personally, I’d rather be the person with the income.
Tax implications on unpaid HBP loans
If you choose not to repay the HBP loan then the government will treat the amount you withdrew from your RRSP as income and tax you on it. Consider this example. Let’s say your husband withdrew $25,000 of out of his RRSP under the Home Buyers’ Plan. If he decides not to pay the money back, given his salary he’ll be looking at a tax rate of between 31% in Ontario to 38% to Quebec (most of the other provinces fall somewhere in between) on the HBP amount. At those rates your husband would take a $500 and a $650 tax hit a year for the next 15 years. Ouch.
Focus on repaying the HBP loan
You also mention that you are trying to pay as much as you can on your mortgage. If mortgage rates were at 20%, that would be the right approach. But rates are at historic lows, so it makes more sense to pay back your HBP loan to avoid the tax hit instead of trying to get around the 3% to 5% interest you’re paying on your mortgage. Generally speaking, you need to repay 1/15 of the $35,000 amount you withdrew under the HBP every year. That works out to just under $200 per month. My advice would be to stop trying to pay more on your mortgage and instead focus on your HBP repayment.
If you’re anything like we were, you are probably wildly excited and totally stressed about the arrival of a child. When you look at your cash flow, if you really can’t make it work to repay both of your HBP loans, then focus on your husband’s portion of the loan first because he is in the higher tax bracket.
Jason Heath has one other encouraging thought: “If the only debt they have right now is their mortgage, I think they’re doing well for a young couple. I’d be more inclined to ignore the HBP repayments if they had credit card or other consumer debt.” But you don’t have consumer debt. And you do have pensions. You would be amazed how many people would give anything to trade places with you.