Q. Last year (2016) my husband and I bought our first home. For part of the down payment we withdrew from our RRSPs under the Home Buyers’ Plan – $25,000 from mine and $10,000 from his. We’ve had a lot of expenses this year and money is a bit tight. What happens if we don’t pay it back? Would it be better to put the money against our mortgage instead?
First of all, congratulations on your new home purchase. It seems you have found out how costly initial expenses can be. The good news is that you won’t have to start repaying the Home Buyers’ Plan loan until the second year after your withdrawal, or 2018. Hopefully, your cash flow will have improved by then.
Repaying the Home Buyers’ Plan Loan
Let’s recap. Under the Home Buyers’ Plan, first-time homebuyers can withdraw up to $25,000 from their RRSP tax free. Under the program, you have to pay back the money over a 15-year period.
So, each year you need to pay 1/15th of the amount you withdrew – $1,666 for you and $666 for your husband, or a little less than $200 a month.
If you don’t pay back the required amount for a particular tax year, you will be taxed on that portion at your marginal rate.
In most cases, instead of putting the money towards your mortgage, it would be better to pay back the HBP and avoid the tax hit.
When does it make sense to not pay back the HBP loan?
If you will be in a situation with low or no income, such as maternity leave, or going back to school, you may want to skip the payment because you will be in a lower or non-taxable bracket. If you can swing it, put the money into your TFSA instead.
If you have any high credit card or other consumer debt you may be better off paying that first.
After examining your cash flow, it you decide you really can’t make it work, at least try to focus on paying back the HBP for the spouse in the highest tax bracket.
Should you pay it back more quickly?
It makes more sense to pay back only the required amount of your Home Buyers’ Plan loan. This allows you to free up money to make a larger, tax-deductible RRSP contribution.
Remember, RRSPs are meant for your retirement. The money you take out will lose its compounding effect until you pay it back.