Some people hate having debts and therefore hurry to repay them as quickly as possible. The feeling is justified and may be applauded!

However, when it comes to making reimbursements under the Home Buyers' Plan, is it really the best option? Usually not...

Obviously, if you are already contributing the maximum eligible amount to your registered retirement savings plan (RRSP), have no unused contribution room and no other debts, promptly reimbursing your HBP loan is a reasonable option! However, it might be better to put this money towards your mortgage loan.

In fact, if your priority is to repay the funds you withdrew from your RRSP in order to benefit from the HBP, it's best to use the full reimbursement period to which you are entitled under the Income Tax Act, i.e., 15 years. You can thereby contribute all your extra savings to your RRSP and benefit from a tax deduction.

Example

Matthew withdrew $20,000 from his RRSP under the HBP and must now begin reimbursing it. The minimum annual amount that he must contribute to his RRSP is $1,334, i.e., $20,000 over 15 years.

Matthew usually contributes $2,500 to his RRSP every year. For the purpose of paying off his debt as quickly as possible, he decided to use this money to make his HBP reimbursements. Is this the most profitable strategy?

Matthew can consider these two possibilities, assuming a marginal tax rate of 45%:
 

• HBP reimbursements of $2,500 for the first eight years and RRSP contributions of $2,500 for the subsequent seven years
• HBP reimbursements of $1,334 for 15 years and $1,166 RRSP contributions for the same period
   

The Second Solution is Best!

Solution B provides $2,769.84 more in tax savings. This amount could be higher if the tax savings generated by the RRSP contribution were put towards a mortgage. This is no surprise, since no interest is charged on funds withdrawn from an RRSP under the HBP. The tax savings may be even greater if the marginal rate is over 45%. This is one case where it is worth doing the math!