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Financial Question: Which Makes More Sense??

drlove

Ph.D. in Pussyology
Oct 14, 2001
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The doctor is in
Assuming you have withdrawn $25,000 from your RRSP (first time homebuyer's plan) is it better to:

A) Repay the RRSP withdrawal within 15 years so you don't get taxed

or

B) Forget about RRSP repayments for the time being and focus on making lump sum payments on the mortgage principal every year (as much as you can afford)

Thoughts?
 

Nickelodeon

Well-known member
Apr 13, 2003
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toronto
I think the conventional wisdom has been that you should do both, rather than exclusively one or the other.

This also makes sense to me, but I don't have the numbers to back up my theory.
 

HG Hunter

Active member
Jun 27, 2005
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I'm not 100% sure, but I thought you were obliged to repay at least something to your RRSP every year. And you must have the total loan paid back to yourself within the 15 years.
If you have a good low mortgage rate, let it ride a bit.
Don't underestimate the power of the RRSP's non-taxable compounding interest. It could very well offset yor mortgage interest costs.
 

atlantica

Active member
Mar 26, 2008
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You don't have to make repayments in year one. After that you should really pay at least 1/15 of the $25K ($1,666,67) per year towards the RSP 'loan'. Otherwise that amount gets added to your income for taxes. In the top barcket that is a 'penalty' of almost $800 (43%) per year. I doubt your mortgage rate is that high, so the better bet is to put it down on the RSP, as the program intended.
 

gundambobo

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Oct 29, 2004
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I have to agree with atlantica, ensure you pay back the RSP as soon as possible. Any investment gain inside the RSP is tax free. with the mortgage rate historically low and assume you have variable rate mortgage and you can do 2 simple tricks which will help you to reduce the amortization by at least 10yrs. 1) set your mortgage payment base on 5yr fixed rate payment where you are paying only the variable interest rate on your mortgage and 2) choose accelerated bi-weekly payment. If you want more info just pm me:D
 

duang

Active member
Apr 17, 2007
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Assuming you have withdrawn $25,000 from your RRSP (first time home buyer's plan) is it better to:

A) Repay the RRSP withdrawal within 15 years so you don't get taxed

or

B) Forget about RRSP repayments for the time being and focus on making lump sum payments on the mortgage principal every year (as much as you can afford)

Thoughts?
Not making the repayments means that the minimum repayment amount is added to your income each year. Essentially each year the issue will be do I put $1667 dollars into my RSP to meet the minimum payment or do I put that against my mortgage?

Putting the $1667 into your RSP means you don't have to pay the tax on the amount and putting it against your mortgage means you save interest going forward.

At a moderate 40% tax bracket [though as a 'dr' of love you would be in a higher tax bracket presumably] the repayment of $1667 saves you $667 of tax that you would have to pay if you instead put the payment against your mortgage. Additionally, you would gain the growth on that extra $1667 into your RSP and with a moderate 7% return you might expect $117 average growth per year [but compounding as well].

The $1667 against your mortgage would save you interest and if you took a long term average mortgage interest rate of 5% that means you would save $83 of interest every year.

So, bottom line for this 'average' scenario, RSP repayment saves $667 upfront and average growth of $117 per year vs. mortgage repayment saving you $83 per year.

In twenty years, RSP would be $6450 higher from one time repayment. On the other hand, over the same twenty years you would save $2750 in interest expense by putting that one payment against your mortgage.


The numbers will vary depending upon your actual tax bracket and your actual returns and interest rates experienced. As well, it bears mentioning that the interest savings are after tax dollars while the RSP gains will eventually be taxed when your RSP is collapsed but for most people the extra RSP amount will be exhausted and taxed many decades down the road so the taxable status is not that material.

Your assumptions will affect the analysis but for most people the large tax savings upfront and tax free growth over the long term make the RSP an attractive option compared to paying down low cost debt but you need to examine your individual situation closely and consider your personal comfort level in carrying the debt. Higher tax bracket or higher expected investment growth rate or lower expected interest rates all would tilt the scales towards the RSP repayment.

Hope that helps.

D.
 
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duang

Active member
Apr 17, 2007
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36
I have to agree with atlantica, ensure you pay back the RSP as soon as possible. Any investment gain inside the RSP is tax free. with the mortgage rate historically low and assume you have variable rate mortgage and you can do 2 simple tricks which will help you to reduce the amortization by at least 10yrs. 1) set your mortgage payment base on 5yr fixed rate payment where you are paying only the variable interest rate on your mortgage and 2) choose accelerated bi-weekly payment. If you want more info just pm me:D
I would also agree with atlantica but I would clarify part of gundambobo's comment relating to repaying the RSP. For most people, they should make the minimum HBP repayment each year but rather than repaying the HBP amount as fast as possible, they should consider anything above the minimum repayment be claimed as new RSP contributions so you get the tax savings.

E.g. a $5000 RSP contribution should probably be claimed as $1667 repayment and $3333 of new RSP contribution that at a 40% tax bracket level will garner $1333 of extra tax savings on your tax return.

If instead you just claimed the whole $5000 as HBP repayment you end up with the same $5000 in your RSP but not the $1333 in tax savings.

Make your minimum repayments but try to claim as much new RSP contributions as possible so as to maximize the tax savings ASAP. Once you max out your RSP contribution limit then you should repay the HBP full bore.

D.
 
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