Thinking of paying off your HBP early? Think again.

Let’s face it. Most first-time home buyers need a serious financial boost for their downpayment so many turn to the Home Buyer Plan (HBP).

With the HBP you and your partner can borrow up to $25,000 each, tax-free from your RRSP. You’ll have 15 years to repay the funds back into your RRSP. If you borrow the full $25,000, that means annual repayments of at least $1,667 or $139 per month.

What’s important to note about your repayments is that you won’t receive any tax benefits because the repayments are not considered “new” money.

Therein lies the problem with repaying it early. You’re better off paying the minimum HBP repayment, and then use regular RRSP contributions to lower your tax bill. There are zero consequences for making the minimum payment – no fees or penalties. This is a win.

Now, if you ONLY repay the HBP minimum and contribute nothing else to your RRSP, you won’t receive any RRSP tax benefits. This is a no-win situation.

But, if you can’t repay the minimum, you’ll be taxed on the difference between what you still owe and what you paid. This is a lose situation.

For all the naysayers of the HBP, of which I used to be one, I have to acknowledge that when you take money out of your RRSP, you lose the power of compounded interest and re-invested returns.

But, I’ve crunched the numbers and the trade is worth it.

The HBP wins because the tax savings through RRSP contributions are nearly $0.30 on every  dollar contributed….and for most first-time home buyers, that savings is huge.