RRSP Home Buyer's Plan is a great tool for first time home buyers to access money for the downpayment of their first home. The maximum allowed withdrawal is $25,000 per person which has to be paid back over 15 years. I will save the details of the RRSP Home Buyer's Plan for another blog post. Here is a controversial idea: Don't payback your RRSP Home Buyer's Plan back! Let me explain.
RRSP Home Buyer's Plan Scenario
- Mortgage amount: $300,000
- Interest Rate: 5% (mortgage rates are much lower now, but I want to use a reasonable interest rate over the life of the mortgage)
- Amortization: 25 years
- Required RRSP Home Buyer's Plan Payback: $138.89 monthly ($25,000/15 years/12 months per year)
My suggestion is not to payback into the RRSP but rather put the $138.89 into the mortgage above and beyond the normal monthly payment. If one pays $138.89 extra into the mortgage, after 15 years the results would be:
- Mortgage balance would be at $127,929 vs $164,894 (savings of $36,965 in principal and mortgage amortization is reduced to 22 years & 4 months from 25 years)
- 47.86% Return on investment: $25,000 of RRSP Home Buyer's Plan generated mortgage principal savings of $36,965
- First time home buyers saving 32 months of mortgage payment (25 years less 22 years & 4 months): $1,744 x 32 months = $55,808 which could be invested into RRSPs then
Since the first time home buyer is not paying the RRSP Home Buyer's Plan back, their income tax would rise by $1,666.68 ($138.89 x 12) annually. Assuming they are in the 45% income tax bracket, their income tax would rise by $750.
I realize this concept might be controversial and some might disagree with, but I hope the above numbers present a case for consideration. Paying down or paying off debt is an important step in achieving financial freedom. I would love to hear from you whether you agree or disagree.
Disclaimer: I am not a licensed financial planner and you should consult with your own financial advisor/planner prior to making any investment decisions. This is article is my personal opinion.