Chris Carter
Province
Dear Chris:
I’m about to buy a condo. If I dip into my RRSP and take out a Home Buyers Plan withdrawal, I’d be able to make more than a 25-per-cent down payment to reduce my mortgage payments. Is this a good idea?
— Christy, Port Moody
Dear Christy:
The pros and cons of building equity in your home versus your RRSP is a common debate for individuals and financial planners. Before you raid your retirement nest egg, here are some facts to consider.
When you access funds from your RRSP using the Home Buyers Plan, you are effectively borrowing from your RRSP. Like any other loan, the HBP withdrawal must be paid back and Ottawa requires you to pay back a minimum one-15th of the original loan per year, starting two years after taking the money out.
Once you add this HBP repayment on top of the slightly reduced mortgage payment, your monthly outlay will be at least as much as the original mortgage payment would have been, and probably more.
The main drawback to raiding your RRSP now will be the damaging impact the loan will have on your fund’s value at retirement.
As an example, if you invest to earn a compound annual return of seven per cent over 30 years, pulling $20,000 out and repaying the HBP over the mandated 15 years would reduce your plan’s value at retirement by more than $60,000.
For those homebuyers with no alternative to the Home Buyers Plan, conceding the future growth of their retirement savings might be a trade-off worth considering.
If you’ve already managed to save your down payment, the odds are stacked in favour of maintaining the RRSP.
© The Vancouver Province 2006
