RRSP, TFSA and HBP: which one is the best strategy when it comes to buying your first home?

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The Tax-Free Savings Account (TSFA) is frequently recommended to young people as the savings vehicle of choice if they earn a low income at the start of their careers. As a result, these young people have a low deduction rate for an RRSP contribution, so it is better for them to contribute to a TFSA. Later, when they are earning more, it will be more advantageous for them to transfer the money from their TFSA to an RRSP.

But when it comes to buying a home, should these young people transfer the money they have accumulated in their TFSA to an RRSP[1] and use the Home Buyers’ Plan (HBP) strategy?

A number of options when buying a home

Imagine the following situation of Vincent. He has accumulated a TFSA worth $16,250. When it comes time to buy a home, Vincent will have to make a choice between borrowing a certain amount of money or using the money he invested in his TFSA and putting it into an RRSP to then use it for the HBP.

In all cases, Vincent has an annual budget of $2,364 that he can allocate between the loan repayment, HBP repayment and a TFSA contribution, depending on the choice he makes.

The following table summarizes three possible scenarios:

Scenario TFSA RRSP Debts Annual contributions
Loan HBP Total Mortgage HBP TFSA Total
1 $16,250 $      – $25,000 $      – $25,000 $2,364 $      – $      – $2,364
2 $      – $      – $8,750 $      – $8,750 $828 $      – $1,536 $2,364
3 $      – $25,000 $      – $25,000 $25,000 $      – $1,667 $697 $2,364

Assumption: The tax rate is 35%. We have assumed a 4% rate of return and a 5% borrowing rate. Each scenario is based on an amount of $25,000 over a 15-year period.

In the first scenario, Vincent chooses to not use his TFSA to buy his home. He thus borrows $25,000. Over a 15-year period, the amount represents an annual mortgage payment of $2,364.

In the second scenario, Vincent decides to use the money in his TFSA to buy a home and borrows the remaining balance of $8,750 (in order to get to the full amount of $25,000 as illustrated in the example).

Over a 15-year period, the loan represents an annual mortgage repayment of $828. He can also contribute $1,536 to his TFSA.

In the third scenario, Vincent opts to withdraw the money in his TFSA and transfer it to an RRSP. By reinvesting the tax refund at a 35% rate, his initial contribution of $16,250 will allow him to accumulate $25,000 in his RRSP. After a 90-day wait period, he can use his RRSP for the HBP.

Over a 15-year period, Vincent does not have to make any mortgage repayment (since he did not take out a loan to make up the $25,000). He must repay his HBP at a rate of $1,667 a year. The money left over in his budget –$697– can be invested in a TFSA.

The chart below illustrates the accumulated savings after the 15th year (at the end of the HBP repayment period).

Remember that in the first scenario Vincent’s choice did not allow him to invest each year, but the $16,250 that was invested in the TFSA has grown.

In the second scenario, Vincent was able to invest $1,536 annually in his TFSA for 15 years, which has also increased in value.

In the third scenario, Vincent was able to invest $1,667 annually in his RRSP for 15 years (to repay his HBP) as well as make 15 contributions of $697 to his TFSA each year.

The chart thus shows that the third scenario is the most attractive, made possible by the creation of the TFSA.

Speak with your advisor

Of course, the best person to advise you on the various strategies when it comes time to become a homeowner is your advisor. Do not hesitate to make an appointment. He or she will help you see the big picture!

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[1] The amount must remain in the RRSP for at least 90 days before it can be used as part of the Home Buyers’ Plan.