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Home Buyers Plan Vs. Line of credit

ImageI recently got the following question in a comment on my previous article:

If we withdraw from our RRSPs we lose out on interest. Would it make more sense to use our line of credit? Is the interest we'd have to pay on that offset by the interest we gain with RRSPs?

In summary, you can borrow money from your RRSP, and use that to buy your home. You have to pay it back over a 15 year period. If you don't pay it back according to the schedule, you are taxed on the money instead.

During the period, you lose the interest earned on the RRSP.

This article assumes that you already qualify for the home buyers plan (HBP), and you are considering if it is right for you or not.

There are about four key numbers to think of when considering using the home buyers plan to borrow from your RRSP vs. using a line of credit.

  • The amount of money, how much do you need

  • The term of the loan

  • The interest rate on the RRSP, that you would lose during the term

  • The interest rate on the line of credit

The first two items will be the same for either option, so we can cross them off the list. This leaves us with the interest rates on the RRSP and the line of credit.

If you can get a higher interest rate on your RRSP than the interest you are paying on your line of credit, then it would be better to use the line of credit. But if the line of credit interest is higher, then it makes more sense to take advantage of the home buyers plan to borrow from your RRSP.

HBP Vs. Credit Line Calculator

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Currently a line of credit should cost you around 6-8% interest. The interest rate on your RRSP can vary significantly, depending upon your investments. A basic term deposit could get you around 4%, and mutual funds and stocks are near impossible to predict. The current economic crisis further makes this difficult to predict.

Usually the difference in interest rates should be enough to make your decision for you. If not, then here are a couple of more

If you borrow from your line of credit, then you extend your credit. This could be an issue if you need to borrow money for something else, such as a car.In the current economic climate, extending your credit might not be so desirable. With a home buyers plan, you do not extend your credit, since you are borrowing from yourself.

One further thing to consider is the compounding interest in your RRSP.If you borrow from your RRSP you lose the interest, compounded. That is you will not get the interest on the interest. Over a long term it could make a difference.

I hope this helps. If you are still unsure, I urge you to contact a good financial advisor, and ideally one who is not selling you any investments. Discuss your specific situation with them and investigate the pros and cons of each potential choice.

Pat

 
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