Blog by Betsy Carstairs

<< back to article list

Mortgages vs RRSP's

I received the following article from Heather Woods hwoods@dominionlending.ca and found it interesting as I am, like everyone else, wondering should I pay down my mortgage or contribute to my RRSP - which is the best value for my dollar???

 

One of the biggest debates around the Canadian personal finance world is the battle between contributing to your RRSP or using the money to pay down your mortgage? The answer depends very much on the individual. Here are the options at hand:

1. Pay down your mortgage first and then start contributing to your RRSP.

There is no doubt that paying off your mortgage will give a guaranteed tax free return.

The problem with this option is that you'll miss out on years of tax free compounding within your RRSP. Simply put, RRSP returns will most likely beat your mortgage rate interest payments based on today's low rates.

Typically, this option is best for people who are in lower income tax brackets.

2. Keep making the regular mortgage payments, but maximize your RRSP.

Providing that you are in a high tax bracket, I don't think that you can go wrong with this option.

This option may not be desirable for someone who has more years left on their mortgage than they do have left until retirement. The ultimate goal should be to retire debt free.

3. Do BOTH. Maximize your RRSP and use the tax refund to pay down your mortgage.

This is the optimal solution. Contribute as much as you can to your RRSP and use your tax return to pay down the mortgage. That way, you get the best of both worlds, a tax free fixed income return (on the mortgage), along with growth (in your RRSP).

Many people know about the following trick already, but make sure that you are paying your mortgage off BI-WEEKLY instead of monthly. Paying bi-weekly will seem like you’re making the same payments as monthly, except, you'll end up making an extra payment in a year.

This simple tweak of paying your mortgage bi-weekly will reduce your amortization from 25 years to 21 years.

Here are three direct links to calculators that will help you determine if you should be spending your extra money on an RRSP contribution or if you'd come out ahead paying down your mortgage:

  1. http://www.insurecan.com/mortgage-vs-rrsp
  2. https://www.onlinebrokerage.cibc.com/publishing/investorsedge/en/calculators/applets/RMortApplet.html
  3. http://www.taxtips.ca/calculators/RRSPvsMtgCalc.htm