Debate: RRSP vs. Mortgage
One of the biggest debates around the Canadian personal finance world is battle between contributing to your RRSP or using the money to pay down your mortgage? The answer is, as always, it depends.
Ok, so lets go through your options.
1. Pay down your mortgage first, 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 is that you’ll miss out on YEARS of tax free compounding within your RRSP. Returns that will potentially (most likely) beat your mortgage rate (today’s low rates that is).
- This option may be best for people who are in the lower 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 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 in my opinion.
- 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 (mortgage), along with growth (RRSP).
I’m sure most of you know about this trick already, but make sure that you are paying your mortgage off BI-WEEKLY instead of monthly. Paying bi-weekly will seem like your making the same payments as monthly, EXCEPT, you’ll end up making an extra payment (monthly) in a year. This simple tweak of paying your mortgage bi-weekly will reduce your amortization from 25 years to 21 years.
Here is a nifty RRSP vs Mortgage calculator that determines if you’d come out ahead paying down your mortgage or investing in your RRSP.