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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.

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 2 comments… add one }

  • Dan January 20, 2013, 11:51 am

    I have an RRSP vs mortgage question for all fellow investors out there. My wife and I owe 366k on our mortgage. We have the option to either make extra lump sum payments towards the mortgage, invest the money in an RRSP or put it into a TFSA. We are considering monthly lump sum payments of $2k that can either go towards the mortgage, RRSP or TFSA.

    With the mortgage I like the idea of eventually having lower payments due to the lump sum payments made. I also like the interest savings. The mortgage rate is 2.6% amortized over 25 years.

    With the RRSP I can probably earn around 7% on the money invested. I like this option because it would increase my tax refund at year end :) I have about $35k RRSP contribution room right now, same with my wife

    The TFSA obviously wins in terms of tax advantage but I wouldnt get a deduction and it wouldnt help the mortgage payments. I have about $3k in a TFSA right now and my wife has none.

    I guess the question is, over a period of 3 years is the interest savings on the mortgage greater than the investment return I could make?

  • Ed Rempel January 21, 2013, 11:29 am

    Hi Dan,

    The short answer is that you will likely make more from your RRSP. You said you expect to make about 7%/year. I’m sure that is much higher than your mortgage, which is probably below 3% today. We are getting mortgages at 2.49%. Investing in your RRSP at 7% is likely better than paying down a 2.5% mortgage.

    Secondly, RRSP is also better because your reason to pay down the mortgage is to reduce your mortgage payments in the future. I have worked out projections comparing RRSP to mortgage and the most significant factor (other than the interest rate vs. RRSP rate of return), is what percent of the mortgage payment will you invest after you pay off your mortgage. If you would invest less than 90%o of it, then the RRSP option will put you farther ahead.

    You have not given us the important facts to give you a real answer, Dan.

    – With your current payment, will your mortgage be paid off before you retire?
    – With your current RRSP/TFSA contributions, are you on track to have the retirement you want?
    – What tax bracket are you in now and what tax bracket to you expect to be in after you retire?

    To answer your question fully, I would have to understand the big picture of your financial position.


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