Comments on: Debate: RRSP vs. Mortgage

By: GS

GS — Sat, 27 Feb 2010 02:00:47 +0000

FT, the link to the RRSP vs Mortgage Calculator link needs updating to:

http://www.empire.ca/consumer/en/calculators/rrsp_mortgage_questions.html

By: BC

BC — Fri, 05 Feb 2010 04:11:50 +0000

In my case, a $27000.00 mortgage @ 2.75% will take me approx. 1.6 years to pay off. I will then have access to approx. $70,000.00 of liquid income for the next 10 to 12 years. Take into account, a little spending of that money, $600,000.00 when I retire, will certainly suffice whether I spend a dime on rsp’s. Add that to a company pension, canada pension and oas and I will struggle more with how to avoid taxation than wondering if I am going to outlive my rif. I’m not bragging about my situation but just explaining my facts. Markets will come back as they always do and anyone in a long term mortgage as opposed to my situation, will no doubt benefit, from regular house payments and increasing rsp investments over the term of the mortgage as well as dumping the tax return against the principal.

By: EricJ

EricJ — Tue, 27 Oct 2009 16:37:32 +0000

I would like to offer a third option…

Use the extra funds to purchase a multi family building. The rents will always increase and you can leave the building to your heirs. In addition, the monthly income will not simply disappear because the property value has declined unlike many retirement vehicles where your monthly income from those depends upon their value.

EricJ – http://www.dreamhomefinancing.com

By: Kris B

Kris B — Mon, 11 May 2009 21:53:49 +0000

Cannon, thank you very much for your calculations. It seems you answered my question, for a higher MTR investing in a non-reg account is best as you loose much less of your investment to taxes than an RRSP if you retire the HELOC. However if the MTR is lower I can see that both the HELOC payments, and tax loss would be much closer. Overall I think it’s conclusive that a non-reg account is better for most using the SM. However I am still interested in other calculations showing a combination of the two. Such as investing the RRSP return in the non-reg account each year, plus monthly contributions to each.

By: cannon_fodder

cannon_fodder — Mon, 11 May 2009 02:21:32 +0000

This is a response to Kris B’s intriguing thought. Instead of borrowing home equity as it accumulates to invest in a non-registered portfolio, borrow to invest in an RRSP, and apply the full refund to the mortgage. This uses a readvanceable mortgage so there is a lot of flexibility to do this as each payment is applied.

So, I tweaked my SM Calculator to allow for this scenario. Here is what I found:

Inputs

- $300,000 House Value
- $240,000 Mortgage @ 5%
- $1,395.85 monthly payments amortized over 25 years
- 8% investment growth rate
- 5.75% HELOC rate
- Marginal Tax Rate of 46.41%

It should be noted that higher MTR’s make the case for investing into an RRSP more favourable when compared to the ‘traditional’ SM.

Here are the outputs:

With SM -
- Mtg is retired in 21 years
- $240k HELOC that is TAX DEDUCTIBLE
- investment portfolio of $304,142 that is NON-REGISTERED
- Adjusted cost base (not including commissions) of $138,516

With RRSP
- Mtg is retired in 18.25 years. Therefore, run the scenario until 21 years still making ‘mortgage payments’ but the money now goes to paying the HELOC interest and anything left goes into RRSP.
- $240k HELOC that is NOT TAX DEDUCTIBLE
- investment portfolio of $395,143 that is in an RRSP

Assuming the same MTR as used above, the net of it is whether a $240k LOC that costs $13,800 after tax to service annually and a fully taxable portfolio of $395k (that would be worth $212k if cashed out all at once) is better than having a $240k LOC that costs $7,650 after tax to service annually and a $304k portfolio (that would be worth about $265k if cashed out all at once).

If, however, your MTR is lower when you cash out (e.g. < 30%), then the advantage swings to the RRSP investment – especially if you can get rid of the HELOC quickly.

By: Sukh

Sukh — Sat, 09 May 2009 01:41:43 +0000

Same here Sue. I am still learning. Hope you make the good decision.

By: sue

sue — Wed, 29 Apr 2009 16:40:20 +0000

Hi sukh i think interest only mortgage is much better then heloc cos u will get better rate on interest only. heloc is good when interest rate is high even with interest only we can get 100,000 loan and do the same thing with u told to make it tax-decductable. rest u might be knowing better cos i m still learning.

By: sue

sue — Wed, 29 Apr 2009 16:37:40 +0000

interest only mortgage is much better then heloc cos u will get better rate on interest only. heloc is good when interest rate is high even with interest only we can get 100,000 loan and do the same thing with u told to make it tax-decductable.

By: Sukh

Sukh — Wed, 29 Apr 2009 03:44:59 +0000

Diifference in the sense that. If we are going with Variable or Fixed Mortgage we are lets say pay $2000 per month. But if we go with HELOC we might be paying around $1400 or less. So, the rest of 600 we can invest it every month. Or we can take investment loan of $100,000 who’s monthly payment will be around 400$ during current market conditions. All the intrest you will pay on your Investment loan will be tax-deductable.

By: sue

sue — Tue, 28 Apr 2009 03:04:56 +0000

what do u think about interest only mortgage…..pay only interest and invest the differance….

By: Sukh

Sukh — Wed, 01 Apr 2009 05:30:26 +0000

Thanks David!

I am just a rookie. I just graduated from college. So, I have long way to go. Thanks for the feedback, I will definitely look for “Tax deductible mortgage”.

By: DAvid

DAvid — Wed, 01 Apr 2009 01:02:58 +0000

Sukh: You should do more research. There are more cost effective ways to accomplish the goals you express in your note.

You might start looking for “tax deductible mortgage” to begin.

DAvid

By: Sukh

Sukh — Tue, 31 Mar 2009 18:23:29 +0000

I like this discussion. I have another idea. Instead of paying Interest + Principle payment. We just pay interest payment and take a investment loan and pay interest for that loan from the principle amount which we are not paying. On the other hand, goverment gives tax- benefit if we take investment loans. So, instead of just paying money into your mortgage and loosing the value to inflation over time. This way we can save for the retierment and pay off mortgage with the same amount. This is the only way we can get tax- benefit from the goverment on the same mortgage where we don’t get if we do it in conventional way.

By: 2invest

2invest — Sat, 21 Feb 2009 15:58:45 +0000

Here is the link.
http://www.taxtips.ca/calculators/RRSPvsMtgCalc.htm

By: 2invest

2invest — Sat, 21 Feb 2009 15:52:06 +0000

Here is a really comprehensive calculator. Enjoy.
Of course anybody that didn’t get to invest but was paying down the mortgage instead just now had the chance to go back ten years in time and start, investment years that is.

By: DK

DK — Thu, 29 Jan 2009 23:32:29 +0000

noblea,

threethings wrote that he had already enough down payment for a regular mortgage so I assumed that meant he wouldn’t need CMHC regardless.

Even at 7% the interest saved is only $28,000

By: nobleea

nobleea — Thu, 29 Jan 2009 23:26:40 +0000

DK;

For a fair comparison, you’d need to include the impact of the CMHC premiums. If, for example, the extra RRSP HBP withdrawal meant no premiums were necessary, then the CMHC premiums and interest on those premiums need to be included. Since the premiums are based on a percentage of the mortgage value, this could be a significant amount.

I don’t think it’s fair to assume a 4.5% mortgage rate over 30 years. The long term average is somewhere between 6 and 7 % I think.

By: DK

DK — Thu, 29 Jan 2009 22:54:51 +0000

threethings,

The answer to your question is: it depends what rate of return you expect to make on your RRSP investments versus the interest rate you are paying on your mortgage. Keeping in mind the requirement to pay back 1/15th of the withdrawn amount every year for 15 years, I have crunched some numbers for you.

If you assume an 8% rate of return in your RRSP, withdrawing $20,000 and paying back $20,000/15 every year ends up costing you about $86,000 over a 30 year period. If the rate of return is 3.75%, the cost to you is about $14,000.

Now let’s look at your mortgage. If the average mortgage rate over 30 years is only 4.5%, the additional down payment would save you about $16,000 of interest. At 6% you save about $22,000.

So it really depends, but as you can see unless you don’t expect to earn much in your RRSP, you are far better off leaving your $20,000 there.

As an aside, note that at an 8% rate of return for the RRSP, the rate on your mortgage would have to be about 18% before you break even!

By: DK

DK — Thu, 29 Jan 2009 21:39:19 +0000

Madusha,

Keep in mind the money has to be in an RRSP for at least 90 days before you buy your home in order for you to withdraw it tax free. If you’re planning to buy in April you may be out of time.

If you’ll meet the 90 day requirement, check your 2007 Notice of Assessment for your available RRSP contribution room. As far options go, you can open an RRSP account at any financial institution. I’ve found ING has a very competitive interest rate with a 90-day RRSP GIC being offered at 3.5% p.a.

By: Madusha

Madusha — Thu, 29 Jan 2009 20:13:28 +0000

Hey,
I am planning to buy a house sometime in April/May and looking to open an RRSP, so I can get a big tax refund as well as use my RRSP contribution towards a big down payment (this is going to be my first home). I am still not sure where to or what sort of a RRSP is good for me. I was also wondering whether it is possible to contribute money in to the RRSP for my previous years (the years I didn’t put money in since i didn’t have a RRSP). Any advice would be greatly appreciated…

cheers