There are so many options and decisions to make regarding where your money should go. Which debt should you pay off first? Should you pay extra payments on your mortgage or invest the excess cash in RRSP’s? Mike Watkins of the Times Colonist shared his perspective in a news article on Tuesday.
If you choose to put more money towards paying down the principal of your mortgage you will benefit in a few ways. Firstly, you will end up paying less interest which can save you thousands of dollars over the course of your mortgage. Check out First Foundation’s mortgage payment calculator to see the difference extra payments will make on your mortgage. Paying off a mortgage sooner than planned also gives many people peace of mind and satisfaction from getting rid such a large debt. Lastly, if you plan to sell your house before your amortization period is up, you will gain more money in profit the less you owe on your house.
In argument, if you have a mortgage with a 4.5% fixed interest rate then you would earn that rate as a return on the portion of your mortgage which you have paid off. However, if you hold RRSP’s which earn more than 4.5% interest then you would probably be better off investing the money in retirement rather than paying off your mortgage. Another concern might be that if you ever need access quick cash you can more easily pull out of retirement savings rather than out of a house.
In the end this decision is dependent on which factors are more important to you. Many people wish to retire as early as possible which means they will need to have decades worth of savings to support their living expenses. In this situation, investing extra money in RRSP’s or Tax-Free Savings Accounts might be more beneficial. As Watkins suggests, a compromise might be to put more money into your RRSP’s and then use your tax refund to make an extra mortgage payment each year. Another suggestion, which allows you to invest in retirement and pay off your mortgage, is to use the Smith Manoeuvre.