Pay Off Your Mortgage or Invest in RRSP’s?


May 20 2010Pay Off RRSP or Mortgage?

As we quickly approach the March 2, 2015 RRSP contribution deadline for the 2014 tax year, many Canadians may be wondering whether their extra funds should be deposited into an RRSP account or used towards an extra mortgage payment.

Benefits of Paying Your Mortgage Faster

If you choose to put more money towards paying down the principal of your mortgage, you will benefit in a few ways:

  1. You will end up paying less interest which can save you thousands of dollars over the course of your mortgage.

  2. You will have more flexibility in the future, where you will have more cash to pay for vacations, higher education for children, etc.

  3. 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.

  4. Should you require emergency funds in the future, it can be less costly to borrow from your accumulated home equity rather than withdraw from your RRSPs.

  5. Finally, paying off a mortgage sooner than planned also gives many people peace of mind and satisfaction from getting rid of such a large debt.

In a recent Globe and Mail article Kira Vermond writes about how many financial professionals recommend eliminating consumer debt and mortgage debt prior to investing in RRSPs, especially if you expect to be in a higher tax bracket in the future where your unused RRSP contribution room can be put to better use.

Check out First Foundation’s mortgage payment calculator to see the difference extra payments will make on your mortgage.

When RRSPs Make More Sense

There are instances where it makes more sense to invest in RRSP’s rather than paying down your mortgage. Imagine, you have a mortgage with a 2.7% fixed interest rate. 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 2.7% interest, then you would probably be better off investing the money in retirement rather than paying off your mortgage.

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.

Alternative Strategies

There are a couple of alternative strategies where you can both invest in retirement and pay off your mortgage:

  1. The simplest strategy would be to invest in your RRSPs first, and utilize your tax refund to make an extra payment on your mortgage.

  2. Another strategy, called the Smith Manoeuvre, allows you to get free tax refunds from the CRA while paying your mortgage down faster and building your retirement savings.

At First Foundation, our specialists would be happy to discuss your particular situation and help you decide which options would be best for you. Contact Us today to learn more!

Editor’s Note: Originally published May 20, 2010, this post was updated and revised January 20, 2015.

President of First Foundation Residential Mortgages and First Foundation Insurance. Live in Edmonton but cheer for the Riders. I have lots of kids. Follow me on Twitter @gordmccallum

Learn more about Gordon McCallum