RRSP vs. Mortgage

One of the most significant questions around the Canadian personal finance world is decision between paying down your mortgage, or putting money into your RRSP? You can make a compelling argument depending on your personal situation.

Let’s explore some options:

A. Pay down your mortgage first, then start contributing to your Registered Retirement Savings Plans.

• 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 (we are still sitting around 40 year lows for rates).
• This option might be considered for people who have a lower tax bracket.
• In addition to this, people who are in lower tax brackets, may also consider a TSFA for their long term strategy VS. an RRSP.

B. Keep making the regular mortgage payments, but maximize your Registered Retirement Savings Plans.

• 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.

C. Do BOTH. Maximize your Registered Retirement Savings Plans and use the tax refund to pay down your mortgage.

• This could be the optimal solution in my opinion.
• It is important to execute a net-worth statement each year, when using this strategy.
• 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).