RRSP vs Mortgage

Well it’s that time of year again and one of the biggest debates around the Canadian personal finance world is the 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 interest savings over the years.
• 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 you’re making the same payments as monthly, EXCEPT, you’ll end up making an extra payment (one month) 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 calculator that determines if you’d come out ahead paying down your mortgage or investing in your RRSP.  http://www.empire.ca/consumer/en/calculators/rrsp_mortgage_questions.html

Hope you find this helpful and if you need to arrange financing for a larger RRSP contribution please feel free to contact me.

Jerry Sims is a mortgage broker with Ambro & Associates Mortgage Consultants Ltd. with over 20 years of lending, banking and financial planning experience. A highly satisfied and loyal client base can attest to Jerry's knowledgeable, creative and caring service that rises above and beyond expectations. Jerry has worked at several financial institutions in the capacity of loans officer, branch manager and credit manager.

Please feel free to ask John for an endorsement if you would like to know more about my services.

Jerry Sims, AMP
Mortgage Broker
Ambro & Associates Mortgage Consultants Ltd.
c 604.808.3420
jerrysims@shaw.ca
http://www.aamc.ca/about.php?id=10