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    The RRSP vs. Mortgage Debate

    January 16, 2014

    With limited savings, the average Canadian struggles with the same question year after year, should I pay down my mortgage first, or invest in RRSPs?

    There was a time, when paying down your debt first was a no-brainer, but with today’s low mortgage rates, you could afford to focus on your RRSPs.

    The right answer really depends on your financial situation, your personality (i.e. if you’re easily stressed you may want to pay down your debts first), and a few other factors:

    Age – The sooner you start to invest in RRSPs at a young age, the longer it will grow on a tax deferred basis.  However, young adults with student loans and other debts, would be better off paying off their debt first.  The structure will change with age, as more income is earned, and debts are paid.

    Income - The more you earn, the higher the rate of tax you'll pay, which means you can earn significant returns in an RRSP.   On the other hand, if you have a lower income, you need to look at which investment provides the better return.

    Investment Returns - Pay attention to the general rate of investment returns you could reasonably expect to earn.  If you earn a higher return on your investments than the interest rate expense on your debt, you should invest. Otherwise, pay off your debt.

    Mortgage Rate - If your current mortgage rate is low, investing in an RRSP can give you a rate of return that outweighs the interest payments.

    RRSP Contribution History - If you have made less than your maximum annual RRSP contribution in the past, a lump sum could allow you to catch up and could generate a healthy tax benefit.

    Pension Plan – If you have a workplace pension plan you may be able to concentrate on a mortgage while still saving for retirement.

    Which option is the best solution for me?

    There are a variety of options to consider when balancing debt with investment, and each option comes with advantages and disadvantages.  The following scenarios will help you better understand what might work best for you.

    The Comparison

    Scenario Pros/Cons Financial Situation

    Pay down mortgage first, then focus on RRSP

    + Guaranteed tax-free return.

    - Miss out on years of tax free compounding within your RRSP.

    Best for people who are in the lower tax bracket.

    Make regular mortgage payments, but maximize your RRSP

    + Opportunity to achieve significant earnings from RRSP.

    - Mortgage will take longer to pay off.

    Best for those who have less years left on their mortgage than they have until retirement or those in higher tax bracket.

    Maximize your RRSP and use tax refund to pay down your mortgage

    + Best of both worlds.

    - Need to be disciplined with your savings.

    Great balance of the other two options for many people.

    Talk to a Coach

    Determining whether to focus on paying down debt or building a nest egg comes down to your goals and what is most appropriate based on your personal financial situation. A Libro Coach can help you assess the various options available to you and determine which fits given your situation, risk tolerance and goals.

    Let's Talk is a series of easy-to-read articles to help you gain a better understanding of financial products and services so that you can take control of your financial well-being.

    Libro Money School

    This is about investing. Most people find that topic scary. It's too complex or they don't achieve their goals. We're here to help

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