It is RRSP contribution season, so you’ve probably seen an article or two about the debate between RRSP vs. mortgages. The people selling the RRSPs are going to try and convince you to buy their product, but is it really the better financial option? The debate between paying down your mortgage or contributing to your RRSP is based on your individual financial situation.
Pay off high-interest debt first!
There should never be a question of whether you should invest in an RRSP or pay down a credit card. You will not be able to make 20% on your RRSP investment in this day and age, so paying off your credit card is a no-brainer. If you are debating between contributing to your RRSP or your mortgage, and you have a revolving credit card balance, take care of the high-interest debt first no matter what.
Contribute to your RRSP and use the tax refund to pay down the mortgage
This is a “best of both worlds” scenario that can sometimes work out, but it really depends on a number of different factors. These factors include: your marginal tax bracket when you withdraw from your RRSP, your rate of return from your RRSP investment (after fees), the interest rate of your mortgage, the amount you plan to contribute and the balance left on your mortgage. It is possible to estimate if taking this approach will benefit you more in the long run than simply paying down your mortgage, but you have to make a lot of assumptions. Will your RRSP investment grow at a higher rate than you are paying on your mortgage? What will your marginal tax rate be when you withdraw from your RRSP? There is a lot to think about it. Talk with your mortgage advisor to discuss the options and determine the right approach for you.
Pay down your mortgage
Instead of making an $8,000 contribution to your RRSP and waiting for your tax refund to be calculated and hoping your investments will grow at a decent rate, you could simply put that lump sum into your mortgage. You’ve instantly reduced your debt load by a large amount, which can have a nice psychological benefit because of the reduced burden. Not to mention that you won’t have to worry if your RRSP investments will pan out or if you’ve made the wrong decision.
Talk to a mortgage advisor at The Mortgage Advisors to learn more. Our agents in Ottawa, Kingston, Brockville and throughout Eastern Ontario are on your side. They’ll help you find an answer or discuss your options like mortgage refinancing to give you the best financial picture going forward.