RRSP or Pay Down Mortgage?

February 9, 2018

The new year is well underway, and many of us have already abandoned our resolutions or have yet to start. Sometimes, our goals are too ambitious, unrealistic, or simply need adjusting. Regardless of where we stand, there’s always room for improvement, especially when it comes to financial health.

It’s no surprise that some of the most common resolutions revolve around money: paying off debt, building savings, investing, and preparing for tax season. But where should we start? What should be our top priority when managing personal finances?

Debt Should Be a Priority - Consumer debt in Canada has reached an all-time high, making it crucial to prioritize paying off what we owe. Mortgage debt, in particular, has become a growing concern, especially with the Bank of Canada increasing interest rates multiple times over the past year. Economists predict further rate hikes, so now is a critical time to focus on debt repayment.

One of the most frequent questions mortgage brokers receive is: Should I invest in an RRSP or focus on paying down my mortgage?

RRSP vs. Mortgage: What’s the Right Choice? - Each RRSP season, this question resurfaces, and the general advice from financial experts is to do both. A common strategy is to invest in an RRSP, then use the tax credit from that contribution as a lump sum payment toward the mortgage. However, this approach isn't one-size-fits-all—your personal financial situation plays a key role in determining the best strategy.

Before deciding, consider these factors:

• High-Interest Debt Comes First - If you have personal debt with high interest rates, such as a credit card with an 18% interest rate, paying that off should take priority. The cost of carrying high-interest debt will always outweigh potential returns from an RRSP.
• RRSP Contribution Room - Unsure if you have space to contribute? Check your Notice of Assessment from the Canada Revenue Agency (CRA) to confirm your RRSP limit.
• Tax Bracket Considerations - RRSPs are most beneficial when contributing in a high tax bracket and withdrawing in a lower one. If you expect to be in a lower tax bracket at retirement, investing in an RRSP now may make sense.
• Mortgage Rate vs. Investment Returns - If your mortgage has a 4% interest rate and your investment is only expected to earn 2.5%, paying down your mortgage may be the better financial move.
• Home Equity Position - Someone with only 5% equity in their home might prioritize mortgage repayment, whereas someone with 75% equity may have more flexibility. If you have significant home equity, a home equity line of credit (HELOC) could provide access to tax-deductible borrowing for investments outside an RRSP.
• Liquidity Needs - If you anticipate needing access to funds before retirement, paying down your mortgage can lead to financial flexibility in the future. Alternatively, contributing to a Tax-Free Savings Account (TFSA) might be a better option since it allows for tax-free investment growth and easier withdrawals compared to an RRSP.

Source: Absolute Mortgage Team