This is the question I have been asked the most in my financial career: Should I pay down my mortgage or put money into my RRSP?
The answer I give is: It depends! I know it’s probably not the answer you were looking for, so let me provide some rules of thumb and opinion on how to walk this through.
Rules of Thumb:
- If your mortgage interest rate is expected to be higher than your RRSP rate of return – pay off your mortgage.
- Likewise, if your RRSP expected rate of return is higher than your mortgage interest rate – put it into your RRSP.
The option I like, and the one my wife and I used, was putting money into the RRSP and then using the tax refund to pay down the mortgage. This allowed us to benefit from both worlds, including some retirement and some debt reduction.
The role of emotions:
Sometimes when there are two good options (increase savings or pay down debt), the numbers at a certain point become less relevant. Sometimes going with the option that makes you feel less stressed is the best option even if the numbers point to the second option. After all, both options are moving you in the right direction.
It’s a Win-Win. Regardless of which option you choose, both choices move you down the right road of financial stability.
- So, if debt stresses you out – pay down your debt. No sense in losing sleep over money.
- If you aren’t what we call a “disciplined saver,” consider setting up an automatic withdrawal for your RRSP contributions. When the tax refund arrives put it on the mortgage. Automation of good habits can help simplify good financial choices.
- Having a regular review with a financial professional can help ensure you are doing the right steps to help you move forward.
Empire Life has a simple to use Mortgage vs. RRSP Calculator that allows you to enter your current mortgage and financial information and see what makes sense for you.
Give us a call if you would like to explore your unique situation to figure out what makes the most sense for you!