Mortgage or RRSP: What should you focus on?

It’s a common dilemma for many Canadians – should you pay down your mortgage or contribute to a Registered Retirement Savings Plan (RRSP) instead?

Unfortunately, there’s no easy or definitive answer. What works for one person may not work for another. It all depends on your particular circumstances and factors related to current economic conditions. For example, contributing earlier to an RRSP leaves more time for investment growth. However, you may be better off paying off your mortgage if you have a high interest rate.

To help you determine whether you should pay down your mortgage or contribute to your RRSP, here are 7 things to consider to help you make that decision:

• Your income
• Your current interest rate
• Other debts you hold
• Your age
• Other retirement income
• Missed RRSP contributions

Your income

If you have a high level of income, and a correspondingly high marginal tax rate, contributing to an RRSP may be more advantageous than paying down your mortgage. RRSP contributions are deductible from income, so the increased tax savings could outweigh the benefit of mortgage repayment. Conversely, if your income is lower, the RRSP contribution will be less valuable in terms of immediate tax savings, so mortgage repayment may be more advantageous in this case.

Your current interest rate

If you have a high mortgage interest rate, you might save more by paying down your mortgage rather than investing in your RRSP. Mortgage pre-payments typically go straight toward the principal and reduce the balance owing. You also know exactly how much you're saving if you have a fixed-rate mortgage. With variable rate mortgages, the savings will vary. Prepayments also mean that when it’s time to renew at higher rates, you’ll have a lower outstanding mortgage amount.

Investment return potential

An RRSP boosts returns by allowing your investments to grow within a tax-deferred account. Further, you get a tax deduction for contributing, which could be re-invested to further boost returns. Your actual investment returns, however, depend on your investments within the RRSP. If you believe that the potential returns you'll gain in your RRSP will outweigh the mortgage interest savings, RRSP contributions may be the better choice for you.

Other debts you hold

If you have high-interest debt such as credit card balances, it usually makes sense to prioritize repayment of those debts before making additional payments on your mortgage or additional contributions to your RRSP. Interest rates on credit cards tend to be very high, and saving the interest on high-interest debt will help you direct more toward other goals.

Your age

Contributions to an RRSP at an early age can make a big difference to your future financial security and help you reach your long-term financial goals. The earlier you get money into a retirement plan, the longer it will have to grow in a tax-deferred manner. That being said, if you have a high interest rate on your mortgage, you may benefit from paying it down sooner.

Other retirement income

If you have a workplace pension or other sources of income that will help provide you with a stream of income in retirement, it may make more sense to pay down your mortgage. Then, after the mortgage is paid off, you can concentrate on topping up retirement savings in your RRSP.

Missed RRSP contributions

RRSP rules allow you to carry forward unused contributions. If you have unused contribution room from past years, that’s another consideration to take into account. Again, you’ll need to assess whether the potential future returns after making up for those missed contributions will be greater than the amount saved by paying down the mortgage.

Remember that the RRSP or mortgage decision does not have to be an "either-or" type of decision. That is, it can be an "and" decision rather than an "or" decision. The best scenario for many people is contributing to an RRSP as well as paying down the mortgage. For example, you could make your RRSP contribution each year, and then use the potential tax refund generated by the tax deduction resulting from your RRSP contribution to pay down a portion of the mortgage principal. 

The RRSP or mortgage decision is highly personal and depends on your individual debt elimination and retirement savings goals. Consult with a financial advisor to help you weigh your options and choose a course of action that makes the most sense for your unique situation.

We can help

At Edward Jones, we can help you achieve your financial goals. Contact a local Edward Jones advisor about a financial strategy that makes sense for you.