Mortgage or RRSP: What should you focus on?

A financial advisor meets with a young couple.

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, plus factors related to economic conditions and developments in the financial markets.

To help you determine what might be right for you, here are 6 things to consider to help you make that decision.

  1. Interest rates
    How much will you save by paying down the mortgage? You might find historically low interest rates to be a factor in favour of investing in an RRSP. That’s because paying off a low-rate mortgage doesn’t offer the same level of savings as paying off a higher-rate mortgage. But remember that as rates move up, mortgage savings could take on renewed importance. Higher rates mean higher interest costs, which means you’ll probably save more by reducing or eliminating your mortgage principal. When it’s time to renew at higher rates, you’ll have less of an outstanding mortgage.
     
  2. Investment returns
    How much can you earn on your investments? Remember, an RRSP boosts returns by allowing your investments to grow within a tax-deferred environment. And don’t forget the immediate tax break your annual RRSP contribution provides. You need to determine whether the potential future returns from a lump sum put into your RRSP will be greater than the amount saved by paying down the mortgage. This decision needs to be shaped by a long-term view, looking at both interest rates and potential investment returns.
     
  3. Other debt
    If you have high-interest debt such as credit card balances, it usually makes sense to pay that off before focusing on your mortgage or RRSP.
     
  4. Your age
    Remember that contributions to an RRSP at an early age can make a big difference in helping 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.
     
  5. Other retirement income
    If you have a workplace pension that will help finance retirement, or other sources of future income, it may make more sense to pay down the mortgage. Once the mortgage is paid off, you can concentrate on your RRSP.
     
  6. Missed RRSP contributions
    RRSP rules allow you to make up for missed 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 mortgage-versus-RRSP decision does not have to be “either-or.” 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 pay down a portion of the mortgage principal using the tax refund generated by your RRSP contribution.

Consult with your financial advisor to help you weigh your options and choose a course of action that makes the most sense for you.

We can help

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