The mortgage versus RRSP debate roars on
By Gordon Powers, Sympatico / MSN Finance
One hot topic on the MSN message boards these days is whether people should pay down their mortgage or contribute to their RRSP before the deadline.
The truth is, there’s no definitive answer. That’s why so many people opt for making RRSP contributions as early as possible and then using the tax refund to reduce their debt.
The major factors to consider are the mortgage interest rate and amortization, the expected return in the RRSP, how long you’re prepared to invest, and your ability to capitalize on mortgage prepayment privileges. Then again, for a more complete picture, you also have to factor in the timing of and tax on the eventual RRSP withdrawals.
As a general rule, you’re better off contributing to your RRSP if the expected rate of return there is at least 1 per cent greater than the mortgage rate.
Even with fairly equal returns, providing you've got a way to go before retirement, the RRSP side generally wins out because the tax deferral it provides lasts for a lifetime, whereas the prepayment’s attraction dries up once you burn the mortgage. Use a shorter time period though and the advantage isn’t as clear cut. Throw in tax-free growth on the house and the pendulum likely swings the other way.
It all comes down to the assumptions you feel comfortable with. If I’m trying to sell you an RRSP though, I’m definitely going to pump up the returns side of the ledger. Have a look at this calculator to see how that one works. Or try this one for a slightly different look.
Posted by: malcolm thomas | Feb 17, 2022 9:10:32 AM
If I had paid down my mortgage over the past 10 years and forgot about RRSP's, I would currently have no debts, no loans and $100k in savings. Instead I've got a mortgage, loans and have lost 50% of my future retirement investment, a rapidly declining house value and shaky job prospects. Bay street? more like Bah street.
Posted by: Ann Bell | Feb 17, 2022 12:09:11 PM
I totally agree with Malcolm Thomas' comment. For many years, we went without vacations, entertainment, and other luxuries to put money into RRSP because my husband was self-employed, while we continued to pay off a mortgage. We are finally retired and mortgage free. Now that we need our RRSP to live on, our funds have plummeted. Please young people, take my advice and pay your mortgage off as quickly as possible. You'll never regret that decision in spite of what the so-called experts tell you. Remember, the fund managers and bankers make their living off us, so they will tell you whatever is in their best interest.
Posted by: A C | Feb 17, 2022 1:27:15 PM
I would have you who you get your advice from and if you are close to retiring you should have known this was coming. What happens after every bull market in history? Yep thats right, a bear market. Its up and down, it always has been and always will be, and if you have an advisor who didnt advise you to swtich to more secure investments when approaching retirement then you should be looking for a new advisor.
On another note, RRSP are no good for anyone except first time home buyers and the government anyway.
Posted by: AB | Feb 17, 2022 1:53:16 PM
Do NOT do either...mortgage rates are low so there's no need to pay it down as quickly as in the past. There's also better ways to use your money wisely with your house, such as home repairs, upgrades, etc which can increase the value of your home. Contiributing to your RRSP used to be a good idea when it was paying out 11-13% per annum. Not anymore. Yes, we've all lost a considerable chunk of our RRSP money and it personally has left me with a bitter taste to contribute any more ever again. It's just not worth it in these volatile economic times for the small tax refund it may provide. I do agree that for first time home buyers, using the interest free RRSP loan option to pay down the house is the only reason I would contribute. Good luck!
Posted by: Tashia | Feb 17, 2022 2:05:46 PM
I also agree with paying down your mortgage BEFORE contributing heavily to RRSP's. I am 34, and for the past few years I have been contributing heavily to our RRSP's. If I had instead concentrated on our mortgage debt, I would not have as much in RRSP's, however I could be almost mortgage free. Which, looks very attractive after being laid off recently. Oddly enough, the amount I currently have in RRSP's is almost equal to my total debt load, which makes me wonder what if that money had been put against my debt in the first place. Everyone assumed that debt was just a part of life, and now we all realize how crippling it can be and how much better life is without debt. On that note, I have paid off the credit card and living lean and green. This economic climate and being laid off has come at a great time in my life. I am learning these lessons while I am young and can change my ways.
Posted by: Len | Feb 17, 2022 2:14:16 PM
Dont do either. In these economic times, its best to take your money to the local Casino and put it all on Black.
Posted by: Ian Free | Feb 17, 2022 2:25:46 PM
This is really two different topics in one. You did not need to contribute to an RRSP in stocks and mutual funds. You could have contributed in GICs, etc. Little to no risk. I think that young people should get rid of their debt first especially if they are not at the top tax bracket. The RRSP room will be there later if you require it. Any money paid out in interest is definitely not the best financial planning if you also invest heavily. Slow and easy always wins the race in the long run.
Posted by: AB | Feb 17, 2022 2:28:02 PM
Great comments Tashia. Debt, especially credit cards, can be crippling and there should be a better education and understanding by young and old alike on how to better manage their credit (mortgage, car loans, student loans, credit cards, etc..) before it burdens then buries them. It would be smart if more people followed your example. My rule regarding credit cards is spend what you can pay off at the end of the month without keeping a balance and keep track of your income so you always know what money is coming in (and going out) and what amounts to set aside for recurring loan and mortgage payments. If worse comes to worse, you can negotiate a lower interest credit line with your bank to consolidate your high interest debt. Good luck!
Posted by: who | Feb 17, 2022 3:09:21 PM
click on cpp will be there when you need it
Posted by: Max | Feb 17, 2022 3:19:55 PM
I just read all the thoughtful and sage comments posted and wanted to throw in my two cents: I think ultimately whether you decide to contribute to your RRSP, mortgage debt (student loan, car loan etc.), or other investment vehicle is always going to be idiosyncratic. Everyone's particular factual situation and comfort level with risk assumption is going to be unique to them. So, there is really no answer to the RRSP v. mortgage debate (without a crystal ball that is). What I think a lot of young people are poignantly learning is that it is necessary to take a more active role in their finances i.e. learn about various ways RRSPs can be invested, have a long term plan. The way I am trying to weather the storm is to split- which may or may not prove wise and I must reiterate is entirely based on my facts and willingness to take risk- 30% of extra $ to RRSP- 70% to mortgage debt. I have held my RRSPs in high interest (which at 2.5% "high interest" seems like an oxymoron to me) for the last year and a half, once that caps at a certain amount I will transfer it to pick and chose the stocks I want to invest in. (Hopefully I will avoid a capital loss, but again, that it is the level of risk I am comfortable with). With the RRSPs I borrow at the beginning of the year (and use the T1213) to take advantage of the time value of $ and tax deduction. There are three reasons why I will be contributing more heavily to mortgage debt in the next year rather than RRSPs: 1) the terms of my mortgage allows a healthy contribution without penalty 2) the interest rate is so low right now (if you are on a variable mortgage)- it is a great time to pay off more of the capital of the mortgage and build equity (or work off negative equity in my case) and 2) I have such a high ratio mortgage and long amortization period that when the interest rates do go up it is in my best interest to have as much of the capital amount paid off as possible. I just wanted to share what works for me- but I in no way am advocating this for anyone else- by area or expertise is NOT finance. One last thing: to all the very hard working, decent people who are feeling like they lost their shirt right now, I can commiserate, and sincerely wish you better times in the near future. Thank you for taking time to read my commentary.
Posted by: Richard | Feb 17, 2022 3:42:22 PM
Living debt free is the key to accumulating wealth. Invest in RRSPs if you are under 30 to maximize the growth potential of retirement income, then switch to private savings after that.
Investing in a home now is a very risky proposition. The reason is that home values are dropping. There will be no miltiplier effect down the road. (i.e. I bought my home in 1979, and sold it in 2008 for 5.5 times the original price). Anyone who bought a home in the mid 2000s or later is probably never going to recover the money paid into the mortgage. A home is now a rapidly depreciating asset. So why pay down the mortgage.
Invest your money instead, as befits your tolerance for risk, and don't invest all your funds in RRSPs, its the worst kind of income to receive in old age. It's taxed as income, the worst kind of tax to pay.
The best kind of investements generate dividends and capital gains which have preferred tax rates. And if you can split your income. The new tax free savings accounts can be used for money market or GIC funds. Don't put in mutual funds or stocks, as, you cannot take advantage of capital losses.
It's probbaly a good idea to hire a financial planner, and get an accountant to help you sort through your best options. Your real goal is wealth accumulation over time. Good luck!
Posted by: Releived | Feb 17, 2022 6:07:55 PM
I bought my first home three years ago. Even though I make regular monthly contributions to a RRSP my main focus since I bought the house was to pay down the mortgage, even before this financial downturn we are in hit.
At the time it was so easy to do the math, what I have been able to pay down on my mortgage has cut almost 10 years of mortage payments off the end, saving me almost $80,000 in future mortage interest, (after the principal I have already paid up front). Meanwhile in the last 5 months my RRSP has lost 25% of it's value. That ten years I've reduced from the tail end of my mortage will give me a lot of time to sock money away for retirement after the mortgage is gone.
If I had gone the other way for some reason and not paid the mortgage down and dumped everything into RRSP's that have since tanked I would feel absolutely sick right now. As it is,I'm happy knowing I made the right decsion.
Posted by: A little bit of both | Feb 17, 2022 6:17:28 PM
Why not have a little bit of both? Contribute to RRSP's, then use your tax refund to pay down your mortgage. My husband and I could never agree as to which to do and so we have reached a compromise - this way we have a little bit of both. It really comes down to what is important to you.
Posted by: Johny Canuck | Feb 17, 2022 8:16:45 PM
The time has come to burst your bubble... pay your mortgage off as soon as you can. The point being, a lot of people felt they had job security, and are finding they didnt. If you own your house, you no longer have to pay rent (mortgage). This little piece of mind can go a long way to stabilizing your status, no matter what the job prospects are. If you go into retirement with a mortgage, you will still be paying, if you have enough retirement funds or not... old age is a bad time to lose your home. I made extra effort to pay off my home , early. I got ill and couldnt work for years, and have only just been able to re enter the job market. I have been lucky to have good work, dispite the economic collapse, and am now very comfortable. If I had owed on my home when i lost my health, what little RRSPs I had , would have been drained quickly. The princple here is: you cannot allways get a raise at work, but you can eliminate your debt .... if you earn 2000 a month and pay 800 on mortgage or rent, you have 1200 in spending cash. If you pay off the mortgage, you essentially gave your self a raise ... 2000 in income.. no mortgage = 2000 in spending cash. Its a nice raise when your company wont give you one. After your mortgage, an RRSP is a great second bet with any leftover money. I would have to advise a cautious outlook and get GIC's ... I recently took a 40% hit to my mutuals .... I will never buy into a mutual fund again.
Posted by: Rhonda Sherwood, CFP, FMA | Feb 17, 2022 8:47:00 PM
I advise my client to contribute the most they can each year to their RRSP. Consider setting up an automatic monthly savings plan. The ‘pay yourself first’ method of investing will help ensure that you are consistent with your contributions to your RRSP plus you will get the benefit of dollar cost averaging. You can then use the tax rebate to either invest back into your RRSP or use it as a lump sum payment down your mortgage.
Posted by: K | Feb 17, 2022 9:01:40 PM
It's simple: You pay down your mortage. Remember those who bought RRSP now have a mortage and a lost of money in their RRSP. Comon sense tells you to pay your bills first than do what you can with the rest of your money after and only after you have no dept.
The recession has been bought on by bis financial companies wanting you to invest in them because they say they are the so called experts when now we know it is you that are the expert and only you should put your money wher you think it is best. Do not losten to those who preach RRSP they are for tax grags for the government and the financial companies to use your money for their own use. Stop being so gullable and put your money under your pillow.
Posted by: A little bit of both | Feb 17, 2022 9:16:45 PM
I think here that once again too many people are tying in RRSP's with mutual funds. You can have one without the other!! You do not need to have mutual funds in your RRSP's - you can have GIC's if that is your comfort level. Many people who are complaining now about the market either didn't understand what they were invested in or had a mismanaged portfolio. I have seen so many people who waited until the market was doing well for a couple of years before investing in mutual funds. Well guess what - it's not a matter of 'if' the value of mutual funds will decline, it is simply a matter of when. It is very important to understand this. And if you are invested for the long term, you should likely STAY invested for the long term! That is why you are in the fund you are in - because it was determined to be the best fit based on your investor profile/time horizon. However there are unfortunately some bad advisors out there, and there is never a wrong time for the right portfolio. If you don't understand what you are invested in then review it with your advisor. That is what they are there for. If you don't feel comfortable with the answers you get, then seek a second opinion.
It is not an easy choice to pick between paying down your mortgage OR paying into your future. It is best to have some balance between the two - it reduces the chance of 'buyers remorse'.
Posted by: Don't trust the banks | Feb 17, 2022 10:10:44 PM
My word of advice: Don`t trust the banks. I saw a 'financial expert' from Scotia bank several years ago who advice me to buy such and such RRSP's. The ROI, after several years was $ 20. for every $ 1, 000 invested. and I was told that I was lucky. In the meantime, the rate offered by Scotia visa on credit cards in 19.5%. so, lets get this straigth....banks take my money, borrow it at 19.5% iinterest, and I get a .0002% on my investment. How about that for ROI! The truth is that you can not trust any of the financial experts around. They are only looking after themselves. We have to educate ourselves and make our own decisions based on our own needs and requirements. No one else will do it for you.
Posted by: Rachel | Feb 17, 2022 10:37:56 PM
Wait a minute ... if you lost 30 or 40% in your RRSP then you had to 100% in stocks which means you must have had several good years along the way. It does balance off, it's just that right now is the worst time in a long while. Seems like a time to buyif you have a long view. And, yes, financial people get paid but that doesn't mean they're all crooked or idiots, just go by word of mouth. In hindsight, mortgage reduction looks good particularly when rates were higher --- now with them so low it's not as clear. Mortgage is always the sure thing though but stocks do make money more often than not.
Posted by: I became my own financial expert | Feb 17, 2022 11:55:55 PM
I consider myself lucky and I relate to "Don't trust the banks" comment above. I was in the same situation, after a 5-year term investment, my ROI was $18.95 in total. And funny enough, same bank and this is exactly what they said to me too, consider yourself lucky! I have decided to just keep my RRSPs in a master account collecting very little interest and I contribute just enough, right before the deadline, to never have to pay taxes on my income at the end of the year. My mortgage is an open variable rate and it is now at 2.5% interest. I borrow from my RRSPs when I buy a new home for the down payment and reimburse it after the sale. I buy a house every other year or so (tax free capital gain), fix them a little, make a little and this is how I grow financially. I cannot for the sake of me rely on any investment any bank can offer. Having had to "start all over again" and after 8 years of hard work, I was able to gain a net of $100K. No bank nor longterm investment will give me such a return and I am not one to play with stocks. I figure that in 2 to 3 years from now, with the gains I will have accumulated, I will be able to build my dream green home (not a castle, however) on a nice little lot and be mortgage free. Being a single mom - without any financial support other than my paycheck - I had to get somewhere and included in my careful planning are my child's tuition fees for University in 7 years from now. Being my own financial expert is working for me!