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February 17, 2022

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.



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...