Pay Off Mortgage or Invest in an RRSP?
June 26th, 2008 | by Editor |A common question brought to Canadian financial advisors and Certified Financial Planners is: “Is it better to pay down my mortgage or buy an RRSP?” Here’s what we’ve gathered from our discussions with advisors.
There is no one answer that applies to everyone. Everyone’s situation is different and many factors play into which of these is a better use of your money. However, there are some basics to consider before making this decision.
First, in most cases, an RRSP contribution results in the investor paying much less tax or getting a bigger than normal refund. So, in essence, it’s “free money.”
Second, the RRSP contribution helps you save for your future, and you can “eat your RRSP” if the need arises. With retirement savings in the form of an RRSP, you could cash in a portion of it in time of need. Conversely, if you pay off your home early, then run into financial problems, it’s difficult to liquidate only a portion of your home without selling off the whole house.
Finally, if you have a relatively large lump sum of money, and room to put it into your RRSP, why not make an RRSP purchase, then using the big tax refund to make a lump sum payment on the mortgage? This technique will give you the triple benefit of saving tax dollars, saving for your future, and saving yourself many future mortgage payments.
Related article: Learn how creditors and debt affect your RRSP.