RRSP or Mortgage?

RRSP or Mortgage?

The year is underway!

Some of us might have already given up on our resolution(s) and many of us have yet to start. Maybe our resolutions were too strict, not realistic, or we just need to revise them a touch. Regardless, we can all agree that there is always room for improvement!

Not surprisingly, some of the most common resolutions and goals are financial ones: to pay off debt, build savings, invest, and get organized before tax season. But where to start? And, what should we make top priority when it comes to our finances?

Consumer debt should be the first thing on the priority list as Canada's consumer debt is at an all-time high. Paying off our mortgages should also be a priority as the OSFI (Office of Superintendent of Financial Institutions) increased the Bank of Canada’s Interest rate three times in the past year. Economists predict that it won’t be stopping there, therefore, this is a critical time to pay off debt.

That said, A common question that we are asked as Mortgage Brokers is, should I Invest in an RRSP or focus on Paying Down My Mortgage?

This is a question we get asked each RSP season, and something very important to consider.  As a general rule, most financial advisors will say to do both!  Invest the extra money you may have this time of year in an RSP, then take the credit that this will generate on your tax return and use this as a lump sum payment on your mortgage.

The keywords of this strategy is "as a general rule" because everyone's personal financial plan is different, so there are some things to consider.  For example, the first thing you should take into account is whether you have any other personal debt at a higher interest rate?  You don't have to be a financial advisor to figure out a 18% credit card debt will always cost you more in the long run than the returns you will gain within an RSP.  So, a piece of advice is to tackle those high interest rate debts first.

The second thing to consider is whether you have room to contribute within your RSP.  Not sure?  Your limit is documented in your Notice of Assessment that you receive from Canada Revenue Agency.

There are other factors to consider as well:

  • What is your tax bracket now, and what do you predict it will be when you retire?  Contributing while you are in a higher tax bracket, and withdrawing when you are in a lower bracket is the premise for RSP investments.
  • Along the same lines, what will be my estimated return on this new RSP contribution?
  • What is your mortgage rate now and what are your pre-payment options?
  • What kind of rate of return do you expect on your investment?  This ties in with the last question about your mortgage rate.  If you're in a 4% mortgage, and you're only comfortable investing in GIC's with a return of say 2.5% then maybe paying your mortgage down is a better option for you.
  • How much equity do I have in my home?  Someone with 5% equity in their home may find paying down their mortgage a priority versus something with 75% equity.  Have a lot of equity in your home?  You may want to consider a home equity line of credit (HELOC) where the interest can become tax deductible for investments outside an RSP.  Ask me how I can set this up for you!
  • Will I need access to this money before retirement?  If the answer is yes, then paying down your mortgage is a strategy that can eventually lead to having a HELOC instead of a mortgage on your property which allows instant access to capital.  Another financial strategy is to consider investing in a Tax Free Savings Account (TFSA) instead that is more forgiving when cashing out than an RSP.  You won't get a deduction up front on your taxes, but you can earn a return within a TFSA that is tax free.

When considering all the factors above, you can see how difficult it is to advise someone because everyone’s financial situation is a little different. It is important to meet with a knowledgeable financial planner to come up with a long term financial plan.  If you are not working with a financial planner, I would be happy to recommend an expert in this field that can develop a plan that is right for you, and place you in the right financial products for your individual needs. 

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