When you have a significant amount of money available, like a number of Canadians, you hesitate between investing it in your RRSP or paying off your mortgage. The first choice might allow you to retire more comfortably, while the second would reduce your debt and diminish your period of depreciation.

Paying off your mortgage

Accelerating the payment of your mortgage would allow you to diminish the interest to pay on the total amount of your loan. While the interest rate may be low, the repayment of your mortgage may constitute a primary concern for Canadian households, as it represents a significantly large amount of their debt. Paying off your mortgage quickly would allow you to redirect your monthly deposits into investments, such as your retirement fund.

For example, you have an amount of 100,000$ that you use to repay some of your mortgage (in this example, your loan of 400,000$ becomes a loan of 300,000$.) With an interest rate of 3% on 2,500$ monthly payments, that payment would allow you to reduce your period of depreciation from 17 to 12 years. That’s 5 years gained!

Investing in your RRSP

It’s important to know that the higher your taxation rate when you make your RRSP contribution, the more important the repayment of your mortgage is important. Additionally, if the moment you convert your RRSP to an RRIF (registered retirement income fund) your taxation rate is lower, you will pay less taxes and your investment will be more advantageous.

Along the same line, if your current situation means that you have a lower tax rate, contributing to your RRSP does not represent as large of a tax exemption as for those who have higher tax rates.

For example, rather than repaying your mortgage, if you decide to deposit 100,000$ into your RRSP, with an assumed return rate of 4% and a relatively high tax rate of 40%, in 17 years your savings would total 321,318$.

Each individual has a different financial situation. To find a solution tailored to your needs, consult with your advisor!