Rhonda's Financial Blog

Should I Invest into My RRSP’s or Pay Down My Mortgage?

Monday, February 6th, 2012

Our home is an important investment and our mortgage is probably the largest financial obligation we will ever have. However, our RRSPs are also very important and are for many the vehicle enabling us to have a comfortable retirement. So what should we do if we find we have surplus cash – pay down our mortgage or invest into our retirement?

Your mortgage is expensive- plain and simple. It is a long term debt paid with your after-tax dollars. The rule of thumb is to pay down those expensive debts first. So if you had a 25 year $250,000 mortgage with a 5 year term rate of 3.29% at the end of the 25 years you would of paid $116,187.11 in interest payments. If you made an extra $5,000 payment each year you will have saved $44,206 off your mortgage and 9 years off your amortization. That is a huge savings!! Another way to look at it, is a 3.29% return on your investment each year.

Hopefully, you will have enough time when the mortgage is paid to start aggressively saving towards your retirement. Remember, your house is a great investment but if your not generating enough income in retirement you will have to consider downsizing and using the equity to help with retirement costs. Or continue working.

So now let’s look at your retirement savings, what will you have coming in in retirement and what how much will you need to cover your essential and lifestyle costs? Do you have a company pension you’re contributing to? Do you feel comfortable replying on government pension income to supplement your shortfall? Do you have RRSPs or other savings? Finally, how far off are you from your desired retirement date? These are important factors in deciding whether or not to contribute to your RRSP versus your mortgage. Also what is the estimated rate of return you might get on your RRSP investment? If you’re an aggressive investor and potentially could return say 6 or 7% on your investment and you’re paying 3.29% (after tax dollars) the RRSP might be the obvious choice. And visa versa, if you have low risk tolerance and want to invest into a 1% GIC then paying down the mortgage may be the better choice.

The bottom line, you should meet with your financial advisor before making any choices. It is so important to have a financial plan in place that addresses all your goals. In the end, the best option may be to invest the most you can in your RRSP and then use the tax rebate to make an extra payment each year on your mortgage. By the time retirement rolls around you will be mortgage free and will have money in the bank. You CAN achieve both financial goals.