Pay down your mortgage or contribute to your RRSP?
The answer to this question depends on your situation.
Compare interest rates to the rate of return
Given the current economic context and its low interest rates, it is better to invest your money than to pay down your mortgage. This is especially true if the expected return on your investment is higher than your mortgage rate.
Option 1: Putting $10, 000 on your mortgage
At an annual interest rate of 2%, you will save $200 per year.
Option 2: Investing $10,000
At a rate of return of 3%, you will earn $300.
By choosing to invest, you will put an extra $100 per year in your pocket.
The RRSP or how to get a tax refund
Since your RRSP contribution entitles you to a tax refund, why not put this money on your mortgage?
This is a very interesting option, even if the expected returns on your RRSP are slightly lower than your mortgage rate.
And the TFSA?
Is it better to invest in a TFSA than to pay down your mortgage?
Not necessarily because it’s not easy to predict the return on a TFSA.
If you do invest in a TFSA, make sure that its expected return is higher than your mortgage rate.
With a TFSA, the returns are tax-free, but that also means you cannot deduct them from your tax return.
However, you can always cash out your TFSA to pay down your mortgage should your financial situation change.
Others factors to consider
To determine whether it is best to pay your mortgage or invest, consider the following:
- your mortgage loan balance
- your tax bracket
- your tolerance to risk
You could also compromise and use your savings to pay down your mortgage as well as invest in your retirement.
For a personalized financial advice
Call your advisor immediately to assess your finances and discuss your needs.
Note: This blog post is provided for information purposes only. It is not a substitute for professional legal, financial or fiscal advice. For advice specific to your personal situation, always speak with your advisor. SSQ cannot be held responsible for any decision made as a result of reading this blog post.