President's Choice Financial|helpful stuff|financial wellness|investing & saving

pay down your mortgage or invest in an RRSP?

Congratulations! You got a holiday bonus. Or perhaps you made a mint at your garage sale. Best of all, maybe your resolution to save more paid off. Whatever the reason, you're in the fortunate position of having some extra cash on hand, and you want to put it towards your future. Which makes more sense: using the money to pay down your mortgage or investing it in your RRSP?

Let's start by looking at each option on its own. When you pay down your mortgage, you reduce your principal. That benefits you in a number of ways, including:

The interest costs over the term of your mortgage become lower.
You get to the end of your mortgage faster.

When you invest in an RRSP, you take a crucial step towards preparing for your financial well-being during your retirement years. With respect to taxes, you also benefit in two ways:

First, the money you invest is tax deductible, which saves you money in taxes in the year of your investment.
Second, money in your RRSP grows tax-free until you withdraw it.

The bottom line is that investing in an RRSP and paying down your mortgage can both be attractive ways to build for the future. Which one makes better financial sense depends on a number of factors unique to your situation, like:

Your age
Your income
The returns you expect on your RRSP investments; and
Your mortgage rate and the remaining amortization period

For instance, the more you earn, the more tax you'll pay. That can make the tax benefits of investing in an RRSP even more attractive, which might tip the scale towards putting your money there. Or let's say you're approaching the years when you want to start withdrawing from your RRSP. In that case, the tax-deferred growth potential of your investments might not be as beneficial to you now, as opposed to when you were younger. As a result, you may want to think about paying down your mortgage.

So what can you do? A fairly common option to consider is investing in your RRSP to help reduce the amount of your taxable income, and then using any tax refund you receive to pay down your mortgage. That way, you reduce the amount of your mortgage, which helps you save on interest payments, pay less taxes, earn more tax-sheltered investment income, and get to the end of your mortgage sooner. You might even consider getting an RRSP loan so you can top up your RRSP contribution. You should consult your financial advisor when considering these options and other ways of investing your money.