Pay Down the Mortgage or Contribute to Your RRSP?
In a perfect and highly disciplined world, paying off your mortgage before contributing to your RRSPs may be the best thing to do. If the return on RRSPs is lower than the mortgage rate, it would be wiser to pay your debts quickly instead of making an RRSP contribution. But, after the last mortgage payment, you should keep putting $800 or $1,000 per month aside for your retirement.
Realistically, it's almost impossible.
Another possibility is to make substantial contributions to your RRSP before buying a home. However, a home is more than a financial investment; it represents a better quality of life and it's a project that you don't want to put off for too long.
The RRSP that you started early could help make you a homeowner more quickly through the Home Buyer's Plan.
Most of the time, it is best to find a balance between paying your mortgage and contributing to your RRSPs. Why? Because the capital invested in your RRSP will produce compound interest in a tax shelter. In the long run, you'll have a substantial nest egg for your retirement. Furthermore, given the high debt rate, many people have nothing to fall back on in the event of illness or unemployment and an RRSP may serve as an emergency fund.
Pay your debts more quickly without hefty instalments!
- Make your payments weekly instead of monthly.
- If possible, select a short term. The interest rate is usually lower than for long terms.
- Opt for the variable rate, the lowest on the market, and by making higher payments, you'll pay off your mortgage more quickly. For example, on average over the last 10 years, the 1-year term was 1.11% lower than the 5-year term.
- Each year, use the tax return you get from your RRSP contribution to pay down your mortgage.
- If you want to contribute to your RRSP but you can't seem to pay off all your credit cards, you need to review your financial plan. Start by listing your priorities.