If you’re like most people, the dollars you have for savings are not unlimited. That means you have some decisions to make, including whether it makes more sense to pay down your mortgage quickly or invest in an RRSP. It’s true that reducing your mortgage quickly makes a lot of sense, but you’ll also need a significant nest egg if you want to retire in comfort.
Here are some things to consider as you weigh your options.
Do you pay off your mortgage first, and then contribute to your RRSP?
The advantage of this is that your additional mortgage payments go directly to the principal, saving you interest and reducing the term of your mortgage. The disadvantage, though, is that you’ll miss out on the benefits of long-term compounding growth and the immediate tax refund that comes with investing in your RRSP.
What about making regular mortgage payments and RRSP Deposits?
With this option, you can take advantage of long-term compounding growth and the immediate tax refund. The disadvantage, however, is that you’ll pay more interest if you pay off your mortgage slowly. Depending on your amortization period, you may be at risk of carrying mortgage debt into retirement.
A third option is to make an RRSP deposit and use the tax refund to pay down your mortgage faster.
With this option, you can reap the benefits of both of the previous ones. An RRSP contribution results in a tax deduction as well as the benefit of compound growth. As well, any additional mortgage payments go directly to the principal, which builds equity in your home and reduces the cost of borrowing.
Mortgage freedom is a worthy goal; however, when you consider your complete financial plan, you can achieve more.