Should I pay down my mortgage or invest in an RRSP?

by: © Sun Life Assurance Company of Canada, 2010.

Perhaps you received a large bonus, won a lottery, or your savings efforts have paid off. Whatever the case may be, you suddenly find yourself with some extra money. Is it smarter to pay down your mortgage or contribute to your RRSP? There is no standard answer, since each option has its advantages:

Pros: pay down mortgage

• Interest costs over the term of your mortgage become lower.

• Your mortgage is paid off faster.

• The overall cost of your mortgage is reduced.

Pros: invest in RRSPs

• Contributions are tax deductible, which saves you money.

• Money grows tax free in your RRSP.

• Your retirement savings will grow more quickly.

One important thing to keep in mind is that an RRSP directly reduces the amount of taxes you pay in the year you make a contribution. As a result, most people can expect to receive a tax refund. While it’s tempting to spend this money, there are strategies you can use to get an even bigger benefit from your refund cheque:

• Contribute to an RRSP and use the

tax refund to pay down your mortgage. Get the best of both worlds! This strategy will give you all the advantages associated with paying down your mortgage and investing in an RRSP.

• Contribute to an RRSP and use the tax refund to contribute more to your RRSP. This strategy maximizes the long-term compounding of RRSP assets and helps build a solid capital base to fund your retirement.

When evaluating which option makes better financial sense for you, you also need to consider a number of additional factors, like:

• your age

• your income

• returns you expect on your RRSP investments

• your investment time horizon

• your mortgage interest rate, the remaining amortization period and any prepayment privileges.

In the end, choosing the “right” thing to do depends on your particular financial situation and your long-term goals and objectives.

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