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You are here: Home > Co-opme > Action plans and tips > Savings and investment > Should you pay down your mortgage or contribute to your RRSP?

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Should you pay down your mortgage or contribute to your RRSP?

In a perfect world, paying off your mortgage before contributing to your RRSP would be a good thing to do. But that would call for extreme discipline.

After your last mortgage payment, you would have to keep putting the same monthly amount aside for your retirement. That's not very realistic.

Another possibility is to make substantial contributions to your RRSP before buying a home. However, a home is more than a financial investment; it's a life choice 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 Buyers' Plan. Find out how to withdraw from your RRSP without penalty to buy a property.

That's why it's usually best to find a balance between paying your mortgage and contributing to your RRSP, even when RRSP returns are lower than mortgage interest rates.

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, for those who have nothing to fall back on in the event of illness or unemployment, an RRSP can be used as an emergency fund.

Whether to pay down your mortgage and contribute to an RRSP also depends on your age. If you're not retiring for a while, the compound interest in a tax shelter of the RRSP is more advantageous than a paid off mortgage. If your retirement is around the corner, pay your mortgage more quickly to reduce your budget for the next few years.

Also to be considered, if you are taxed at a high rate, RRSP contributions might be more advantageous than mortgage payments because of the associated tax savings.

To pay off your mortgage more quickly, follow these tips:

  • 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.
  • 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 can't seem to pay off all your credit cards, you need to review your financial plan. Start by listing your priorities.

Tools and tips

RRSP: Don't wait

The sooner you start contributing, the better!

Read tip - The advantages of making early RRSP contributions

Unused RRSP contribution room

If you haven't been contributing your maximum, you can catch up by using your unused contribution room in subsequent years.

Read tip - Using your unused contribution room

Couples can pay less tax

The higher-earner can contribute to his or her spouse's registered retirement savings plan (RRSP).

Read tip - Contributing to your spouse's RRSP

HBP: Using your RRSP to buy a home

How to withdraw some or all of your RRSPs without paying income taxes.

Read tip - Withdrawing from your RRSP without penalty to buy a property

Should you put your savings in an RRSP or a TFSA?

It all depends on what you want to do with your money.

Read tip - Comparing TFSAs and RRSPs

An RRSP loan can help you increase your contribution

Borrowing $10,000 for your RRSP could pay off in a big way.

Read tip - Borrowing to contribute to your RRSP

Unexpected windfall: Invest or spend?

An inheritance or lottery winnings: what to do with it.

Read tip - Unexpected windfall: Invest or spend?

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