Canadian Personal Finance Blog
Personal Finances and Consumer Concerns, essays, stories, examples and how to articles with a distinctly Canadian Point of View
Case 3: Refund to the Mortgage
Tuesday, February 28th, 2006So this scenario is a little artificial, in how I calculate the payments over the year. I am assuming a single lump payment a year, and throwing your refund directly onto the mortgage principle. No one has a mortgage like this (ok maybe someone does, but I don’t know them), and typically if you are paying monthly or bi-weekly, a lump sum payment of $300 in the middle of the year, may actually be better (depending on how your interest is calculated and compounded). Just note the data here, and think about it:
| Savings Rate | 1.00% | ||||
| Yearly Input | $1,000.00 | ||||
| RRSP Return | 5.00% | ||||
| Tax Rate | 30.00% | ||||
| Mortgage Rate | 6.00% | ||||
| Mortgage Balance | $110,000 | Payment | $9,590.30 | ||
| Year | To RRSP | Total RRSP | Refund to Mortgage | Mortgage Balance | Extra Pay Down |
| 1 | $1,000.00 | $1,000.00 | $300.00 | 110000 | 110000 |
| 2 | $1,000.00 | $2,050.00 | $300.00 | $107,009.70 | $106,709.70 |
| 3 | $1,000.00 | $3,152.50 | $300.00 | $103,839.98 | $103,221.98 |
| 4 | $1,000.00 | $4,310.13 | $300.00 | $100,480.08 | $99,525.00 |
| 5 | $1,000.00 | $5,525.63 | $300.00 | $96,918.58 | $95,606.20 |
| 6 | $1,000.00 | $6,801.91 | $300.00 | $93,143.39 | $91,452.27 |
| 7 | $1,000.00 | $8,142.01 | $300.00 | $89,141.70 | $87,049.10 |
| 8 | $1,000.00 | $9,549.11 | $300.00 | $84,899.90 | $82,381.75 |
| 9 | $1,000.00 | $11,026.56 | $300.00 | $80,403.59 | $77,434.35 |
| 10 | $1,000.00 | $12,577.89 | $300.00 | $75,637.50 | $72,190.11 |
| 11 | $1,000.00 | $14,206.79 | $300.00 | $70,585.45 | $66,631.21 |
| 12 | $1,000.00 | $15,917.13 | $300.00 | $65,230.28 | $60,738.79 |
| 13 | $1,000.00 | $17,712.98 | $300.00 | $59,553.79 | $54,492.81 |
| 14 | $1,000.00 | $19,598.63 | $300.00 | $53,536.72 | $47,872.08 |
| 15 | $1,000.00 | $21,578.56 | $300.00 | $47,158.62 | $40,854.10 |
| 16 | $1,000.00 | $23,657.49 | $300.00 | $40,397.84 | $33,415.05 |
| 17 | $1,000.00 | $25,840.37 | $300.00 | $33,231.41 | $25,529.65 |
| 18 | $1,000.00 | $28,132.38 | $300.00 | $25,634.99 | $17,171.13 |
| 19 | $1,000.00 | $30,539.00 | $300.00 | $17,582.79 | $8,311.09 |
| 20 | $1,000.00 | $33,065.95 | $300.00 | $9,047.45 | $0.00 |
So what does this tell us? Well if you put your money in your RRSP, and then take the refund you get, and put that on your mortgage, you should shorten your Mortgage by at least 1 year (on a 20 year mortgage), if not more.
Tomorrow, which is the BEST way to work with your RRSP? –C8j
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