This post predates the TFSA (launched 2009) back then, it really was RRSP vs mortgage. Since then, the equation has changed: mortgage rates have fallen to historic lows. They only spiked in 2023–24. Investment returns have become volatile. The question still matters, especially now that the average mortgage renewal adds thousands to monthly costs.
After Mortgage worksheet calculators, the next question is which is more important. Should you pay into your Retirement Fund (RRSP or 401k) or pay off your Mortgage (and debts)? Since the U.S. model has tax implications for paying off your Mortgage, and I do not wish to mention the Smith Manoeuvre for Canada, let’s concentrate on the Canadian model.
In many cases, this question is of no real value. Many people can only afford to pay for their living expenses. They do not have free money to pay for their retirement or to speed up their debt payments. For those folks, the job is hard enough. Still, I encourage you to find savings and do something more meaningful with your money than just “party” with it.
Arguments For Paying Down Mortgage
Some of the reasons I have heard and espouse for paying down your Mortgage first would be:
- Carrying debt is dangerous. Removal of debt is the most important financial task you have.
- Once your mortgage is paid off, you can start saving for retirement. You will know that you will not have that expense in your golden years.
- Paying off your Mortgage is similar to investing in Real Estate, which is generally considered a good investment.
- I don’t view my house as an investment. I view it as an essential of life, as in shelter is somewhere you live, not where you invest.
- You are increasing your liquidity by having more credit available in case of emergencies.
Arguments For Retirement Money
The reasons to put money in your retirement funds are many as well:
- Retirement saving is like Golf, the sooner you start doing it the better you will be at it later. Money saved at age twenty has a much longer time to double than money invested at age 50.
- With current interest rates, you can invest your money and make more with it. This is better than paying off your Mortgage. A typical Mortgage rate is about 6%. The Stock Market’s normal rate of return is about 7%, so you are ahead in the game.
- You get tax money back for putting money in your RRSP, but you don’t if you put that same money into your mortgage. This is important since the major expense for most of us, is still taxes.
- Maybe you can get free banking with your mortgage ? I mean if you continue to carry debt, maybe your bank will waive your service fees.
TFSA ?
This wasn’t even an option when I initially wrote this, but now it is. A TFSA might be a better choice for your savings, something to think about.
Best Choice?
That would be telling. I’ll write some more about this tomorrow. I am open to discussion. I welcome pointers to good articles. I also welcome any other comments folks might have. They are about what the right choice for them was and is. Remember at the end of this, it is a personal choice on your part.
Make a move, not a meme! Do Something!
The Series
- RRSP or Mortgage? The question remains: Savings or Debt?
- Put it in the Bank – maybe not the bank maybe this should read you invest it
- Refund to RRSP as well – Not sure why it was “as well” but putting your refund somewhere instead of blowing it on bottle rockets and moon pies is a good thing.
- Refund to the Mortgage as mentioned, it would be a good thing to put this found money into something useful.
- RRSP or TFSA is a new question to add to these stories.
Remember, a Mortgage is Debt, and Savings is TFSA, RRSP, RESP or Savings. Oh, and there is no such thing as good debt.
FAQ RRSP vs. Mortgage
It depends on your tax bracket, risk tolerance, and interest rate; a high mortgage rate tips the scale toward debt repayment.
For most Canadians, the TFSA should come before the RRSP unless your income is high enough to benefit from the RRSP tax refund.
Yes use your RRSP refund to make an extra mortgage payment. You get compounding growth and lower debt. Sort of a Grand Jete move with your money.
Yes, ignoring both and building up more debt, is a very wrong answer. Figure it out for yourself, as you mileage may vary. Don't be a nimrod!
Obviously it is too complex an issue to have a single method for everyone.
One thing most people don’t consider when comparing ‘rates of return’ is that the approximation for stock market returns are calculated annually, mortgages are compounded semi-annually, so its more accurate to compare dollars spent paying interest vs. dollars of return.
The investment vehicle will also obviously play a role. If you participate in DRIPs, depending on the frequency of reinvestment/distributions, the $$$ at the end of the year will differ also.
Not all advice is appropriate at all times but given current conditions I think it makes dollars and sense to aggressively pay down one’s mortgage first.
Interest rates in Canada are likely rising and as Gene pointed out mortgage interest is paid in After-Tax dollars.
One counter argument is that many great dividend stocks are less ‘expensive’ now and one could secure a lifetime of dividends with careful stock selection.
Still, once Risk is considered, the balance falls squarely on the shoulders of paying down one’s mortgage.
I referenced David Ingram’s excellent discussion on this in yesterday’s post. He agrees you have to get a stellar return on your RRSP to beat paying down the mortgage first.
DAvid
I think I know the punchline. I remember reading an article featuring Malcolm Hamilton in Moneysense magazine that talked about the issue.
Assuming all things equal, I would be inclined to pay down the mortgage first, especially in your example where the rate is 6%. This 6% interest is paid in after tax dollars. One would have to achieve maybe 8.5% before tax outside an RSP to match that 6%. That’s a decent risk-free return for early mortgage payments.
Perhaps a middle ground can be achieved by maxing out the RSP, but putting one’s entire tax refund towards paying the mortgage off early.
Non-financial factors come into it too. Some people are loathe to be in debt, so would go the extra mile to getting out of mortgage debt as quickly as possible.
I think this one is such a personal choice that the comparison is really moot. In most cases if you just simply flip a coin and pick you’ll be better off than you were before. As long as you don’t waste the money on buying stuff you don’t need, that’s the key.
Might be, but it is worthwhile at least talking about it as well.
I’m in the fortunate (and increasingly rare) situation of having a great pension plan, which means that my RRSP limit is reduced significantly each year – this year I’m only allowed to contribute about $1900 to my RRSP. As a result, it isn’t that hard to maximize my RRSP contributions. Once that’s done, I put my “extra” cash into the mortgage.
My goal is to be mortgage-free by the time my wife and I are 40. We’re 30 now, so that gives us a little under 10 years to accomplish the goal.