Pay Down Debt or Contribute to RRSPs?
Although we use
the term mortgage, you can use this calculator for any type of loan.
All amounts in yellow input cells can be changed as desired.
Use the tab key or your mouse to move between input cells.
Amounts are recalculated automatically when you tab out of the
cell, click elsewhere, or click the Calculate button.
Input data into the yellow input fields, tab to
the next field.
Choose
province or territory from drop-down list
AB
BC
MB
NB
NL
NS
NT
NU
ON
PE
QC
SK
YT
Your
estimated taxable income per year
Your current mortgage:
Current
mortgage balance
Mortgage
interest rate
What is the frequency of
your mortgage payments?
weekly
every 2 wks
semi-monthly
monthly
Is your
mortgage compounded monthly, or semi-annually? (check your mtg documents)
monthly
semi-annually
-
Canadian mortgages are normally compounded semi-annually
Effective
annual rate (equivalent rate with annual compounding)
Years left to
pay on the mortgage
Number of
mortgage payments remaining
Amount of
final payment on the mortgage
Extra payments on mortgage or on RRSP:
If you contribute $1,000 to an RRSP and are in a
32% tax bracket, your tax savings is $320, for a net cost to you of
$680. If you wish to pay down your
debt and have the same after-tax disposable income, you would pay $680. For this reason, we use the before-tax
amount for RRSP contributions, and the after-tax amount for mortgage
payments.
Marginal tax rate
Extra
contribution to your RRSP at the time of each mortgage payment
Extra amount to pay on the mortgage (after-tax
amount)
New mortgage
payment amount
Years left to
pay on the mortgage with higher payments, rounded to even months
Number of
mortgage payments remaining with higher mortgage payment amount
Amount of
final payment
Once the
mortgage is paid off, contributions are then made to RRSPs for
Calculation of RRSP contribution amounts at revised marginal
tax rate once mortgage is paid off early
Once the mortgage is paid off, you will
contribute to an RRSP. This increases
your RRSP contributions, and may also put you into a lower tax bracket, with
some of the tax savings at a lower tax rate.
The calculator uses the revised tax savings and the after-tax value of
the mortgage payment to calculate the RRSP contribution for Case 2 below.
Example, using original marginal tax rate of 32%,
and revised marginal tax rate of 25%:
Before-tax amount required to contribute an after-tax amount of
$1,000 at 32% marginal tax rate = $1,000 / (1-.32) = 1,000 / .68 = $1,470.59
Before-tax amount
required to contribute an after-tax amount of $1,000 at 25% marginal tax rate
= $1,000 / (1-.25) = 1,000 / .75 = $1,333.33
Your RRSP contribution amount using revised marginal tax
rate:
To determine your before-tax contributions after
the mortgage is paid off, your marginal tax rate is recalculated based on the
increased total annual RRSP contributions.
This often results in a lower marginal tax rate. This new marginal tax rate is used to
calculate your RRSP contribution amounts in Case 2 of "B" below.
Your revised marginal tax rate, used to calculate RRSP
contributions for Case 2 in "B"
Calculation of monthly RRSP contribution except
for the 1st and the last contributions:
Net cost of each RRSP contribution after tax (same as mortgage
payment)
Add back tax savings with higher RRSP contributions
Amount of 1st
contribution, at same time as last mortgage payment
Amount of last
contribution, based on original final mtg pmt + extra pmt
Average annual contributions to RRSP once mortgage
is paid off
If the average annual contribution exceeds the annual
contribution limit (2022 is $29,210, 2023 is $30,780, future year limits are
indexed), and you do not have sufficient contribution room carried forward,
then this analysis will NOT provide accurate results. This analysis doesn't take into account the
fact that an average annual contribution could actually be divided between 2
tax years, which could have quite different results if the amounts are large.
Input 2 more
rates, to compare values
RRSP Rate of Return - 1st column is mortgage rate ->
Case 1
Total contributions
Less tax savings @
marginal tax rate of
Net out-of pocket cost
Add total paid on
mortgage
Total out-of-pocket
cost RRSPs + Mortgage
Value in RRSPs at the end of the original mortgage
amortization period
Case 2
Pay the extra amount on the mortgage, and when
the mortgage is paid off, contribute the mortgage pmts to your RRSP.
Less tax savings @
marginal tax rate of
Net out-of-pocket
cost
Add total paid on
mortgage
Total out-of-pocket
cost RRSPs + Mortgage
Value in RRSPs at the end of the original mortgage
amortization period
Case 1 is better (worse if negative) than Case 2 by
The
values in RRSPs at the end of the original amortization period will be the
same for Case 1 and Case 2 if:
- the effective annual rate of the mortgage is the
same as the effective annual return on the RRSP, and
- the marginal tax rate used for calculating the
RRSP payments is the same in both Case 1 and Case 2.
However, the marginal tax rate will sometimes be lower in Case 2
due to the higher RRSP contributions once the mortgage is paid off
early. For this reason, the values for
Case 1 may be higher than the values for Case 2 even when the effective
interest rates are equal.
Tip: Unless your RRSP
returns are going to be consistently higher than the rate on your mortgage,
it is probably better to pay down your mortgage.
Tax rates used are 2023 rates known as of May 30, 2023. Taxes include basic tax and
surtax..
The above calculations are estimates for planning purposes, and
assume constant interest rates throughout the analysis. It is assumed that there are no changes in
the tax rates, and no change in the taxpayer's income throughout the
analysis.
We strive for
accuracy, but cannot guarantee it.