Financial Planning -> RRSPs RRIFs and TFSAs -> Save Money -> Mortgage vs RRSP
Pay Down Your Mortgage, or Contribute to an RRSP?
Which option is better for a person with a 30% marginal tax rate:
- Pay $1,187 per month in mortgage payments to pay off a $100,000 mortgage in 10 years, then continue to pay $1,187 per month into your RRSP for 15 years, and also invest the tax savings in your RRSP, or;
- Pay only the required $739 per month on your mortgage, and pay it off over 25 years, and invest the difference of $448 ($1,187 less $739) plus tax savings in an RRSP.
| Option | Option 1 | Option 2 |
| Mortgage term (yrs) | 10 | 25 |
| #Months investing in RRSPs | 15 yrs x 12 = 180 | 25 yrs x 12 = 300 |
| Monthly amount invested in RRSPs | $1,187 | $448 |
| Monthly tax savings invested in RRSPs | $356 | $134 |
| Total in RRSPs at end of 25 years at RRSP returns of: | ||
| 5% | $399,549 | $333,341 |
| 7.5% | $483,608 | $474,779 |
| 10% | $588,299 | $686,887 |
We're assuming that you don't have credit card debt - this should definitely be paid off right away!
You are better to pay off your mortgage first if your mortgage interest rate is equal to or higher than the rate of return on your RRSP. However, if the rate of return on your RRSP is consistently higher than the mortgage interest rate (can you guarantee this?), you would have more money by paying the lower amount on your mortgage, and investing the difference in an RRSP.
If you pay down the mortgage faster, you have guaranteed savings. If you have or plan to have children, you should try to ensure that the mortgage on your home will be paid off before your children enter university. This will free up funds for their education.
In order to get a better rate of return in your RRSP than the interest rate you are paying on your mortgage, you may have to take on riskier investments, which will not have a guaranteed rate of return. We believe you can make a return of 8 or 9% per year on your RRSPs, but this is not without ups and downs.
TaxTips.ca Resources
Historic Returns on Investments
Risk as it Relates to Investing
Tip: Unless your RRSP returns are going to be consistently higher than the rate on your mortgage or other loan, it is better to pay down your debt.
See also: What is better - TFSA or RRSP?
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Tax Tip: Pay down all non-tax-deductible debt with over 8% interest, then see our Save and Invest page.
Revised: October 26, 2023