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Managing Your Debt
Trade-Off Time: Your Mortgage Or Your RRSP?


Your first thought is that a choice has to be made: pay off your mortgage faster? Or boost your RRSP? Fortunately, when you take a closer look, you'll find there are several ways to approach this issue. The trick is to find the strategies that work best for your situation.

What do the numbers tell you?

There are a couple of general rules of thumb that you should consider in the RRSP versus mortgage debate. But remember, these aren't absolute financial planning rules you have to follow. First, the younger you are, the more time your RRSP has to increase in value. This is important, because with enough years, your increased RRSP value can total many times over what you spend in interest on mortgage payments. One big reason? RRSP dollars grow without any tax, as long as they stay in your plan. At an average annual compound return of just 7%, an annual RRSP contribution of $5,000 will grow to $224,326 in 20 years. At 10% it will grow to $320,012. Second, you need to consider your mortgage rate. Suppose your mortgage is locked in at such a high rate that paying it down fast will save you more in interest than you could generate in your RRSP. If this is the case, consider focussing on the mortgage, at least until you can renegotiate your interest rate.

Double whammy: How to handle both your mortgage and RRSP.

Say you've looked at the situation and you're still determined to pay down your mortgage as quickly as possible and build up your RRSP at the same time. How can you manage that? There are two options to consider. One strategy is to put as much money as possible into your RRSP, then use your tax refund to help pay down your mortgage. This makes sense in many situations. The other strategy is to alternate priorities from year to year. This year, invest as much as possible in your RRSP; next year, use that same amount of money to help pay down your mortgage. Remember that you can carry forward any unused RRSP contribution room. And this can be especially useful if you end up in a higher tax bracket a few years down the road. You can alternate like this until your mortgage has been reduced to the point where it makes more sense to contribute to your RRSP every year.

Another way of looking at it.

Want another way out of the dilemma? Try to accelerate your mortgage payment plan without sacrificing any of your RRSP growth. Start by reducing your mortgage amortization period. With a mortgage of $100,000 at an 8.5% rate, you can save more than $32,000 in total interest costs simply by shortening the amortization to 20 years from 25 years. And your bi-weekly payments will increase by only $29. Also, look at increasing your regular payment frequency and your regular payment size. Doing these things alone or in combination will help you reduce your mortgage principal more quickly and save you thousands of dollars in interest costs without significantly affecting your cash flow.

Puttering around the garden, or surfing in Hawaii?

The numbers don't tell the whole story in the mortgage versus RRSP debate. Your plans for retirement activities also play a big role in how you approach your financial and investment planning. If you plan to enjoy your home and travel very little, then it may make sense to focus first on paying off the mortgage. If you want to travel extensively or indulge yourself in expensive hobbies, then you may need to focus on maximizing your RRSP growth so that you generate as much retirement income as possible. And for that, your RRSP is your best money machine.