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Each Wednesday, the Amazing Accountant who does my personal and business taxes, Mindy Abramowitz, highlights an accounting topic many Canadians encounter.  Today she dives into the frequent question:  to pay down my mortgage or contribute to my RRSP?

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This is hotly debated question in Canadian personal finance circles and the answer will differ according to the asker’s situation and temperament.

From a tax reduction perspective, the mortgage payment will yield no immediate benefit, whereas an RRSP contribution will minimize taxes payable in the year it is made. Over the long term, the decision to pay down the mortgage will save you interest but will deprive you of tax-free compound growth in your RRSP.

However, if the following conditions apply to you, the mortgage payment route will likely be the more helpful option:

  • your annual income falls into one of the lower tax brackets; or
  • the interest rate on your mortgage is higher than the return on the investments in your RRSP; or
  • your retirement will come sooner than your last mortgage payment; or
  • you simply cannot tolerate carrying debt.

Assuming you are in a high tax bracket, bumping up your RRSP contributions will give you the most bang for your buck. In some cases, you’ll get to have your cake and eat it too: you can use the resulting tax refund to pay down your mortgage.

Crunch the numbers to figure out what would work best for you — easy-to-use RRSP vs. mortgage calculators abound on the internet (try the one at taxtips.ca) — or talk to your financial advisor.

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About the Author


Imagine if Canadians were known for being all over their money. Engaged. Proactive. Getting out of debt. Savvy. Saving. Generous. Nancy wants to help. Nancy started her own journey with money over 15 years ago, and formed her company “Your Money by Design” in 2004 to help others along the same path. It’s not the usual financial advising/investment stuff. It’s about taking control of day-to-day finances –managing monthly cashflow effectively, spending appropriately, getting out of debt, saving. If you're ready to take control over your finances, pop by her business site, YourMoneybyDesign.com

3 Comments

  1. It’s important to save up cash reserves to cover your monthly payments for 6-12 months. This is much higher priority than paying down your mortgage.

    IMO, It’s important to build your “peace of mind” reserve than to get the mortgage paid down.

    [Reply]

    Oct 10, 2007
  2. Traciatim

    Hey Monty, though I don’t disagree with the importance of an emergency fund I would find that having investments and available credit that doesn’t cost money to keep open a much better alternative Why not instead use the funds to pay down your mortgage and then have a small stand by line of credit available for emergencies? Sure it might cost a few dollars if you even need to use it, but that money would probably be offset of the savings during better times. Though this is highly a personal call, I would prefer this method.

    Nancy, do you have any hard numbers that would back up at what point do you make out better paying off the mortgage and at what point you make out better with the RRSP? I tried sitting down with the numbers but there were far too many variables to consider for a comment on a blog, but would appreciate if there was a generag ‘rule of thumb’ of which is better.

    [Reply]

    Oct 11, 2007

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