Personal Finance

25k pay down mortgage or buy rrsps, then pay mortgage with return?

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  • Nov 16th, 2012 10:37 am
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Newbie
Jul 27, 2007
16 posts
1 upvote

25k pay down mortgage or buy rrsps, then pay mortgage with return?

This year I have about 25k extra at the end of this year.

My financial situation:
-------------------------
Mortgage: 293k, 2.3% variable (I currently double pay my mortgage each month)

Income: 150k pretax (single, early 30's).. I never have any deductions to lower tax rate.

Currently I have saved about 100k in RRSP's. I must put back 20k I borrowed when I bought the house starting 2013. (I have the money in the bank to do this already)

My options are:
1. Use the 25k to pay down mortgage (leaning this way)
2. Use the 25k to buy RRSP's, get a refund and pay down mortgage with the refund

Suggestions? I can't decide what to do.
22 replies
Deal Addict
Jul 8, 2009
2028 posts
482 upvotes
Edmonton
Choose door number 2, my friend.
Newbie
Jul 27, 2007
16 posts
1 upvote
Why is the second option better? I really hate having a mortgage and would like it gone as soon as possible.
Jr. Member
Nov 17, 2003
139 posts
Kelowna BC
Is this your forever house? by that I mean the last primary residence you will buy?
Deal Addict
Jul 8, 2009
2028 posts
482 upvotes
Edmonton
You're already paying the mortgage down fast with the extra payments. Your income is high so you need the tax deduction. Interest rates are low so the mortgage is cheap money and I think the markets are low for where they'll be in 10 years. Those are my reasons.
Deal Guru
User avatar
Jul 7, 2007
10983 posts
2915 upvotes
mortgage rate at 2.2%. what's the rush??

if you are telling me you haven't bought any RRSP, I will first go to where you live and punch you in the face.... and then thank god there are people like you to support our health system.

however if you are talking about paying back the Home Buyer's Plan amount.. then there's no rush
Newbie
Jul 27, 2007
16 posts
1 upvote
@Justin- I don't see myself moving unless I meet someone who forces me to. I'm currently in a house.

@Wing Nut- Do you think I should use my savings to max out my RRSP's? Currently all my savings are cash in the bank. It's my rainy day money.
Newbie
Jul 27, 2007
16 posts
1 upvote
@kingofwale- Yes this year I have not bought any RRSP's. I'm glad you dont know where I live. ;) Last year I bought 25k, and saved the return in the bank.
Newbie
Jul 27, 2007
16 posts
1 upvote
Side question: I can ask my accountant, but some of you probably know the answer- are the RRSPs purchased in Jan and Feb "counted" the same as ones bought the previous year?
Deal Guru
User avatar
Jul 7, 2007
10983 posts
2915 upvotes
smartthinker wrote: Side question: I can ask my accountant, but some of you probably know the answer- are the RRSPs purchased in Jan and Feb "counted" the same as ones bought the previous year?
it doesn't really matter when you buy it, Since you can carry the contribution room forward anyway.

but Dude, at your income level, max your RRSP.

What's your rush on paying the mortgage off?? interest is 2.2%. At your age, I would stick with regular mortgage payment (unless rate starts to go up) and use the rest of the money for investment.
Newbie
Jul 27, 2007
16 posts
1 upvote
@kingofwale- I don't know anything about investments. Everyone I talk to always tells me "they lost tons in investments".

Thanks for everyone's help.

I will max out my RRSP contribution limit using 40k of my savings. I'll take the refund and add it back to my savings. Regarding the 25k, I'll probably pay down my mortgage since I know nothing about investing.
Jr. Member
Nov 17, 2003
139 posts
Kelowna BC
If you don't plan on moving,being mortgage free sooner is great.Now you do have a subtantial income and the tax deduction is a benefit for sure and I would suggest doing a regular investment plan of some sort as apposed to one time purchases.I agree with Wing nut about housing prices being low,and if down the road you need to sell or use equity to purchase another home the value of your home will have increased as well.
Not knowing where you live and kind of market it is the return on you homes' value maybe more than what you will gain in some investments.I don't think interest rates will continue to stay low for long,as they have no where to go but up.
I would suggest to you that you need to sit down with someone to discuss where you are and where you want to be.These questions are best suited for a professional either at a bank or an independant CFP there are many determining factors to everyones plan. This forum might be good for quick answers but I wouldn't bank on the advice given as your situation,is your situation and without all the variables that matter to you. The answers given are uneducated to what is the most important to you and your future.
Newbie
Jul 27, 2007
16 posts
1 upvote
@Justin Cider - I appreciate the help. Oddly enough I trust this forum more than financial professionals, as the members in this forum have nothing to gain when I invest my money.

My main concern is to be mortgage free as soon as possible. My mortgage is really my only debt. Investing usually requires risk, and I'm not a risk taker at all.
Deal Addict
Aug 1, 2005
1705 posts
61 upvotes
Windsor
The rush is so he's paying down 250k at 2.2% now, and not 250k at say 6% in a few years.
Jr. Member
Nov 17, 2003
139 posts
Kelowna BC
Well,if you're risk adverse.I would say pay down your mortgage as fast as possible as it will give you your best returns. I will assume that since you are not a risk taker that your RRSP's are in GIC's and Daily interest accounts with returns of 1-3%. I will give you a word of caution,Inflation is not your friend. If you are 30yrs old and makeing 1-3% in your investments you are going no where as inflation is killing your returns. Inflation averages approx 2% which will eat away your purchasing power down the road.

I get your issues with financial professionals as I am one,but you wouldn't ask your buddy to represent you in a murder trial either.
At the end of the day the advise given by either a independent Certified Financial Planner,or one that works for a bank is just an opinion.The final decision is ultimately yours,speak to more then one. Get more then one opinion then one find someone that make sense to you. The best clients I have are the ones that challange my opinions,as they make me work for their business.
Deal Guru
User avatar
Jul 7, 2007
10983 posts
2915 upvotes
CompWizrd wrote: The rush is so he's paying down 250k at 2.2% now, and not 250k at say 6% in a few years.
well, a few years down the road, he will have 125 sitting in investment somewhere else.

Speaking of investment. smarthinker, there's absolutely no guarantee in investment (other than if you want to go with GIC), but then again, there is no guarantee that you won't get run over by a bus tomorrow. Talk to an expert (not forum people, as much as you want to trust everyone here), keep your mind open, and trust me, your 60 yr old self will thank you in 30 years.
Deal Addict
Feb 4, 2008
3137 posts
179 upvotes
smartthinker wrote: @Justin Cider - I appreciate the help. Oddly enough I trust this forum more than financial professionals, as the members in this forum have nothing to gain when I invest my money.

My main concern is to be mortgage free as soon as possible. My mortgage is really my only debt. Investing usually requires risk, and I'm not a risk taker at all.
You have just answered your question. :)
Do your mortgage math correctly!
Deal Expert
Dec 5, 2006
16787 posts
12571 upvotes
Markham
smartthinker wrote: This year I have about 25k extra at the end of this year.

My financial situation:
-------------------------
Mortgage: 293k, 2.3% variable (I currently double pay my mortgage each month)

Income: 150k pretax (single, early 30's).. I never have any deductions to lower tax rate.

Currently I have saved about 100k in RRSP's. I must put back 20k I borrowed when I bought the house starting 2013. (I have the money in the bank to do this already)

My options are:
1. Use the 25k to pay down mortgage (leaning this way)
2. Use the 25k to buy RRSP's, get a refund and pay down mortgage with the refund

Suggestions? I can't decide what to do.
what are you going to do with RSP? if you deposit just for GIC, then mortgage is better since 2.3%>2%,if you don't know investment, then you might end up losing money. It is really about your RSP investment ROI and compare with 2.3%,but variable, it could go up next year,so if your investment return is less than 3%, probably mortgage is a better option
Deal Expert
User avatar
Nov 2, 2003
17117 posts
3872 upvotes
GTA
the only one who could give you the right answer is yourself.
buying investments in an RRSP is an investment in your retirement... paying down your mortgage is an investment in your house... doing nothing and holding cash is an investment in your government/nation's currency...

anything you do, or don't do, is an investment of some sort that you're literally voting with your dollars. and any of those investments can go horribly wrong.

you need to find out what really bothers you the most.
paying taxes? RRSPs can reduce taxes
having a mortgage? pay off the mortgage
scared you'll have no money? hang on to the cash

if i were you, i would max out the RRSPs... then pay down the mortgage, then borrow the amount from the mortgage and invest that borrowed amount... write off the interest from my taxes...
Deal Addict
Jul 14, 2009
1548 posts
51857 upvotes
New Westminster
I'm not sure if it has been mentioned yet, but you can use the money to put in your RRSP to get your tax credit. Then you can make use of the Home Buyers Plan where you can use $25,000 from your RRSP to use towards your first owner-occupied home. This is payable over 15 years.

Note Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible for any year.

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