Personal Finance

Locked: Pay down mortgage or grow rrsp?

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  • Jan 16th, 2023 10:53 am
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[OP]
Newbie
May 26, 2011
85 posts
30 upvotes
BRAMPTON

Pay down mortgage or grow rrsp?

Hi all,

Noobie here,

My wife and I have a $450,000 mortgage on our house, we both have very good pension plans and are close to mid forties. I think it would make more sense to save all of our money each year to put down on our mortgage, which is at 2.5% for another 4 years, to pay that down as quickly as possible rather than invest in our rrsp of this point, since we both have good company pension plans... does this make sense?

We are currently able to save 35,000 each year plus the $15,000 that automatically goes towards our mortgage. So in one year we will put down about $50,000 in total to our mortgage.Our investors are telling us to invest half in rrsps and half towards the mortgage, but to me this doesn't make sense because with rising interest rates on housing, once our mortgage term expires we're going to be paying higher interest on a larger lump sum mortgage. I would rather pay this off as much as possible and let our pension plans take care of our rsps in the future.

Any thoughts?
112 replies
Member
Dec 5, 2017
266 posts
249 upvotes
I would do what makes you most comfortable. Seems like you already answered your own question and are just looking for reassurance.
Deal Guru
User avatar
Oct 16, 2008
10164 posts
4435 upvotes
Vaughan
I would pay down the mortgage. The sooner it is gone, the sooner you will be mortgage free.

Your pension is there anyway.
...
Jr. Member
Apr 26, 2022
155 posts
146 upvotes
It comes down to what you save in interest versus what you could reasonably expect as a return in your RRSP investments. I'm sure my wife and I could have made more money using the money to invest instead of paying off the house early but there's something about having a clear mortgage that does wonders for your mood. Having that monkey off your back might be more worthwhile than a little more investment $$$
Jr. Member
User avatar
Dec 10, 2006
120 posts
49 upvotes
Thornhill
Having peace of mind that you don’t have a mortgage is priceless
Deal Addict
Mar 3, 2018
3057 posts
3442 upvotes
GTA
You really need to decide whether you want to make an emotional decision as in paying down your mortgage sooner, or make the best financial decision as in earning a higher rate of return in an RRSP then your 2.5% mortgage for four years. One increases your net worth over four years even by just investing in 5% GIC's, while the other makes you feel better having a lower mortgage. Either choice can be correct depending on what you value.
Deal Addict
Jan 5, 2018
1711 posts
1497 upvotes
Right now pay off mortgage lol....

Maybe once rates taper off, maximizing RRSP and TFSA.
NOT A WOMAN. JUST GOT A WEIRD NAME. I AM A MAN. THANKS.
Sr. Member
User avatar
Jun 6, 2009
960 posts
544 upvotes
Montréal
It's a false choice in my opinion. Having a fixed mortgage rate gives you the luxury to plan accordingly.

Leaving the RRSP out of the equation for a moment, let's say you have $10,000 and you're wondering what to do with it.
Scenario 1: Dump it in the mortgage, you'll save $10,000 X 2.5% X 4 years = $1,000 in interest over four years.
Scenario 2: Invest it in a tax-free GIC at 4%, you'll earn $10,000 X 4% X 4 years = $1,600 in interest over four years, that you can dump on the mortgage at renewal.

In other words, in the long term, you'll pay your mortgage off faster if, instead of making prepayments, you invest that money in a tax-free savings vehicle with a better interest rate. It's very easy to find savings accounts and GICs above 2.5% these days. If savings rates go south, you can make a lump sum payment to the mortgage (depending on the terms) and shift your focus on prepayments.

As for RRSP contributions, the incentive is the tax refund, that you can dump on the mortgage or invest. So I wouldn't rule them out just because you have a good pension plan at work. But the tax implications make it very difficult to determine if that money would be better spent on the mortgage in the long term. That said, if your pension plan really is that good, you probably don't have a whole lot of RRSP contribution room.
Deal Addict
Sep 13, 2003
1324 posts
160 upvotes
Four years from now, would you regret your decision if you invested your money if you looked back knowing you could have increased your investments of 7% or even 10% each year?

Aside from the very good feeling of paying off your mortgage quicker, what financial benefit is there especially when the house prices are falling this year?
Someone once told me that you're paying into a depreciating asset in a falling housing market... most people or companies wouldn't pay more than they need to for an asset that is depreciating (e.g. car)

Truth be told, I'm trying to make this decision myself but I think investing is the wiser choice (if you're doing this long term) and the feel good feeling will have to wait (for my situation)

But if piece of mind is what someone is looking for, it's not a bad choice and you can sleep better at night. :)
Sr. Member
May 28, 2012
585 posts
567 upvotes
ONT
Pay down mortgage or grow RRSP?

I don't know about 2022 but 20-30 years ago the answer was always do both. Add to the RRSP and then put the resultant tax savings against the mortgage.
[OP]
Newbie
May 26, 2011
85 posts
30 upvotes
BRAMPTON
Thank you for all the replies this far. Helps us out lots.
Member
May 29, 2020
377 posts
626 upvotes
I would put it in an rrsp and use the tax savings to pay down the mortgage.
Deal Addict
Aug 15, 2009
2594 posts
2182 upvotes
Montreal
Mortgage but I also have a DCPP and contribute to my RRSP. 2023 I'll lower my RRSP contribution and give more to our mortgage. We have also augmented our contribution biweekly of 150$. My goal (gf goal is different then mine lol) is to have our mortgage paid in 10 years.
Deal Addict
User avatar
Mar 25, 2012
2657 posts
1665 upvotes
Kelowna
slang75 wrote: Hi all,

Noobie here,

My wife and I have a $450,000 mortgage on our house, we both have very good pension plans and are close to mid forties. I think it would make more sense to save all of our money each year to put down on our mortgage, which is at 2.5% for another 4 years, to pay that down as quickly as possible rather than invest in our rrsp of this point, since we both have good company pension plans... does this make sense?

We are currently able to save 35,000 each year plus the $15,000 that automatically goes towards our mortgage. So in one year we will put down about $50,000 in total to our mortgage.Our investors are telling us to invest half in rrsps and half towards the mortgage, but to me this doesn't make sense because with rising interest rates on housing, once our mortgage term expires we're going to be paying higher interest on a larger lump sum mortgage. I would rather pay this off as much as possible and let our pension plans take care of our rsps in the future.

Any thoughts?
What are the pension plans? DB or DC? Who is the plan sponsor and administrator? After you and your employers' contributions, do you have any RRSP room left over? Pension contributions reduce your available RRSP room every year, so I'm not sure how much 'room' you actually have. Save in your TFSA certainly, but if you're already saving $35,000 per year, if you haven't exhausted your TFSA contribution room yet, you will in the next year or two, so saving too aggressively in non-registered accounts will incur additional taxes at higher marginal tax rates once you have a significant non-registered cash pile. I'd normally favour doing what makes you feel most comfortable, or advise you to split the difference and do both, but if you're already maxing out your pension contributions, maxing out your TFSA, then the only thing left is an emergency fund and your kids' RESPs, so accelerated mortgage pay down makes a lot of sense.

One other thing: do you and your spouse have either individual and/or group (employer) term life policies? If you have kids, I would advise you look into that, or consider if your existing coverage is 'enough'. (Will it pay off the mortgage if one of you passes away?)

Cheers,
Doug
Deal Addict
Sep 2, 2009
2488 posts
2504 upvotes
Ottawa
saiz66 wrote: Having peace of mind that you don’t have a mortgage is priceless
While I agree with the sentiment, there actually is a price and you can estimate it.
Deal Addict
Nov 8, 2006
1045 posts
494 upvotes
Toronto
cloak wrote: While I agree with the sentiment, there actually is a price and you can estimate it.
The price of freedom!!!
Honestly, yes, there is a price, knowing that you can most likely not in a whole lot of stress if either one looses a job, or even want to switch careers. Or need a break from working.

So, the financial price is one of their income.

This would definitely make a retirement impact overall, but risking the mental health. Money isnt everything.
The OP seems well levelled in their finances, able to save, max out registred accounts and planning their mortgage properly.
Deal Fanatic
Jan 31, 2007
5039 posts
5154 upvotes
Richmond Hill
My choice would be pay off mortgage early.
After that, you can invest what you paid in mortgage into RRSP
******************************************************
Bright side of RFD: Often find good deal
Dark side of RFD: Tons of stuff that I don't need but still got them because of RFD
******************************************************
Deal Addict
Nov 17, 2012
4735 posts
4233 upvotes
Toronto
If you have high incomes, dump money into your RRSP and use the refund to pay down the mortgage.

If you are paying 50% income tax dump $10K into your RRSP (assuming you have room) get a $5K refund and put that into your mortgage.

Even with the taxes you pay on the $10K 25 years from now when you only have your pension and you're forced to take cash out of your RRSP, you're going to pay a lot less than 50% on it.

I'm at the point where I'm self-employed, paying myself in dividends, in my early 50's with a modest amount left on my mortgage because I bought a cottage 10 years ago. With interest rates spiking on my variable rate mortgage, I'm now taking extra cash out of the business and paying my mortgages off fairly quickly - likely in then next 12 months or so.

I have more than enough cash in the business to cover my mortgage debt, but it's earning less invested than I'm paying in interest, so to heck with it, I'm moving to eliminate the mortgage debt.
Jr. Member
Jan 19, 2018
111 posts
48 upvotes
slang75 wrote: Hi all,

Noobie here,

My wife and I have a $450,000 mortgage on our house, we both have very good pension plans and are close to mid forties. I think it would make more sense to save all of our money each year to put down on our mortgage, which is at 2.5% for another 4 years, to pay that down as quickly as possible rather than invest in our rrsp of this point, since we both have good company pension plans... does this make sense?

We are currently able to save 35,000 each year plus the $15,000 that automatically goes towards our mortgage. So in one year we will put down about $50,000 in total to our mortgage.Our investors are telling us to invest half in rrsps and half towards the mortgage, but to me this doesn't make sense because with rising interest rates on housing, once our mortgage term expires we're going to be paying higher interest on a larger lump sum mortgage. I would rather pay this off as much as possible and let our pension plans take care of our rsps in the future.

Any thoughts?
Pay down mortgage for sure...., there are many discussion on this topic and even without the size of your RRSP / Pension portfolio, the direction is always to pay off the mortgage...

In current environment this even makes more sense... (High mortgage rate and probably low market return)
Sometime its not even about number crunching and comparing two scenarios, but is more about peace of mind (No debts means less worry)...

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