Pay off your mortgage,

but don’t neglect your RRSP

$160,000

$140,000 $142,995
Mortgage paid off
$120,000 at age 51 $121,942

$100,000 Mortgage paid off

at age 47
$80,000

$60,000

$40,000

$20,000

$0
35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
Age
Investor A: invests in RRSP then uses refund to reduce mortgage
Investor B: reduces mortgage then invests in RRSP

Consider two 35-year-old investors with $100,000 mortgages (original

amortization – 20 years at six per cent). Monthly mortgage payments are
about $726. Example assumes six per cent rate of return for RRSP savings.
Assumes marginal tax rate of 40 per cent.
Many homeowners are anxious to pay off their mortgage as early as possible to reduce interest
costs.After all, it makes sense to get rid of non-deductible debt. Strategies like seeking out
the lowest rates, the best possible terms and accelerating payments are all appropriate strategies
for reducing the size of your mortgage. Making additional payments can also make you
mortgage-free that much sooner.
But what about your retirement savings goals? How effectively do you take advantage of the
great tax deferral opportunity associated with a registered retirement savings plan (RRSP)?
The above example shows an alternative – two investors using additional funds toward their
goals. Investor A chooses to contribute to an RRSP and applies the tax refund to a mortgage,
while Investor B chooses to pay off a mortgage first and then contribute to an RRSP.

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Investor A – makes RRSP contributions, Investor B – uses all cash flow to pay
uses refund to pay down mortgage down mortgage
Mortgage payments: $726/month or Mortgage payments: $726/month or
$8,718/year $8,718/year
Initial RRSP contribution: $3,000/year Initial RRSP contribution: $0
Uses $1,260 annually from RRSP tax savings Uses $3,000 annually from out of pocket
to pay down mortgage savings to pay down mortgage
Mortgage paid off by age 51 Mortgage paid off by age 47
RRSP contributions after mortgage paid: not Investor B still has four years to reach age
applicable since illustration ends at age 51 51. RRSP contributions after mortgage
paid: $3,000 annually, plus original mortgage
payment ($8,718) plus RRSP tax savings
($1,260) for four years
Total combined out of pocket expenses (regular Total out of pocket expenses (mortgage pay-
mortgage payments plus RRSP contributions): down plus RRSP contributions starting at
$175,770 age 47): $175,770
Results at age 60: House paid off plus RRSP Results at age 60: House paid off plus
worth $142,995 RRSP worth $121,942

Both mortgages are paid off, but by age 60 Investor A accumulated over $21,000 or
17 per cent more in an RRSP!

This strategy illustrates a specific situation assuming no changes in interest rates, personal
tax rates and consistent growth rates. Interest rate changes may impact the decision.
For example, in situations with high interest rates and low personal tax rates,
this strategy may not be as effective.
Note: Example demonstrates specific situation and makes certain assumptions about interest rates, rates of return and individual tax rates.

This information is general in nature and is intended for educational purposes only. For specific situations you should
consult the appropriate legal, accounting or tax expert.