Pay down mortgage or contribute to RRSP?
 It’s
a tough question. One expert says paying down debt is the
most important thing. Another says building an RRSP is first
priority. Who’s right?
The right answer depends on interest rates, mortgage rates,
investment returns and your own situation. But putting all
that aside, here’s a strategy that allows you to satisfy
both objectives.
Just make your RRSP contribution and use your tax refund
to reduce your mortgage. Let's look at the following example:
Assume you have a $100,000 mortgage, a mortgage interest
rate at 8 per cent per annum, and make monthly mortgage
payments of $836. You have 20 years until retirement and
have $5,000 in savings to invest.
You invest your savings in an RRSP, receive a $2,000 tax
refund assuming you are in a 40 per cent tax bracket, and
use your tax refund to pay down your mortgage.
Over a twenty-year period, if your $5,000 investment in
an RRSP earns an 8 per cent annual rate of return, the investment
would be worth $23,305.
With the lump sum payment of $2,000 on the principal amount
of your mortgage you have reduced the principal from $100,000
to $98,000, reduced your amortization period by one year,
and saved approximately $9,900 in interest. Your combined
savings of $23,305 in your RRSP and interest savings of
$9,900 total approximately $33,205.
This is based on a one-time contribution. Do this every year
and you’ll build an RRSP and at the same time, reduce
the principal, the amortization and the interest on your mortgage.
Is this strategy right for you? You can find out by clicking
here to find the RBC financial planning professional closest
to you.
Important information about our financial planning services can be found at the bottom of our
homepage.
|
