RBC Financial Planning is a business name used by Royal Mutual Funds Inc. (RMFI). Financial planning services and investment advice are provided by RMFI. RMFI, RBC Global Asset Management Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated. RMFI is licensed as a financial services firm in the province of Quebec.
1) This example is based on a 3.5% interest rate on the mortgage and a 5% rate of return earned in the RRSP. Both strategies will pay the mortgage off faster; by focusing on the mortgage alone, the debt is repaid in full after 15 years. By focusing on the RRSP and using tax refunds to prepay the mortgage, the mortgage is paid off in 20 years—five years earlier than the original 25–year payment schedule
2) The change in net worth was calculated by adding:
Growth of RRSP investments
Price appreciation of house (2% per year)
Increase in home equity from mortgage payments
* If Andrew and Anna were conservative investors and earned a lower rate in the RRSP, the result may have favoured prepaying the mortgage. Likewise, if they were in a low tax bracket, that could also change the numbers because the RRSP refund would be lower too. Finally, if the interest rate on the mortgage was higher than what the RRSP earns, the strategy might favour paying down the mortgage first.