Let’s look at a couple asking this same question:

Strategy 1: Pay Down Mortgage First1

  • Pay an extra $750 per month on the mortgage.
  • Once the mortgage is paid off, put the former mortgage payment plus $750 per month in the RRSP.
  • Invest the income tax savings in a TFSA, once the RRSP limits are reached.

Strategy 2: Save in RRSP While Paying Down Mortgage1

  • Contribute the $750 per month to an RRSP
  • Put the income tax savings from the RRSP against the mortgage.
  • Once the mortgage is repaid, put the amount of mortgage payments and the income tax savings in a TFSA

Difference = $101,249 in Favour of Strategy 2*

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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:
  • RRSP contributions
  • 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.

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