Are you torn between paying down your mortgage faster or building up your retirement nest egg? You’re not alone! This financial dilemma keeps many Canadian homeowners up at night, wondering if they’re making the right call with their hard-earned dollars.
As a financial advisor who’s helped countless families navigate this exact question, I want to break down this complex decision in simple terms that actually make sense. There’s no one-size-fits-all answer here, but I’ll help you figure out what’s best for YOUR specific situation
The Big Question: RRSP vs. Mortgage – What’s the Smarter Choice?
When you get extra money, like from a bonus, a tax refund, or just savings, you have two strong choices for your future finances:
- Accelerate your mortgage payments – Get debt-free faster and potentially save thousands in interest
- Boost your RRSP contributions – Build your retirement savings while enjoying immediate tax benefits
Both choices have serious merit! Let’s dig into what makes each option attractive and what factors should influence your decision
Why Paying Down Your Mortgage Makes Sense
Putting extra money toward your mortgage principal can be incredibly satisfying for several reasons:
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Guaranteed returns: If your mortgage interest rate is 5%, every extra dollar you put toward the principal saves you 5% in interest. That’s a guaranteed return with no risk!
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Future financial freedom: Eliminating your mortgage payment years earlier frees up significant monthly cash flow and reduces stress.
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Peace of mind: There’s something psychologically powerful about being debt-free and fully owning your home.
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Protection against rate increases: When it’s time to renew at potentially higher rates, you’ll have a lower outstanding mortgage amount.
Why RRSP Contributions Might Be Better
On the flip side, maxing out your RRSP has some compelling advantages:
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Immediate tax savings: Contributions reduce your taxable income, potentially generating significant tax refunds you could reinvest or use to pay down your mortgage.
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Tax-deferred growth: Your investments grow without being taxed until you take them out. This lets your money grow very quickly over time.
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Long-term wealth building: Historically, well-diversified investment portfolios have outperformed mortgage interest rates over long periods.
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Flexibility: You can carry forward RRSP contribution room that you haven’t used, which gives you options for making the best use of your future tax situation.
7 Factors to Consider When Making Your Decision
1. Your Current Income and Tax Bracket
The higher your income and marginal tax rate, the more valuable RRSP contributions become from a tax savings perspective. For high-income earners, the immediate tax deduction can create substantial savings that might outweigh mortgage prepayment benefits.
For example, if you’re in a 40% tax bracket, a $10,000 RRSP contribution could generate a $4,000 tax refund – money you could then direct toward your mortgage if desired!
2. Your Mortgage Interest Rate
This is huge! When mortgage rates are high, the guaranteed return from paying down your mortgage becomes more attractive.
Current situation comparison:
| Mortgage Rate | RRSP Investment Return | Better Option |
|---|---|---|
| 2-3% | 6-8% expected return | Likely RRSP |
| 5%+ | 6-8% expected return | Could go either way |
| 7%+ | 6-8% expected return | Likely mortgage |
Remember that investment returns fluctuate while mortgage interest savings are guaranteed.
3. Your Age and Time Horizon
The power of compound growth in an RRSP is strongest when you have many years for investments to grow. The younger you are, the more compelling the case for prioritizing RRSP contributions.
- Under 40: The long runway for growth makes RRSP contributions particularly powerful
- 40-55: A balanced approach often makes sense
- 55+: Mortgage-free retirement becomes more immediate priority
4. Other Debt Situations
Higher-interest debts should always take priority! Before wrestling with the mortgage vs. RRSP question, tackle these first:
- Credit card balances (often 19-22% interest)
- Personal loans or lines of credit (typically 8-12%)
- Car loans (usually 5-9%)
Only when these higher-interest debts are eliminated should you focus on the mortgage vs. RRSP decision.
5. Your Retirement Income Sources
If you have a solid pension plan or other guaranteed retirement income streams, you might have more flexibility to focus on mortgage repayment.
Consider:
- Do you have a defined benefit pension plan?
- What CPP and OAS benefits can you expect?
- Do you have other investment accounts or rental properties?
The stronger your retirement foundation, the more comfortable you might be prioritizing mortgage repayment.
6. Your Unused RRSP Contribution Room
Many Canadians have accumulated significant unused RRSP contribution room from previous years. If you have substantial room to catch up, the tax benefits of making those contributions could be significant enough to prioritize over mortgage prepayments.
The current maximum RRSP contribution limit for 2025 is 18% of your earned income up to $32,490. If you’ve been missing out on contributions, you might have considerable catching up to do!
7. Your Comfort With Investment Risk
Be honest with yourself about your risk tolerance. While RRSPs historically outperform mortgage rates over the long term, they come with investment volatility that some people find uncomfortable.
- If market fluctuations keep you up at night, the guaranteed return from mortgage prepayment might better suit your personality
- If you’re comfortable with temporary market downturns and focused on long-term results, RRSP investing might be your better option
The Best of Both Worlds: A Hybrid Approach
After helping many clients work through this decision, I’ve found that the most practical solution is often a balanced approach. Here’s a strategy that many of my clients have found success with:
- Contribute to your RRSP first to get the tax deduction
- Use your tax refund to make a lump-sum mortgage payment
- Rinse and repeat annually
This way, you’re growing your retirement savings while also accelerating your mortgage payoff! It’s what I like to call a “win-win” approach.
Real-World Example: Meet Sarah
Sarah is 35 years old with a $400,000 mortgage at 4.5% interest. She has $15,000 in extra savings this year and is trying to decide what to do with it.
Option 1: Put all $15,000 toward her mortgage
- Reduces mortgage principal immediately
- Saves approximately $35,000 in interest over the life of her mortgage
- Helps her become mortgage-free about 3 years earlier
Option 2: Contribute all $15,000 to her RRSP
- Generates a tax refund of about $5,000 (assuming 33% marginal tax rate)
- If invested with a 6% average annual return, could grow to approximately $86,000 over 30 years
- Provides immediate tax savings she could use for other financial goals
Option 3: Hybrid approach
- Contribute $15,000 to RRSP
- Use the resulting $5,000 tax refund for a mortgage prepayment
- Gets both the long-term RRSP growth AND accelerates mortgage payoff
For Sarah, the hybrid approach gives her the best of both worlds – tax advantages now and long-term retirement growth, while still making progress on becoming mortgage-free sooner.
Common Mistakes to Avoid
When making this decision, watch out for these potential pitfalls:
- Ignoring high-interest debt – Always tackle credit cards and other high-interest debts first!
- Making decisions based on emotion rather than math – The satisfaction of paying off your mortgage is powerful, but might not always be mathematically optimal
- Forgetting about emergency funds – Before extra mortgage payments or RRSP contributions, ensure you have 3-6 months of expenses saved
- Failing to consider your complete financial picture – This decision should fit within your overall financial strategy
- Not reassessing as circumstances change – What makes sense now might change as interest rates, your income, or life situation evolves
Bottom Line: What’s Right for You?
At Rothenberg Wealth Management, we believe the RRSP vs. mortgage decision is highly personal and depends on your individual situation. While we’ve outlined the key considerations, your best move depends on your specific circumstances, financial goals, and comfort level.
The good news? You don’t have to make this decision alone! Speaking with a financial advisor can help you run the numbers specific to your situation and develop a strategy that balances both short-term comfort and long-term financial success.
Remember – whether you choose to focus on your RRSP, accelerate your mortgage payments, or adopt a balanced approach, the fact that you’re considering these options means you’re already on the right track toward financial wellness!
Have you been wrestling with the RRSP vs. mortgage decision? What approach have you taken? Share your experiences in the comments below, or reach out to discuss your specific situation – we’re always happy to help!
FAQs About RRSPs vs. Mortgage Payments
Q: If mortgage rates are higher than potential RRSP returns, should I always prioritize the mortgage?
A: Not necessarily! Even if your mortgage rate is slightly higher, the tax benefits of RRSP contributions might still make them more advantageous overall, especially for high-income earners.
Q: Can I withdraw from my RRSP to pay off my mortgage?
A: Yes, but it’s generally not recommended except through specific programs like the Home Buyers’ Plan. RRSP withdrawals are fully taxable and permanently reduce your contribution room.
Q: I’m close to retirement – should I still be contributing to my RRSP?
A: If you’re approaching retirement, becoming mortgage-free might take priority, but it depends on your overall retirement readiness and income sources. This is definitely a situation where personalized advice is valuable!
Q: What if I can only afford small extra payments?
A: Even small additional amounts can make a significant difference over time, whether toward your mortgage or RRSP. Consistency is more important than the size of your contributions!
Q: Should I consider a TFSA instead of an RRSP in this decision?
A: TFSAs offer different benefits than RRSPs and might be appropriate in certain situations, especially if you expect to be in a higher tax bracket in retirement than you are now. This could be a third option worth exploring with your advisor!
