This might be the most asked personal finance question in Canada, should you contribute to an RRSP or pay down your mortgage? Most people would lean towards putting money into an RRSP because of the tax credit and the possibility of a higher return.

When considering the tax benefits of the RRSP option, some people don’t realize the tax savings related to reducing their mortgage principle. Your mortgage payments are made with after-tax dollars. Because of this, you not only save the interest, but the taxes on that interest as well. The other argument for the RRSP was the potentially higher return, but with that return comes risk. Paying down your mortgage has a guaranteed return, equal to the interest and income tax saved.

With the current stock markets and mortgage rates, the arguments either way are magnified. For the pro-RRSP case, stocks are at lower prices, increasing the likelihood of a greater return. For the pro-mortgage side, rates are low, the more you pay on your mortgage principle now, the more interest you’ll save in the future when rates increase.

While you can never be completely sure which choice is best for you, you could do both as a form of diversification. You could contribute to your RRSP and then use the tax credit it provides to pay down your mortgage principle.

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