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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Tom Drake is the owner and head writer of Canadian Finance Blog.
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I wrote about a tiny little twist to the last stragedy listed to give a person what I will call “free money.”
Have a read here:
http://www.debtfreeby43.com/2009/07/06/free-money/
[...] Drake presents Contribute To RRSP or Pay Down Mortgage? | The Canadian Finance Blog posted at The Canadian Finance Blog, saying, “This might be the most asked personal finance [...]
Paying for a house or a retirement plan, could you not have both. If you are paying for a mortgage on a house that you are not struggling with them in realty you should try and pay more into paying off the mortgage. This is a good idea as there will be less interest and as soon as your mortgage is paid off then no more mortgage payments means more money available to you while you are still earning. But there is always the notion of retirement and what money is available when you are no longer earning and have a paid off house.
.-= housing finance advice´s last blog ..30 Year vs. 15 Year Mortgages =-.
[...] that amount as soon as you can. With the emergency fund taken care of, you may want to focus on an RRSP, TFSA, RESP or maybe paying down more of your [...]
You have valuable information on here for Vancouver realtors and their clients, thank you!