By Maurício Dreher
Most of my clients ask me: should I invest in RRSP or should I make an extra payment on my mortgage?
In fact, both alternatives would help you increase your wealth. The best option for you would depend on some factors.
What if you invest in RRSP?
In this case, you might have a tax deduction that could generate a tax refund for you, and by investing this tax refund, you’d have a greater potential to increase your retirement savings.
If you are thinking to use only your home towards your retirement, this could not be the best idea; better would be to have some amount invested in RRSP to increase the diversification, instead of having all your money invested in a single asset.
What if you make an extra payment on your Mortgage?
If you use extra cash to pay down your mortgage, it would reduce your interest costs and it would increase your equity. However, the decision may be affected by situations such as if you are near retirement, since many people try to pay down the mortgage before retirement, so that they can retire debt-free and not have to worry about mortgage payments when they are no longer receiving regular employment income.
What if you do both?
A good idea could be to do both: invest in RRSP and make an extra payment on your mortgage.
Contribute up to your maximum RRSP room to lower your taxes, and then use the tax refund to make an extra payment towards your mortgage. Depending on your marginal tax rate, your RRSP new contribution could return a substantial amount of tax savings. You can use this money to pay your mortgage; this way you would be increasing your retirement savings, diversifying your portfolio, increasing the home equity, and reducing the interest cost on your mortgage.
Financial planning can help you determine which decision would be the best one for you. That’s why you should talk to your CFP – Certified Financial Planner; to help to increase your wealth with the best decision.