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In this panel, you will learn about RRSP and mortgages. You will be able to learn about their differences and similarities as well as learn whether it's better to prioritize paying off your mortgage or put more money into your RRSP

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In this video, Brandon goes into an in-depth explanation of the purpose of the RRSP. He explains the tax benefits, and if there is any limit to how much money you can put in. He also describes how RRSPs can be used to grow your retirement savings. The reason why I chose this video was that he was able to explain the basics of how RRSP works and at the same time went into a little bit more in-depth about the basics of it. Still, at the same time, he was able to explain it so that someone who doesn’t have any idea how it works will have a solid understanding of it.

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RRSP Explained for BEGINNERS (EVERYTHING YOU NEED TO KNOW)

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This Article talks about the problem that many of Canadians end up facing decadent if it is smarter to prioritize paying down their mortgage or focusing on their RRSP. An important factor to keep in mind is your income, the interest rate on the mortgage and the potential return you could achieve with the investments. If you have a higher than average income most people benefit from contributing to their RRSP over their Mortgage. However, if you are someone with a high-interest mortgage you should prioritize paying off your mortgage. Both choices can be balanced but it's best to get a financial advisor to see which one is the better option for you.

I chose this article because I felt like it shows that it all depends on where you are in your life and what your financial situation is

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Should you pay down your mortgage or contribute to your RRSP? We can help you determine what will work best for you.

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The Morning Star explores whether building up your RRSP is more important than paying off your Mortgage. The article shows that even tho paying down your mortgage will provide a guaranteed return and could help reduce stress. Most people who are in a higher tac bracket should contribute to their RRSP because it can be extremely beneficial since you would get tax deferrals.

I chose this website because I think it’s a good idea to see the benefits of both sides to see which one is ultimately the better option for you and if either one would have a better benefit for your future.

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Amid mounting household debt, millions of Canadians are forced to make the difficult choice between saving for retirement and paying down the largest and longest lasting debt, their mortgage.

According to the latest figures from Statistics Canada, the total credit-market debt (mortgages, consumer credit and non-mortgage loans) among Canadian households has jumped to 162.6% of disposable income, the bulk of which is resulting from continued borrowing for home purchases.

Against that backdrop, having to choose between saving for retirement and paying down the mortgage may seem like fighting a losing battle to the vast majority of Canadians able to afford only one or the other.

How to decide? Cynthia Kett, a principal with the advice-only firm Stewart & Kett Financial Advisors Inc. in Toronto, suggests considering your mortgage rate on a pre-tax basis.

"If you're in a 50% marginal tax bracket, your pre-tax mortgage rate would be double your stated rate," she says. "A 2.5% mortgage rate would be equivalent to 5% on a pre-tax basis. By paying down your mortgage, you're earning a guaranteed rate of return equal to the pre-tax mortgage rate. Where else could you get the same risk-free rate of return?"

And the faster you pay off your mortgage, the less total mortgage interest you'll have to pay. "You reduce the amount of your mortgage that may need to be renewed at a higher rate than you now pay," adds Kett.

David Trahair, a chartered accountant and author of Crushing Debt, says that in addition to marginal tax rate on RRSP contribution versus at withdrawal, the math behind the decision comes down to rates of return. "If you think your RRSP is going to beat the rate on your mortgage, stick with your RRSP. If not, go with paying off debt."

In the right circumstances, says Trahair, an RRSP offers a great tax advantage. Investing in an RRSP makes sense "if the person is in a high marginal tax bracket when they make the contribution, and therefore get a significant refund, and a low marginal tax bracket when they withdraw from their RRSP in retirement."

For people in a low marginal tax bracket, though, making an RRSP contribution offers much less bang for their buck. "If they also withdraw from it when their tax bracket is higher, it makes it even worse," Trahair adds.

Unless you can afford to do both, paying off the mortgage trumps the RRSP because of the psychological benefit of being mortgage-free sooner. "Being debt-free is the ultimate freedom and significantly reduces the financial stress of retiring," says Trahair. "A declining income after retirement does not fit well with the requirement to continue large monthly mortgage or home equity line of credit (HELOC) payments."

Risk-takers who feel confident they can make an excellent return on their RRSP could be stuck, due primarily to poor returns, with a small RRSP and still hold a mortgage going into retirement, cautions Trahair.

Further, a shrinking tax benefit is making investing in RRSPs less advantageous, at least for Ontario residents. The 2014 Ontario budget included provisions to raise marginal tax rates for individuals earning between $150,000 and $220,000 to 47.97%, from 46.41%, and 49.53% from 46.41% for individuals making more than $220,000.

Another consideration is that RRSPs are discretionary. "You don't have to make contributions and you can take out the money at any time, even though you'll have to pay when you do," says Trahair. Second, people just don't have the money after paying all the other bills.

According to Statistics Canada, the total unused RRSP contribution amount is estimated to exceed $1 trillion by 2018. This suggests that Canadians are likely to stay committed to reducing mortgage debt rather than building retirement savings within RRSPs.

However, deciding whether to pay down your mortgage or build up your RRSP ultimately comes down to personal circumstances.

It depends on the size of mortgage and the interest being paid, the age of the person and what stage they're at in the life cycle, says Jonathan Chevreau, a veteran financial writer who runs financialindependencehub.com.

"For young people, paying down debt is a certain winner," says Chevreau, author of Findependence Day, a book about achieving the financial flexibility needed to retire. "RRSPs in equities can go down and the tax refund is less compelling if they are not in the top tax bracket."

In the years when interest rates were at double-digit levels, the argument in favour of RRSP contributions would have been more compelling, he adds.

As for people near retirement, especially if in the top tax bracket, they may want to maximize the RRSP, says Chevreau, but maintains they should strive to be debt-free once in retirement.

"Paying down a mortgage is a guaranteed return while RRSP is not. Plus, the RRSP is only a tax deferral," says Chevreau. "You can be blinded by the refund only to regret the future tax liability once it becomes a registered retirement income fund (RRIF) with forced annual and taxable withdrawals."

That said, some households are able to invest in RRSPs while also paying down their mortgage. Chevreau, along with his wife, maximized their RRSP contributions and still managed to pay off their mortgage in five years. "Those with risky careers, however, may prefer the certainty of a paid-for home and focus on RRSPs in the second half of life," he says.

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Pay down the mortgage? Or build up your RRSP?

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If you can't afford to do both, here's how to decide.

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This video explains the basics of a mortgage and how it works. It covers the basic knowledge about how a mortgage is a loan with a long-term payment period. There are different types of mortgages like fixed and variable mortgages. As well as an understanding of the condition and term.

I chose this video because I think it’s important to understand what a mortgage is and the different types of mortgages you can get. I think it’s also important to have a clear understanding of how interest rates work and the difference between a fixed and variable mortgage.

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Video 3: The importance of paying your house early

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Video 3: The importance of paying your house early

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In this video, it highlights the benefits of focusing on paying your mortgage off over an RRSP. By focusing more on paying off your mortgage you can reduce your debt with this it can lead to a more financially stable life and it can also decrease the amount of interest payments you need to pay off. You won’t only get financial relief but also you’ll have more emotional stress relief since you won’t have to worry about future payments.

I liked this video because it chose the benefits of focusing on paying off your mortgage and shows that even if you put in extra payments even if it’s a small amount it can greatly reduce the length of your mortgage.

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Why Paying Off Your Home Early Is Important

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Video 4: Should You Pay Off Your Mortgage Early or Invest for Retirement

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Video 4: Should You Pay Off Your Mortgage Early or Invest for Retirement

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This video gave a good description of the pros and cons of paying your mortgage off early, instead of prioritizing building up your RRSP. She talks about the factors that you have to think about when planning she brings up the importance of interest rates and the potential return on investments. However, prioritizing your mortgage can also result in a lower potential for compound growth and your RRSP could suffer.

I liked this video because it not only showed the pros of paying off your mortgage but also showed the cons of it as well. I don’t think many people like to talk about the cons so I liked the fact they talked about the cons

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ACCOUNTANT EXPLAINS Should You Pay Off Your Mortgage Early or Invest for Retirement

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This website writes about the different pros and cons of prioritizing your mortgage over the RRSP. It brings up a lot of factors to think about like the age you want to retire at, the length of your mortgage and any investment growth.

I liked this website because it goes more into depth about which options you should go with depending on your financial structure. I also liked how it gave real-world examples as they talk about a couple that is 20 years away from retirement with a 4% fixed mortgage for 5 years. This couple should focus on building up their RRSP. As opposed to the other couple who is older with the same mortgage structure it’s smarter for them to focus on paying off the mortgage because of the tax tolerance and tax situation.

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Wealthsimple makes powerful financial tools to help you grow and manage your money. Learn more

In case you've somehow blocked it out, here's a quick recap of the last 10 months: 😬.

The TSX is down 8.3%. The S&P is in the hole 20%*, and Nasdaq hopes you're so distracted by crypto (-55%) that you won't notice it's dropped nearly a third of its value since January. In case this economic wound isn't salty enough for you yet, inflation's also at 7%, year over year - the worst we've seen since the line-up-for-gasoline recession of the early 1980s. That's why Tiff Macklem and the Bank of Canada have been so gonzo with rate hikes. The more expensive he makes it to borrow money, the less money people are expected to spend. Which should lead to lower demand and (hopefully) lower prices. Eventually.

If you're a homeowner, one effect you'll feel from those hikes is higher mortgage payments. The average 5-year rate most borrowers now get on mortgages is 4.7%, up from 2.1% a year ago. Between that and the lousy market, we've gotten a lot of questions from investors who wonder if it's smarter to use extra money to pay down the mortgage or invest. In past years the answer was clearer: invest. But now it depends a lot more on your particular circumstances.

Even if you aren't facing a jump in your mortgage payments - or any mortgage at all - understanding how you might figure this out is a great way to understand how money works. Here's how to think it through.
Consideration #1: your mortgage rate
Like tickling rattlesnakes, mortgages have a guaranteed negative return. If you're paying 5% interest, that's a loss of 5%. Which means paying down your debt is like earning 5% compound interest. You just need to consider the opportunity cost: In order to save yourself that 5%, you have to tie up money that could possibly earn more somewhere else.
Consideration #2: how much you expect to make in the market
You're probably sick of hearing this, but we'll say it one more time: past performance is no guarantee of future returns. Nobody knows what the markets are going to do (not even this guy), but we do know what they've historically done: gone up, although it sometimes takes a while. (We get into why in more detail here.) Which means despite the suckfest this year has been so far, there's nothing wrong with a little hope - especially if you have time to wait things out. (See below for a handy chart showing you the effects of time on investments.) There's also nothing wrong with a little pessimism. In whatever way you feel comfortable - by asking an advisor or doing your own research - figure out what your return expectations are and judge based on that.

One more thing to consider? The record-high stock prices of the last couple years are back to more reasonable levels, and with both stocks and bonds lower, long-term return expectations are once again up. (It's a lot easier to go up when you're on the middle of the mountain than the very peak.)
Consideration #3: how long you have to invest
We can't predict the future, but we can get a pretty good guess of how likely something is based on the past. And then we can put it in a chart!

The longer you have till you need your money - whether it's for retirement, a new house, leg-lengthening surgery, whatever - the better your chances of surviving market downturns.

Why? It's all about reducing the chances of a negative outcome. When you're only invested for a short period of time, one big dip can cost you a lot. The longer you stick it out, though, the lower your chances of taking a loss and the higher your chances of making money.
Consideration #4: how much tax-sheltered savings room you have left
One thing that can change the math is whether or not you'll get a tax break from investing. If you have contribution room left in a registered retirement account like a TFSA or RRSP, you might want to fill 'em up. Tax-advantaged accounts like these effectively boost whatever returns you get, since you save on taxes. Otherwise, you're taxed twice: the money you invest was taxed when you earned it, and your returns will be taxed, too.

If you've fully maxed out both accounts, you'll lose a percentage of any investment returns to taxes. (If you're in a high tax bracket, you can expect to pay roughly 35% of your gains back in capital gains and dividend taxes.) When you pay down a mortgage, however, the money you save is not taxed.

Grab those calculators! 🤓

If you earn 7% returns and pay a 25% tax rate, your returns are 25% less than 7%, or 5.25%. So if you have a 5% mortgage, the risk is probably not worth the hope of a 0.25% reward - and that's assuming you get 7% returns. If it's less than that, you're not even clearing your 5% mortgage rate after taxes anymore.

If you're in the highest bracket (showoff), the cutoff point gets even lower. If you got those same 7% returns, minus an estimated 35% tax, you're looking at returns of 4.55%. If your mortgage rate isn't well below that, investing starts to make less sense.
Consideration #5: your taste for risk
Which of the following scenarios worry you?

a. Making a call on your cell phone while close to a gas pump

b. Swimming 29 minutes after eating

c. Using a public restroom without one of those crinkly paper toilet covers

If your heart skipped at the thought of any of those things, the market may not be a great space for you. And that's okay! The less comfortable you are with the idea of losing any of your money - and there are a lot more of us feeling that way after the last ten months - the less appeal the markets have. But as the chart above shows, if you are open to risk with the possibility of higher rewards, the market has historically been a strong place to be.

The more risk you take on, the higher your potential for return. Paying down your mortgage has no risk. You know exactly what return you'll get. Investing has higher risk, but it could also earn you a lot more than 5% in the long run.

Now that we've given you the information that's out there, it's time to decide what's best for you. It's also time for ...

Examples!
Couple A
They're nice! They have a house and a dog named Tiff. (The house doesn't have a name.) Now say they are 20 years from retirement. They've just renewed their mortgage and have a 4% fixed rate for the next five years. They have a healthy emergency fund, a high tolerance for risk, and a sizable amount of contribution room in their RRSPs and TFSAs.

The numbers suggest: INVEST!

The table above shows that their odds of being better off investing during the five-year term of their mortgage are 67%. If they're able to renew their mortgage at 4% or better until they retire, that probability jumps to 80-90%. Plus, they're investing in tax-sheltered accounts, so they'll also benefit from tax deductions.
Couple B
Also nice people! But they don't love how much dogs shed, so they've always stuck with fish. (They have a betta fish named Alpha.) They also have a 4% fixed-rate mortgage on their condo, but they're older, closer to retirement, and not as comfortable with risk. They don't have any room in their registered investment accounts, leaving them with the choice of investing in a taxable investment account or paying down the mortgage.

The numbers suggest: PAY IT DOWN!

Because of their risk tolerance and tax situation, this couple would be better off taking the safer approach and paying their mortgage down. Their odds of being better off investing are less certain. On top of that, they'll have to pay about a third of their investment gains to the government.

___________
*all percentages are based on local currencies †- the very technical description: to avoid making any assumption about return distribution, we have adjusted the mean of historical returns to match with our expected gross annual return. We then used the block-bootstraping method to simulate thousands of different return paths for the growth portfolio. Then using these simulated return paths we estimate the probability of the growth portfolio outperforming paying down the fixed mortgage rate.

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The content on this site is produced by Wealthsimple Media Inc. and is for informational purposes only. The content is not intended to be investment advice or any other kind of professional advice. Before taking any action based on this content you should consult a professional. We do not endorse any third parties referenced on this site. When you invest, your money is at risk and it is possible that you may lose some or all of your investment. Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only.

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Is it better to pay down your mortgage or invest?

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With interest rates up and markets... not, a few tips to help you decide where your money will work harder

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Website 4: Focus on your RRSP or Mortgage

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Website 4: Focus on your RRSP or Mortgage

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This website talks about the importance of planning out your budget and what your plan is to see whether to contribute to your RRSP or your Mortgage. Just like most of the other websites, it says that the decisions are all about your financial situation, and what stage of life you're at.

I like this website because it gives a full analysis with real examples of short and long-term goals you're trying to achieve. Comparing the tax savings, debt reduction and return on investments can help show what your priorities should be and what you focusing on making a decision.

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Does it make sense to put some extra cash into an RRSP or use it to help pay off part of a small mortgage?

Ask MoneySense

Which should Canadians prioritize: RRSP or mortgage?

Most of us have debt, and most working adult Canadians will have room in their registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). Some of us have group plans with matching contributions at work as well, just to complicate things. Making sure your cash flow is properly funneled is an important part of financial planning.

You're 2 minutes away from getting the best mortgage rates in Canada Answer a few quick questions to get a personalized rate quote*

You will be leaving MoneySense. Just close the tab to return.

In your case, Linda, I note that you refer to your mortgage as a "small" mortgage. Small can be relative or based on your own perspective. If that feels like a small debt to you, that suggests to me that you're not that "worried" about it. If someone has a modest mortgage relative to their home value, I agree that's less of a reason to focus on debt repayment versus investing. If you had 10% home equity, on the other hand, I'd be more inclined to build a bit of a buffer by paying down debt over investing.

Comparing mortgage interest to investment returns

A quick way to think about debt repayment versus investing is to compare your mortgage rate to your expected rate of return. Say, you have a $100 debt with a 5% interest rate. You'll incur $5 of interest over the coming year. If you had the opportunity to invest that $100, you'd only need to earn $5 or a 5% return to have increased your net worth and be better off, right?

Unfortunately, the math is a bit more difficult than this rudimentary example, Linda. If you earn $5 of income in a non-registered account, it's taxable. If what you earn is in a TFSA, it's tax-free. If you earn it in an RRSP, it's tax-deferred and you have to factor in the tax refund on the contribution and the eventual tax on the withdrawal.

Unless your RRSP or TFSA are maxed out, which I gather they are not, you shouldn't be investing in a non-registered account (unless you have a group plan at work with a company match-always take that free money). I think in your case, your main options are RRSP or TFSA. (Check your RRSP contribution room and TFSA limit.)

Considering the tax implications of investments

With an RRSP contribution of $25,000, you're going to have a big tax deduction. You should consider whether that tax deduction would be more beneficial for you or your spouse, depending on your respective incomes and tax rates. I'd tend to focus RRSP contributions in the name of the higher income spouse.

A large deduction of $25,000 might be best to claim over two years, Linda, depending on your income. In other words, if a $25,000 deduction this year brought you down into a lower tax bracket, it might be advantageous to claim the deduction over two years. In Ontario, for example, if your taxable income is in the $86,000 to $106,000 range, your marginal tax bracket for an RRSP tax deduction could range from 30% to 43%. If you could take the full deduction in a 43% tax bracket, rather than some of it at 31%, you could earn a 12% after-tax return by delaying the deduction. You would still make the contribution, but you don't have to claim an RRSP deduction in the year it's made. You can carry it forward to deduct and reduce your income in a future year.

TFSA vs RRSP

With RRSPs, it's not just as simple as comparing your expected return to your mortgage rate, but suffice to say that over the long run, you can generally earn a lower rate of return than your mortgage rate in an RRSP and still come out ahead. If your tax bracket is high, your risk tolerance for investing is high, your income in retirement is projected to be low or your timeline until return is long, these are factors that would help further reinforce an RRSP contribution over debt repayment.

TFSAs are a bit of a wildcard, because you can invest in a TFSA and then access the money for any variety of reasons-like paying down debt or making an RRSP contribution. A TFSA contribution could allow you to have the best of all worlds, keeping the savings accessible and then choosing debt repayment or RRSP contribution in the future, hopefully with a larger amount of money.

When an RRSP makes more sense than paying off a mortgage

Without knowing all the facts in your situation, Linda, I might be inclined to lean towards an RRSP contribution, due solely to the fact that your mortgage is modest. And a MoneySense reader with a bit of money savvy can probably come out ahead in the long run.

Both options are good ones, it's just a matter of which is "more" good and more good is always a personal decision.

Read more about investing and mortgages:

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Contribute to an RRSP or pay off mortgage?

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Linda has a small mortgage and extra cash. Should she use it to pay off mortgage debt or contribute to her RRSP to bolster retirement savings?

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What did you learn about your topic that surprised you the most?

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What did you learn about your topic that surprised you the most?

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What I was most surprised about learning was how much the state you at in life and your personal goals affect whether your choose to focus on your RRSP or your Mortgage

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Provide a real-life example of how this topic is relevant or interesting for you.

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Provide a real-life example of how this topic is relevant or interesting for you.

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This topic is relevant to me because at my stage of life, I’m starting to think about what goals I should focus on making a priority. Understanding the pros and cons of either the RRSP or paying your mortgage will be super important when I decide to move out.

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If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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I thinkk the most important takeaway is that it’s all a personal choice and you need to understand what stage you're at in your life and which decision will better help you in your future.

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The graph shows how an RRSP with $ 10,000$ can contribute to a higher outcome. It shows the different types of returns you can obtain from various incomes ranging from 3,000$ at 75,00$ up to 4,800 at 200,00$.

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What RRSP facts do physicians need to know?

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What is the RRSP contribution deadline? How do you create contribution room? What are the benefits? Here are things physicians need to know about RRSPs.

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This graph shows how much the interest rate can influence the total cost of paying off the mortgage over time. It shows two lines of interest payments and principal payments and how after 222 months, the monthly payments cost more than the interest payments.

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How mortgage interest rates work | Meridian

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Learn all about what a mortgage interest rate is, how it affects what you pay, and what changes in the market might mean for your rate