Mortgage versus RRSP Calculator

Pay Down Your Mortgage, or Contribute to an RRSP?

Which option is better for a person with a 30% marginal tax rate:

  1. Pay $1,187 per month in mortgage payments to pay off a $100,000 mortgage in 10 years, then continue to pay $1,187 per month into your RRSP for 15 years, and also invest the tax savings in your RRSP, or;

  2. Pay only the required $739 per month on your mortgage, and pay it off over 25 years, and invest the difference of $448 ($1,187 less $739) plus tax savings in an RRSP.

  Mortgage Term(yrs)
@interest
rate 7.5%
# Months Investing
in RRSPs
Monthly Amount
Invested
in RRSPs
Monthly Tax
Savings Invested
in RRSPs
Total in RRSPs at end of 25 Years
at RRSP returns of:
5% 7.5% 10%
1. 10 15 yrs x 12 = 180 $ 1,187 $ 356 $ 399,549 $ 483,608  $ 588,299
2. 25 25 yrs x 12 = 300 $    448 $  134 $ 333,341 $ 474,779 $ 686,887

We’re assuming that you don’t have credit card debt – this should definitely be paid off right away!

mortgage versus RRSPYou are better to pay off your mortgage first if your mortgage interest rate is equal to or higher than the rate of return on your RRSP.  However, if the rate of return on your RRSP is consistently higher than the mortgage interest rate (can you guarantee this?), you would have more money by paying the lower amount on your mortgage, and investing the difference in an RRSP. 

If you pay down the mortgage faster, you have a guaranteed savings. If you have or plan to have children, you should try to ensure that the mortgage on your home will be paid off before your children enter university.  This will free up funds for their education.

In order to get a better rate of return in your RRSP than the interest rate you are paying on your mortgage, you would have to take on riskier investments, which will not have a guaranteed rate of return.  We believe you can make a return of 9% per year on your RRSPs.  See TaxTips.ca Save and Invest webpage for the strategy to achieve this.  See also TaxTips.ca’s RRSP vs Mortgage Calculator.

 

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