To choose between home mortgage repayment or RRSP contribution is not always obvious… Unless you have debt problems, you must choice first to contribute to your RRSP.
Then, you should choose to reduce your debts. But you may consider the choice to repay your home and other debt or to contribute to your RRSP in relation to your comfort zone in regarding debts.
The next point to consider is the nature of your debts. Is interest rate you pay is high? Is the interest is tax deductible? (It is so for a loan used for investment purposes, for example)
The best for you is to repay all your high interest rate debts first. Those debts are not tax deductible. Home could wait after.
Optimize your debts and pay your mortgage loan thereafter
Here is how to optimize your debts. Your first goal is to repay enough high interest rate debts to lower its cost. You can also consolidate your debts through home mortgage refinancing or other means, especially if the interest rate after consolidation is lower.
Once you have reduced your high interest rate debt, you just have to compare the borrowing rate and the expected return to choose to repay your home mortgage loan first or contribute to your RRSP.
If the rate is the same, it is better to contribute to the RRSP because of the compound interest return. The same calculation applies to the repayment of your home mortgage.
If you think to get 8% interest on stock market investment and your mortgage rate is 5%, you are better to choose to invest.
That’s all for this article. If you have any comments or experience to share, please write it right away! You will help a lot of people to get good information and avoid mistakes!
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