Should you skip the RRSP contribution and pay off your mortgage first?

 

Kira Vermond of Globe and Mail perhaps has the answer: 

The big push is on to convince Canadians to load their extra cash into registered retirement savings plan (RRSP) investments before the Mar. 3 deadline. But though it may seem as though contributing is the only option when it comes time to decide what to do with the money, it’s not.

Many financial planners, accountants and other experts suggest there’s an even better way to work toward a well-heeled retirement down the road: Pay off the mortgage first. And do it as fast as you comfortably can.

Anyone looking at their mortgage today might be wondering, “Why make pre-payments? My mortgage rate is so low, it’s costing me next to nothing to borrow this money.” However, If mortgage rates climb to 5 per cent in the coming years – a definite possibility – and you’re in the 35-per-cent marginal tax bracket, paying off the mortgage faster means you’ll be getting a guaranteed pre-tax rate of return equivalent to 7.69 per cent, says  Cynthia Kett, a chartered professional accountant with Stewart & Kett Financial Advisors Inc., in Toronto.

Miss Kett also answers the following questions:

  • What gives me the tax advantage?
  • Can I afford to take a risk?
  • How much financial flexibility do I need?
  • Does the idea of having a mortgage burning party make me deliriously happy?

Overall, becoming mortgage-free is an emotional relief for many Canadians – and offers more bang for the happiness buck than any bullish market.

The comments section generally agrees: 

Keep2 mentions: Paying off the mortgage is one of the best things you can do. The benefits of no mortgage payments are tax free. Works for us.

Ricardo101 comments: Don't end up house-rich and cash-poor! The best option is to BE ABLE to make payments-or pay down the mortgage- within your control.

Blakdann has a different view: The only thing I see here that is totally missing is fundamental human psychology. People can easily force themselves into making a loan payment. Making a monthly deposit to a savings type account (whether registered or not) is always harder. Most people even though they claim they would not do it, end up frittering that money away.

For the full article visit Globe and Mail

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Jeremy Spilkin

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