The question RRSP or Mortgage is really the question of Savings or Debt Payment. This series is from 2006 as you can tell by the dated numbers. There is also no mention of the TFSA or incredibly low interest rates. The low rates since 2009 have really muddied the water in these discussions. Saving is no longer a savings account, and debt is so cheap, people get really confused. Still a good question to start with, even today.
So this scenario is artificial, in how I calculate the payments over the year. I am assuming a single lump payment a year, and throwing your refund directly onto the mortgage principle. No one has a mortgage like this (ok maybe someone does, but I don’t know them), and typically if you are paying monthly or bi-weekly, a lump sum payment of $300 in the middle of the year, may actually be better (depending on how your interest is calculated and compounded).
Just note the data here, and think about it:
| Savings Rate | 1.00% | ||||
| Yearly Input | $1,000 | ||||
| RRSP Return | 5.00% | ||||
| Tax Rate | 30.00% | ||||
| Mortgage Rate | 6.00% | ||||
| Mortgage Balance | $110,000 | Payment | $9,590.30 | ||
| Year | To RRSP | Total RRSP | Refund to Mortgage | Mortgage Balance | Extra Pay Down |
| 1 | $1,000.00 | $1,000.00 | $300.00 | $110,000 | $110,000 |
| 2 | $1,000.00 | $2,050.00 | $300.00 | $107,009.70 | $106,709 |
| 3 | $1,000.00 | $3,152.50 | $300.00 | $103,839.98 | $103,221 |
| 4 | $1,000.00 | $4,310.13 | $300.00 | $100,480.08 | $99,525 |
| 5 | $1,000.00 | $5,525.63 | $300.00 | $96,918.58 | $95,606 |
| 6 | $1,000.00 | $6,801.91 | $300.00 | $93,143.39 | $91,452 |
| 7 | $1,000.00 | $8,142.01 | $300.00 | $89,141.70 | $87,049 |
| 8 | $1,000.00 | $9,549.11 | $300.00 | $84,899.90 | $82,381 |
| 9 | $1,000.00 | $11,026.56 | $300.00 | $80,403.59 | $77,434 |
| 10 | $1,000.00 | $12,577.89 | $300.00 | $75,637.50 | $72,190 |
| 11 | $1,000.00 | $14,206.79 | $300.00 | $70,585.45 | $66,631 |
| 12 | $1,000.00 | $15,917.13 | $300.00 | $65,230.28 | $60,738 |
| 13 | $1,000.00 | $17,712.98 | $300.00 | $59,553.79 | $54,492 |
| 14 | $1,000.00 | $19,598.63 | $300.00 | $53,536.72 | $47,872 |
| 15 | $1,000.00 | $21,578.56 | $300.00 | $47,158.62 | $40,854 |
| 16 | $1,000.00 | $23,657.49 | $300.00 | $40,397.84 | $33,415 |
| 17 | $1,000.00 | $25,840.37 | $300.00 | $33,231.41 | $25,529 |
| 18 | $1,000.00 | $28,132.38 | $300.00 | $25,634.99 | $17,171 |
| 19 | $1,000.00 | $30,539.00 | $300.00 | $17,582.79 | $8,311 |
| 20 | $1,000.00 | $33,065.95 | $300.00 | $9,047.45 | $0.00 |
So what does this tell us? Well if you put your money in your RRSP, and then take the refund you get, and put that on your mortgage, you should shorten your Mortgage by at least 1 year (on a 20 year mortgage), if not more.
The Series
- RRSP or Mortgage? Really the question remains Savings or Debt ?
- Put it in the Bank – maybe not the bank maybe this should read you invest it
- Refund to RRSP as well – Not sure why it was “as well” but putting your refund somewhere instead of blowing it on bottle rockets and moon pies is a good thing.
- Refund to the Mortgage like mentioned, it would be a good thing to put this found money into something useful.
Remember Mortgage is really Debt, and Savings is TFSA, RRSP, RESP or Savings.
