Does it make sense to skip your RRSP contribution and instead put more money into your mortgage?
For the risk-shy or for those concentrated on that mortgage-burning party, it may be tempting but local experts don’t advise it.
As many investors begin to pour money into RRSPs before the March 3 deadline, Kerry Auriat, vice-president of National Bank Financial, said it depends on — among other variables — how much of a return you get back from your RRSP investment.
"If you look at it and say ‘I’m in the 50 per cent tax bracket and my mortgage is three per cent,’ that means you’d have to be getting six per cent inside your RRSP in order to break even."
If the RRSP contains low-risk, low-return investments, such as GICs which have around a two per cent return, Auriat said it’s best to pay down the mortgage.
But for the market-oriented investors bringing in double-digit returns from their RRSPs, they’d be losing money by paying down their mortgage, Auriat added.
"Some people have an absolute hatred of debt, so I’ll say to them ‘pay (the mortgage) down,’" he said, "but with interest rates being the lowest since Eisenhower was president (1953-61) and really no impetus that says they’re going to go back up any time soon, I think you have to sit down and do your math.
"To me, it looks like a really easy decision."
Auriat said if you’re a younger person with a real fear of the equity markets or are in a lower tax bracket where you don’t get as much of a tax break on an RRSP contribution, pouring a little more cash into your mortgage may make sense.
"It’s something we do run into, but it’s not hugely common because rates are so low."
Sometimes, he said, people will act against their own economic self-interest because of emotions.
Others, Auriat said, cannot get over the fear of equity markets after the U.S. sub-prime-mortgage-driven crash of 2008 or the devastating market correction in the 1980s.
"That guy, you’re going to have a really hard time convincing that equity markets are a reasonable idea," Auriat said.
"But the performance of equity markets in the last four or five years has been for the most part quite positive and meanwhile interest rates are at historic lows, I think it’s really a good idea to continue to invest in the market and let the mortgage debt stay where it is.
"It’s a far better play — as long as you have a reasonable view of equity markets."
Consumer debt, such as credit cards, which hover around the 20 per cent interest rate mark, is a different story and more common with younger people.
Auriat said it then becomes very easy to say to somebody "do not (invest in) your RRSP, do your consumer debt because the rates are so high, absolutely."
Melody Judson, a branch manager for Westoba Credit Union Ltd., doesn’t agree.
"You should always, always put something away for retirement or a rainy day fund," she said.
"For a lot of people, that’s where they fall, so if something happens and life changes ... they have nothing to fall back on."
She urges her clients to try to put anything into savings — even if it’s $25 a week — and still concentrate on consumer debt.
Even for those who refuse to assume any risk with their money, Judson said she still urges to put money away in a high-interest savings account, something all financial institutes offer.
"But if you’re not going to retire for about 40 years, you’re better off investing in something with a little risk such as a mutual fund."
Judson pointed to other strategies as well to address mortgage concerns.
"One of the things I’ve suggested to many members is to take advantage of they’re carry-forwards," she said.
"When you do take advantage of a carry-forward, we have RRSP loans for a longer amortization that means you get a larger (tax) refund back."
Judson went on to say it may be a good idea to use the larger tax refund towards paying off the mortgage.
"A lot of members are very concerned about their mortgage so if they get that large refund then maybe put into the mortgage, that’s a strategy to use," she said.
"You still do have the RRSP loan, but the payments are really small and a lot of people like to concentrate on their mortgage."
» Brandon Sun