Mortgage or RRSP? How to make the most of the extra money

Whether it is better to save for retirement or pay off a mortgage is one of the most asked by homeowners. (Photo: The Canadian Press)

Jennifer Woodfine continues to wonder if she should use her extra money to pay off her mortgage faster or invest it in retirement savings instead.

“The question I often ask myself is, if I set aside $ 10,000 a year for my retirement, but I pay more than $ 10,000 a year as interest on my mortgage, would I better put that $ 10,000 away? on my mortgage to pay it off faster, and then, when the mortgage is paid off, increase my pension contributions significantly? ” explained Jennifer Woodfine.

The 35 -year -old project manager, who lives in Hamilton with his wife and two daughters, has invested his excess money into his Registered Retirement Savings Plan (RRSP). Her husband contributes $ 4,000 a year to an RRSP and she puts $ 6,000 a year through an employee stock sale program. They both picked up the habit at an early age, 15 in the case of Jennifer Woodfine.

“We are always taught to contribute to RRSPs for retirement planning and tax benefits. My employee shares have been improved by 60% (by the employer), so I consider it non-negotiable, “she said. Jennifer Woodfine also puts money into Registered Education Savings Plans (RESPs) for the education of her students. son.

Whether it’s better to save for retirement or pay off a mortgage loan is one of the most asked questions by homeowners with extra money, observes Ron Haik, wealth advisor and director of client relations. at the Nicola Wealth firm in Toronto.

For homeowners who may choose to pay off a mortgage faster or fund a retirement plan, Ron Haik said the first goal should be to maximize their contributions to the RRSP, with intends to use the tax deduction to pay off his mortgage.

By using the entire RRSP contribution room, one takes advantage of the tax deduction for contributions and the tax -deferred growth on one’s investments, as they are not subject to tax until we start earn money from it.

This technique only works if you use the tax refund to pay off your non -deductible mortgage debt. Unlike in the United States, interest paid on mortgage debt for primary residences is generally not tax deductible in Canada.

For those with extra money left over after maximizing their RRSP and paying off their mortgage debt on their repayment, Ron Haik recommends splitting the extra money between paying the extra mortgage and maximizing their contributions to the account. tax-free savings plan (TFSA).

Homeowners should check to see if their mortgage contract allows for lump sum payments or doubling of payments, which contributes to the principal payment to help pay off the mortgage more. fast.

“Most (contracts) allow up to 15% or 20% of the mortgage amount to be paid over a year with no penalty,” he explains.

Smith’s Maneuver

Ron Haik pointed out that there is also another strategy, called the Smith Maneuver, that homeowners can use to help pay off the mortgage while saving for the future.

Smith’s maneuver replaces non -deductible mortgage debt with deductible debt. You first need to repay part of the mortgage, then borrow the amount of capital paid off to be able to invest it. Investments need to exceed the amount of borrowing to generate additional income, which will be used to pay off more mortgage debt, he explains.

This method is not for everyone. To perform the Smith Maneuver, you need to be comfortable with leverage, have a plan that you can stand by when markets are volatile, and have some flexibility in your cash flow, Ron Haik says.

You also need to be good at keeping records, because you need to separate the payments you make on the mortgage loan from the payments you make on the investment loan.

In addition, you should have a plan B in case you decide to move, or if the value of the home should go down. But in general, if a person is investing correctly, he graduated, the portfolio should at least cover the debt.

The advantage of the Smith maneuver is that you can build a large investment portfolio while paying off your mortgage, he argues.

You can pay off your non -deductible mortgage faster, depending on the performance of your portfolio relative to the amount of borrowing.

This acceleration can be significant. This could mean an eight -year reduction in mortgage payments from a standard amortization schedule, depending on yields and interest rates, he says.

However, Ron Haik does not recommend that owners try the Smith maneuver for themselves. He strongly advises to do this technique only with the advice and regular review of a financial advisor.

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