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Hi everyone,

I currently still owe 59 000$ on my mortgage at 5.2% and if i give it my all i will be done paying it in 2 to 2 1/2 years. My question is, should i put some money into my rrsp or keep paying down my mortgage. I'm in the 32% tax bracket and i would put the rrsp money in a rrsp savings accout or gic.
 

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Pay down the 5.2% mortgage. You will not earn better than that in an RRSP GIC or RRSP savings account. Congrats on being so close to being mortgage-free!
 

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If you are a young I would do both if you are closer to retirement do both.

Basically you need to build 1 brick at a time.
 

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I think it depends on how deep into your amortization you are. Most of the interest on your initial loan has probably already been paid so its not exactly like you'll be getting a 5.2% tax-free return, it'll likely be much less than that.

Like Oldroe, I'd suggest you do both, hedge both decisions - they are both good, and its impossible to know which is better without a crystal ball and knowing market returns.
 

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I would say put some of the money into your mortgage but keep some cash aside too, in case adversity strikes. Even $10K into your 2009 and 2010 TFSA (assuming you haven't already done so) would be a good safety cushion to have, then you could put the rest towards your mortgage, which is costing you 5.2%, quite a bit.

My logic/thinking: If adversity strikes, it would be great if the house is paid but you also need cash (without going into debt) on hand to pay for food, house maintenance, ulitilities, transportation expenses and other life costs.

I suggest this instead of RRSP/GIC simply because 1% seems to be about the best rate of return the average person can count on these days, from those instruments. So the money is more valuable (IMO) as a safety cusion than the little bit of cash you would get in a GIC right now.

Or do you already have a cash rainy day fund?
 

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A common strategy is to:

- max out your RRSP contribution;
- use the tax rebate that you get as a lump-sum toward the mortgage.

This is (generally) the approach that I employ.


K.
 

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I disagree with Sampson completely. He seems to think the principal portion of the mortgage payment will not 'earn you a return'; that it is only the interest portion of the mort. payment that you will 'save'/'earn'. That is just not so. When you pay down debt your 'return' on the cash equals the rate of interest being charged on that debt.

I also disagree with DrV. Discuss in last point. Of course you have to consider any fees for prepaying the debt.
 

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A common strategy is to:

- max out your RRSP contribution;
- use the tax rebate that you get as a lump-sum toward the mortgage.

This is (generally) the approach that I employ.


K.
Ditto here, that's what I do.

In a straight comparison, it's true that you're unlikely to get more than 5.2% anywhere so it would seem like you should just pay off the mortgage. But you have to balance this against the tax advantages of contributing to your RRSP plus the strategic advantage of spreading your eggs among several baskets.

There's a big psychological hit from paying off your mortgage and you'll feel a lot more freedom without that debt hanging over your head. But if you set yourself a goal to have as least as much money in your RRSP as you have in equity in your house, that'll help balance your risks and keep you focused.
 

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When you pay down debt your 'return' on the cash equals the rate of interest being charged on that debt.
How does this square with the fact that when you first start repaying your mortgage, most of your payment goes toward interest, whereas when you're close to finishing your repayments almost all your payment goes toward principal?

If I have one year left on my mortgage, I don't think I'm paying 5.2% on the amount that's remaining. The mortgage was for 5.2% over its lifetime, and most of that interest was paid near the beginning, not spread evenly over every payment.

Isn't that right or am I misunderstanding every mortgage calculator I've seen?
 

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Brad, think of it this way. Let's say you had a simple interest loan of $500,000 at 5% and you pay off $100,000 of principal a year. Basically you'd have:

Year 1: $25,000 interest, $125,000 total payments
Year 2: $20,000 interest, $120,000 total payments
Year 3: $15,000 interest, $115,000 total payments
Year 4: $10,000 interest, $110,000 total payments
Year 5: $5,000 interest, $105,000 total payments

Just like a mortgage, at the beginning a lot more of your payment is interest than principal. In essence, all they've done with the mortgage, is come up with a payment figure so that all 5 years give you identical payments... again, very simplistically, using the above example but making payments of $115,000 each year...

Year 1: $25,000 interest, $115,000 payments, new balance $410,000
Year 2: $20,500 interest, $115,000 payments, new balance $315,500
Year 3: $15,775 interest, $115,000 payments, new balance $216,275
Year 4: $10,800 interest, $115,000 payments, new balance $112,075
Year 5: (fudged to work out since I'm not a mortgage amortization program :)
$2,925 interest, $115,000 payments, new balance $0.

In both cases you're still paying 5% on the outstanding principal, you're just paying less principal in the early years and more in the later to make your total payments the same.
 

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I think it depends on how deep into your amortization you are. Most of the interest on your initial loan has probably already been paid so its not exactly like you'll be getting a 5.2% tax-free return, it'll likely be much less than that.
This doesn't sound right to me either - perhaps you've not written this the way you intended.

The amount of "return" you earn by making an extra lump sum payment has nothing to do with the principle, either original or current.

If you put a lump sum prepayment of $5000 toward your mortgage which carries a 5.2% interest rate, then you earn a "return" of 5.2% in after-tax dollars on that $5000.

This has nothing to do with how deep you are into your amortization. The interest you currently pay for a loan has everything to do with how large it is today, not how large it was yesterday.
 

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Hi all, yeah, I re-read my post and I must have been on glue or something. I'd like to retract the interest/return portion of my statement. :eek:

BUT... I would still like to highlight that I think doing both is a prudent move. It certainly will lead to a sub-optimal return, but at least you hedge the not being in the markets if there are returns greater than your mortgage interest rate.
 

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Stay off the glue - bad for me, bad for you.

BUT... I would still like to highlight that I think doing both is a prudent move.
Doing both is a prudent move, for diversification.

It certainly will lead to a sub-optimal return, but at least you hedge the not being in the markets if there are returns greater than your mortgage interest rate.
Doing one or the other will not certainly lead to sub-optimal return. Rather, doing one or the other may lead to sub-optimal return. Only hindsight says for sure.
 

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The words 'prudent', 'hedge', 'diversification' obscure reality. The OP must realize that the posts recommending you 'do both' are ignoring your stated alternate investment, and presuming:
* that you will put your money into investments.
* that using debt to leverage investments is a good thing.
* that paying down the mortgage is putting all your eggs in one (RE) basket and therefore bad.

You are not doing the first. And I disagree with the next two.
 

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Discussion Starter #17
Thanks for everyone's input but i still don't know what to do,i'm 28 years old, i already got my TFSA max out , i got 11 000 in the stock market 4000 in rrsp, 5000 in a saving account, 2500 in checking account. I got more then 3months of living expense so, i don't know????
 

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My 2 cents

I'm surprised people ask this question so often. The "correct" answer depends how much you value being debt-free vs. increasing your net worth. I'll explain: net worth = assets - liabilities. If you use $1,000 to pay extra on your mortgage (assuming there's no pre-payment penalty) then your debt decreases by $1,000 and your net worth increases by the same amount. If, as Dr Y suggests, you put $1,000 into an RRSP and use the deduction (0.32 X $1,000 = $320) to pay down the mortgage, then your net worth increases by $1,320 rather than $1,000. Therefore, if increasing your net worth is your primary concern then contributing to an RRSP and using the deduction is "best." If being debt-free is more important, then paying down your mortgage is "best."

You say that you can pay down $50K over the next 2 years. I'll assume that you can save ~ $25K per year - a hefty sum. May I suggest that you save as much as possible over 4 years? That way you can still pay your mortgage in 2 years AND have ~ $50K in an RRSP in 4 years.
 

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May I recommend you pay down the mortgage on your residence?

I think this is an awesome idea, I did this myself and my house was paid off by the time I was 30 too :)

Since then I have been ill, switched jobs and careers and started a business. They first step to financial freedom is to eliminate/minimize regular monthly payments.

I lived very well on EI when I was laid off and then when I started my current business. It gives you a lot of options you would not necessarily have if you have to make those payments.

There is a world of difference between wanting to make money and HAVING to make money.
 

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The words 'prudent', 'hedge', 'diversification' obscure reality. The OP must realize that the posts recommending you 'do both' are ignoring your stated alternate investment, and presuming:
* that you will put your money into investments.
* that using debt to leverage investments is a good thing.
* that paying down the mortgage is putting all your eggs in one (RE) basket and therefore bad.

You are not doing the first. And I disagree with the next two.
Good points. Mea culpa - I had been completely ignoring the OP.

The OP states he would invest in RRSP savings account or GIC. As the rate of return in doing so would certainly be less than than the 5.2% return on paying off the mortgage, I would pay off the mortgage.

I don't think using debt to leverage investments is a good thing. In spite of this, I have a mortgage and still put some money into RRSP's. Admittedly, this is a bit of a contradiction.

With respect to diversification: paying off the mortgage, in the complete absence of any other financial assets to act as an emergency fund, would be foolhardy. One doesn't want to be in the position of having to sell the house just to put food on the table. But, in this case, as the OP has a reasonable cash cushion, I'd pay off the mortgage and ignore any concerns about "eggs in one basket".

The OP is 28 years old. Pay off the mortgage, and then start to accumulate other financial assets.

The paragraph above very nearly describes my own plans, so I say what I do!
 
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