RRSP vs. Mortgage

By Mike Howe

RazorPlan’s RRSP vs. Mortgage calculator lets advisors compare investing a lump-sum in an RRSP today versus paying down a mortgage and investing future mortgage savings into an RRSP. The calculator outlines which strategy produces the larger RRSP balance at retirement and may warrant further consideration.

Let’s look at an example of how this calculator works by helping a client with the decision on whether to invest $20,000 into their RRSP or pay down their mortgage. The details needed to perform this analysis are the following:

Current Age: 40
Planned Retirement Age: 65
Marginal Tax Rate: 36%
RRSP Contribution: $20,000
RRSP Rate of Return: 6.00%
Mortgage Balance Owning: $300,000
Mortgage Interest Rate: 3.95%
Mortgage Monthly Payment: $2,000

Based on this information, the RRSP vs. Mortgage calculator determines that the $20,000 RRSP contribution is equivalent to a $12,800 lump sum mortgage payment. This lump sum payment results in $24,620 of mortgage savings and reduces the amortization by 1.02 years. If the client decides to pay down the mortgage and then invest the mortgage payments into an RRSP they will accumulate $62,325 in the RRSP by the planned retirement age.

In comparison if the $20,000 is invested directly into the RRSP first and then when the mortgage is paid off the $2,000 monthly payments are added to the RRSP the client will accumulate $85,837. By depositing the $20,000 into the RRSP first, this client’s RRSP at retirement is $23,513 higher compared to depositing the after-tax equivalent to the mortgage first.

Advisors should use this calculator when they want to determine the best course of action for their clients who are considering if they should pay down their mortgage or make a deposit to their RRSP.

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