Extra Mortgage Payment Vs RRSP in Canada - Deep Dive

0:06 buy rsps or pay down your mortgage faster what to do this is a question that I've been getting a lot lately and and it's an important one uh given the relatively higher interest rates we're seeing uh interest costs are going up there's a lot of uh political and economic uncertainty right now and so it makes a lot of sense you know um thousands of dollars are at stake what do I do uh so in this video we're going to take a deeper dive into into uh this question and and try to try to help you determine your best answer we're going to look at the numbers we're going to look at some charts and calculations and schedules but we're Al we're also going to go beyond the numbers um is it's not just about every last penny um there's

0:53 there are some uh there's some other factors involved that we're going to talk about um long story short we're going to see that you know most of the time it actually does make sense to buy rsps you're going to be financially further ahead um in in most cases but but not every case so um we're going to look into why this is the case and and you know who should who should be buying rrsps maybe and who should lean towards paying off their mortgage faster and so um that said let's jump into the uh let's jump into the uh presentation here and I hope you enjoy uh feel free to ask any question questions in the uh in the comments area better yet uh visit our website or uh or or follow me on on Twitter or X and uh we can continue the

1:40 conversation thanks so much so let's start off by talking about the advantages of making extra mortgage payments so the first point is that when you make an extra mortgage payment 100% of that extra payment or prepayment goes directly towards the mortgage principle and so it's interest you don't have to pay if your interest rate is in the low 4% range whether it's 419 429 439 that's absolutely a higher rate than the best GIC rates those are guaranteed investment rates that you can find um you know through a bank or a financial institution so by paying down your

2:27 mortgage faster you're foro that higher interest rate which which puts you further ahead than uh the GIC rates um and it does so in an after tax way deleveraging high interest costs what does that mean essentially what it means is that at the beginning of your mortgage most of the payment is going towards interest costs um the payment's also very high it's it's it's for many a big portion of their income and so I mean if if we're comparing you know $300 or $500 a month to an RSP with you know ,700 or $22,000 of Interest cost we want

3:13 to get that cost under control so by repaying the mortgage Faster by making those extra payments near the beginning of the mortgage we can get that payment under control then as we move in to um the the the more the middle of the mortgage or towards the end of the mortgage more of more of our every payments going towards principal so that's essentially forced savings not as much towards interest even though it's it's you know the same rate and so getting to that point of of making a huge interest component of the payment to a huge principal component of the payment is important and again we have to look at the size of this cost relative to how much we're considering putting into r rsps

4:03 mortgages take a long time to pay off for most people um and and there's a a high percentage of income for for a lot of this time for many however um for those last few payments once we get to this part of the mortgage where there's you know 5 years left or three years left or three months left it it starts to get really exciting because once the mortgage is paid off you've got zero mortgage mortgage payments it goes from maybe 3,000 or 2,000 per month to zero just o literally overnight and so you know that is a big lifestyle change it gives a lot of freedoms very suddenly um and and so it's a lot of work to get there but once you get there it it can

4:50 be very rewarding create a lot of freedoms and flexibilities in life um and and this goes beyond just the numbers and this brings us to our final main point here about the benefits and advantages of repaying the mortgage faster and that's Financial Freedom um and and and mortgage Freedom more specifically um the feeling of of having their mortgage paid off um I've heard um unfortunately not me as of yet but I've heard that you know it's it's you know highly rewarding for many it's it's a very personal uh goal to achieve to be lender free and interest free on their home and again um it's an emotional thing it might not be uh you know it

5:36 might have not involved uh Computing every last dollar uh mortgage versus RSP but it but it's absolutely a real uh goal and and for maybe uh a few thousand dollar difference potentially um between the RSP you can get a lot of satisfaction and a lot of of of you know mental benefit by having that mortgage paid off let's move on to the advantages of buying rsps tax-free savings and higher returns I guess I I clumped a couple of them in there but they're both very related so so when you buy an RSP that that savings is allowed to grow tax-free it it it's compound growth on a tax-free basis

6:21 you're not paying income tax on that money invested so because you might save or or get a tax refund of of ,000 or 5,000 or $10,000 in a year and you can invest that money um this over you know 5 10 20 years or longer has a major effect on growing your investment that's held within the RSP now a tfsa is actually more similar it behaves more similarly to um how repaying a mortgage faster would and that's because when you repay a mortgage you're actually repaying it faster with with income you've already paid taxes on you're not going to get uh a tax refund

7:07 when you buy a tfsa and you're not going to get a tax refund when you buy when you repay your mortgage faster however the gains still happen and and and with a tfsa you don't have to pay the um the taxes on the growth of that income um and whereas you would with an RSP when you cash it out you have have to pay income tax Now with an RSP just to focus in on the point a little more if your marginal tax rate or if your highest tax bracket is let's just say for example 10% higher during your working years than in your than in your um retirement years this is a huge benefit you're actually saving the

7:54 equivalent of 10% in this picture um in this example so so really um that's a huge benefit if the proper tax planning is done um with the RSP to to help ensure that there's a plan for these tax savings um in addition to this there's there's higher growth with rsps potentially a lot of people love the idea of guaranteed returns and and you know that you get with the mortgage when you're not paying that 4% or 4.5% interest that's a guaranteed uh savings uh which can also be seen as a guaranteed return so when we're saying oh there's a 6% uh uh return on investment in an RSP or a 7% we're we're

8:42 estimating we're projecting and that's what financial planners do that that should happen that absolutely you know should be the case but it's not guaranteed so um you know the the benefit is higher potential returns you just have to be comfortable with that risk there could be Market fluctuations you could see the markets drop by 20% and not come back for 10 years and then Skyrocket you need to be comfortable with that and if you're not um you know maybe uh you're leaning more towards the the um morgage repayment with with that guaranteed return when we go on to a mortgage versus RSP calculator you can find

9:29 several of these on the internet um this one here is from Razer plan you can just Google that um and we do the calculations they're pretty good calculations um and and they most often will project that um an RSP will um you'll make more returns you'll have a better outcome by buying the RSP than investing money into the mortgage and and a lot of this has to do with with the compound growth of the RSP and and also just starting to save more now uh than later um in in a tax efficient way um even if we use um the the same interest rate um as like the as the

10:16 mortgage payment would be um there would be uh tax savings there and and so instead of looking at the RSP as as you know an investment I I would look at it in this case more as a is a tax efficient vehicle that again if the planning if the financial planning is done properly it affords more opportunity to um to get ahead by Saving on income taxes and so uh you know this other calculator here is is tax tips.car you to kind of uh play around with some scenarios here it takes a few minutes to get into but at the end of the day if we look at the cold calculations if you look at the Hard

11:02 some of the hard numbers given enough time um in in many cases um the the RSP does come out ahead um and and this this is probably the most significant um realization in the RSP versus mortgage payment uh conversation debate is the tax savings that you get so what do we make of all this we've seen some pretty good arguments for both the RSP and paying off the mortgage faster let's take a dive into uh some more uh practical situations to help determine which could be right for you all right so you could look at paying down the mortgage faster if you're more risk averse you don't like Risk you're uncomfortable with it and um

11:48 you don't want any swings in the financial markets it's just you lose sleep over it if you're closer to the beginning of the mortgage with a significant payment you've got 1 two $3,000 per month going towards interest well in a situation like that it can help um to to get to make some Headway on the mortgage before really tackling rsps get more of that mortgage payment going towards principal before focusing on growth um if you love the idea of of being mortgage free I've got lots of friends like this who just just want to get the mortgage paid off they get a tremendous emotional value emotional benefit out of it and um and and maybe have some some pension maybe you you've got a government pension or or you've

12:34 got a workplace pension or or both and this is going to take care of you you it's already actually taken some of your rssp room potentially and so um you want to retire with that pension but no mortgage payment well get the mortgage paid off and and this will help out and so it can make more sense to contribute uh to the RSP or make additional RSP uh contributions if if you're a little more risk tolerant it doesn't have to be a lot super high risk but if you're okay with seeing some fluctuation in the markets you could um you know you're likely to see um you know a a reasonable return maybe six or 7% over time that's a fairly balanced

13:22 approach balanced aggressive maybe to get to 7% um if you're in a higher marginal tax bracket as we discussed you know the RSP is really a it's a tax planning uh tool that's where you get more guarantee out of an RSP is that it will it it will help you lower your tax rate it just takes planning to make sure that um you're going to benefit there's no point in paying uh you know a higher tax rate later on if um you know you're in a lower tax rate today it's not going to help so uh the potential is there certainly with the r RSP um and if you plan on selling uh a larger home if you got a you know a four or five bedroom home um and and you know you want to

14:09 sell and get a two-bedroom home or or condo or something in retirement well you may not need to stress too much about paying off that mortgage if you're going to sell your home and pay off the mortgage anyway and maybe you still have a few hundred, left over um and so in that case it might make more sense to contribute more to the rrsp make sure you have a comfortable lifestyle and retirement even after downgrading uh your home and and selling it maybe for um a profit get rid of that mortgage so hopefully that helps that brings us to the end of of this uh uh YouTube video of this discussion um maybe it's just the start for you maybe it's just the start of of you know

14:55 further discussion I I suggest reaching out to a a good financial planner to take you through the tax exercises and and really work with you um you know to to see which might be right for you based on your own situation and your your big picture long-term Financial strategy that's always going to be your best bet you know I'm happy to do that here at altrua Financial I am a certified financial planner or um you know there there are many other good ones out there uh maybe you're already working with a great one so either way thanks so much for watching uh don't forget to like And subscribe and I look forward to chatting in the next one take care [Music]