Today’s Big Q: RRSP or Mortgage Contribution?

So you’ve found yourself in possession of a lump sum of money, and now you’re trying to figure out where to invest it—your RRSP, or your mortgage? Conventional wisdom often states that home owners should devote as much liquid as they can towards paying off their mortgage. But before you run to the bank just yet, there are some considerations worth paying attention to.

Much of this decision will reflect the realities of your specific tax bracket. Particularly if your annual income has seen a change, it is best to speak with a financial advisor or an accountant who can steer you in the right direction. Today most mortgages in Canada offer a pre-payment privilege, which allows you to contribute a lump sum amount to reduce your mortgage and, in turn, your amortization. But with rates at an unprecedented low, it’s important to decipher whether or not this is the best use of your money. If your return on an investment will be higher than the percentage of your mortgage, then it’s safe to say your money would be better off being invested. If you contribute to RRSPs and save money in your taxes, the savings will outweigh the interest savings on your mortgage.

Many people are surprised to find out that contributing to their mortgage with a lump sum does not guarantee to reduce their payments. Another potential downfall exists for individuals without a line of credit. In these circumstances, putting the lump sum towards the mortgage means that the amount you pay won’t be available later on in case of an emergency, or other unexpected expenses.

Exercising caution when investing a lump sum is key in getting the most out of your money. Holding off on the desire to pay your mortgage and instead investing in a TFSA or RRSP will often provide a higher return and, in the end, greater financial security.

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