Posted by: MonsterMortgage.ca
Paying down your mortgage instead of purchasing RRSPs may actually do that for you.
Everyone knows interest rate being earned from GICs, term deposits and government bonds remains low.
Do the math. If you are paying 3-5 per cent on your mortgage but you’re earning 1%, 2% or 3% on your investments then you are effectively destroying wealth. It is the equivalent of constantly buying high and then selling low in the stock market.
Of course, if your investments – RRSPs and the like – are invested aggressively under the hope and expectation that they will earn more than mortgage rate you are paying or current bond yields, then you can justify not paying down your mortgage. After all, borrowing at 5 per cent makes sense if you expect to earn much more.
To calculate the rate of return you can make and deciding whether it makes more sense financially to pay down your mortgage or purchasing RRSPs requires that you understand the following:
• What is your Marginal Tax Rate
• Canada has a graduated tax system (i.e., the more you earn, the more income tax you pay)
• Mortgages in Canada are not tax deductible so that rate you are paying is actually considerably
higher, why? Because it must be paid with “after tax income”
You can really begin to see the effectiveness of this mortgage strategy and how your money can add up in your favour if you apply it to the lifetime of your mortgage.
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