think one thing no one is mentioning is mindset and budgeting. So let’s say you decide you’re young and are just going to forget about RRSPs for now and just do mortgage. Chances are you will just look at a bigger down payment and decide you can spend that much more on a house. Now you’re still paying the same amount of interest and as another said you have no fallback. I think it’s much better to contribute to retirement as much as you can, and it is far, far better to underestimate how much debt you can handle than to overestimate. What’s wrong with maxing out that RRSP and just starting with a condo for 250k instead of starting with a 400K+? After you nearly have it paid off you can upgrade and you have your interest savings instead of starting with that 400k and paying that throughout the life of the mortgage. Or if you are comfortable enough financially you can buy a 2nd home, use the condo as a rental and shift a much mortage to it as possible, thereby having a lot of mortage that is tax deductible as well as your tax returns on RRSPs. Best of both worlds. Of course I understand not everyone is in that position.

Most people have a mortgage they are carrying and in servicing that debt they will pay a small fortune before finally owning their home.

Meanwhile they are being encouraged to put money into an RRSP – and even to borrow to do so – where nobody but their financial institution will make use of it until they are forced to withdraw it at which time it will be 100% taxable.

Yes, they will likely be withdrawing it at a time when their income is lower than when they were making the contributions, but it is not “free” when it comes out because they will still be in a tax bracket and they will still pay tax.

Mortgage is a lousy form of debt because unlike in the US it doesn’t provide for any tax advantages on a principal residence.

Contrast that with debt incurred in borrowing for investment purposes – fully tax deductible.

So it is really a no-brainer – you should be putting every dime you can find towards your mortgage and borrowing back the equity for investing outside of an RRSP where the interest will be tax deductible.

The mortgage will be paid off rapidly and you will have a huge investment portfolio and the interest on the borrowed money to acquire it is fully tax deductible. You keep that loan and continue deducting the interest even after you have paid off your mortgage.

Then you start taking that same amount of money you were putting towards your mortgage into your non-RRSP investment portfolio and focus on dividend and other tax-friendly income generation and the proceeds from that are yours – 100% to do as you wish.

So many people have spent so much time trying to sound like the wealthy barber that they haven’t seen the forest for the trees. RRSPs are for suckers. The bank loves them. The bank loves mortgages even more.

What the bank loves is not what is good for you. Think about it.

Loki: 2 things – 1 – I think Rob? might have pointed out that you can contribute now and then use the contribution for tax purposes later on when you feel it’s more appropriate. 2 – if you contribute too much in one year then you can reduce your marginal tax rate and won’t get as much benefit. It’s best to research the various tax brackets and make sure that you stay in a high one when you make contributions. I think it’s better to spread out the ‘catch-up’ contributions rather than do it all in one year.

mike says – “I’d like to add one thing to the debate: Another thing to consider about the rsp vs mortgage debate is risk. If a young couple for example has a large mortgage and a small rsp I would say they face a lot more risk from the mortgage than from the lack of an rsp. Interest rates could go up, one person could lose a job, babies start appearing etc. I would suggest they should concentrate more on the mortgage until it gets to a less risky level. At that point they can reasses and maybe start or increase their rsp contributions. ”

*****

I say…
‘higher mortgage PLUS higher RSP’ = less risky
‘lower mortgage PLUS lower RSP’ = more risky

To have a $200K mortgage and a $100K in RSPs (net worth = negative $100K) is far safer, than owing the bank $100K (same negative $100K net worth) and having little else to fall back on.

I feel too many people underestimate the importance of having options and control when things go badly. RSPs give you options and control in that should you get into financial trouble due to job loss, sickness, etc, you can always withdraw from RSPs to cover the mortgage payments until you get back on your feet. If you don’t have RSPs to fall back on, you may not be able to make your payments. The bank can get cruel when they feel their money is at risk – that is not what you need when you’re down.

Again, I feel Mike’s points about risk are sound, however just wanted to add that perspective.

On the topic of RRSP contribution room – I have a large amount of contribution room, wondering if it’s best to let it build up to when I am making more money and then catch up with a $50,000k contribution or is it better to contribute little by little every year.

You can try this calculator from the Stingy Investor website, but it only goes back to 1970.

Link