RRSP vs. Mortgage Contribution

Kevin Zakus
Nov 14, 2018
2 min read

RRSP vs. Mortgage Contributions: What’s the Better Move?

You’ve come into an extra $1,200—now what? Should you contribute to your RRSP or put it toward your mortgage? This is one of the most common financial planning questions in Canada, and the answer isn’t always clear-cut. Let’s break down the pros and cons of each option.

Option 1: Mortgage Prepayment

Applying extra money to your mortgage can help you become debt-free faster. In the early years of a mortgage, most of your payments go toward interest, so any additional payment directly reduces the principal. This shortens your amortization period and significantly cuts down interest costs.

Example: A $120,000 mortgage with a 25-year term, plus an extra $1,200 paid annually for five years, could reduce your repayment period by 1 year and 8 months—and save you around $8,000 in interest.

Option 2: RRSP Contribution

Investing the $1,200 annually in your RRSP gives you two advantages:

Tax savings from the contribution
Tax-deferred growth on your investment

With a 5% annual return, your RRSP could grow to $6,962 after five years. If you reinvest the tax refunds—assuming a 22.7% marginal tax rate—you could grow your RRSP to $8,605.

So, What’s the Best Choice?

On paper, if your RRSP earns more than your mortgage interest rate, investing may offer better long-term returns. But unlike mortgage savings, market returns aren’t guaranteed. Your decision should consider your: