Mortgage vs RRSP: Where Should Your Lump Sum Go?
So, you’ve got a chunk of cash—maybe a bonus, some savings, or an inheritance—and you’re wondering:
Should I throw it at my mortgage or beef up my RRSP?
It’s a classic Canadian money dilemma. And while it’s tempting to look for a one-size-fits-all answer, the truth is… it depends. Let’s break it down.
First Things First: High-Interest Debt
Before you even think about mortgage vs RRSP, check if you have any high-interest debt (like credit cards or payday loans).
Rule of thumb: Always pay off the highest interest debt first. Why? Because the interest you’re paying there is likely way higher than any mortgage savings, and maybe even higher than what you can reasonably expect to earn on a stock portfolio.
Why This Isn’t Just About Math
Sure, you could crunch the numbers to see which option maximizes your future net worth. But here’s the catch: those calculations rely on assumptions investment returns, future mortgage rates, tax brackets—that are basically educated guesses.
Instead of obsessing over perfect predictions, let’s look at the big picture and what matters most to you.
Option 1: Pay Down Your Mortgage
You use the entire lump sum to reduce your mortgage balance.
This shortens your amortization period. For example, if you had 20 years left, you might shave it down to 18.
Once the mortgage is gone, you redirect those monthly payments into your RRSP. That money then grows tax-free.
Pros:
Guaranteed “return” equal to your mortgage interest rate.
Peace of mind—less debt feels good.
Cons:
Less liquidity. Your money is locked into your home.
You miss out on potential investment growth during those extra years.
Option 2: Contribute to Your RRSP
You put the lump sum into your RRSP, where it grows tax-free.
Bonus: RRSP contributions usually trigger a tax refund. If you use that refund to pay down your mortgage, you get a hybrid benefit.
Pros:
Immediate tax savings.
Potential for higher returns if your investments outperform your mortgage rate.
Cons:
Market volatility—returns aren’t guaranteed.
You can lose money, particularly in the short-term
Key Considerations
Prepayment Privileges: Can you even make extra mortgage payments without penalties? Check your lender’s rules.
Fees & Penalties: Some mortgages charge for lump-sum payments. Factor that in.
RRSP Room: If you’re maxed out, this option isn’t on the table.
Risk Tolerance: Investments, especially those heavy in stocks, can have large swings while mortgage interest rates are more stable and predictable.
So… Which Is Better?
There’s no universal winner. It’s about your priorities:
Want guaranteed savings and less debt? Mortgage.
Comfortable with market risk and want tax perks? RRSP.
Bottom line: Both choices can work. As is often the case, the best decision is not just about math. It's one that aligns with your financial goals, risk tolerance, and lifestyle.