John Jordan, CFP...providing Specialized Financial Planning Solutions

Mortgage Advice - Tip #4

How to combine your mortgage with an RRSP and RESP

RRSP - Put your tax refund to work on your mortgage

Instead of debating whether or not to contribute to an RRSP or pay down your mortgage, why not do both? For most Canadians, contributing to an RRSP is one of the only routes that they can take to lower their annual tax bill. Let’s say that for every $100 that you place in an RRSP you can save roughly $30 in taxes. Let’s assume that your mortgage interest rate is 7%. If you were to use this $100 to pre-pay your mortgage, it would take you roughly 4.29 years to achieve the same amount of savings.

Staying with this example, let’s assume that you’ve contributed $100 per month for an entire year. After the year is over, you would then take your 30% tax savings (12 x $100 x 30% = $360.00), and use that amount to prepay your mortgage by using part of the prepayment privilege cited in Tip #2. This way, you can combine both interest and tax savings!

RESP - Invest your rate discount in your child’s education

Rising tuition rates for post-secondary education have caused many parents to worry about their ability to help their children achieve a higher level of education in the future. Here’s an easy way to think about saving for your child’s education while paying for your mortgage. Let’s assume that you’ve taken out a 5-year mortgage for $120,000.00 with a 25-year amortization period. The posted rate for that mortgage when you borrowed the money was 7%, but you were able to negotiate a lower rate of 6%. By negotiating this lower rate, you are able to lower your monthly mortgage payment by $73.20 per month. Instead of these savings finding their way into your discretionary spending, set up an RESP with a monthly pre-authorized investment for the exact amount that you will be saving in interest.


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