Accelerated Mortgage Payments Vs. RRSP/TFSA Investing
In April 2023 we took a poll on our Instagram Account requesting what topic our followers would like us to cover. Poll results saw followers looking to confirm what is better: accelerating mortgage payments or investing in a registered account like an RRSP or TFSA. There are numerous variables and assumptions when analyzing this situation and may vary widely from person-to-person. That said, we have made the following assumptions for the real estate/mortgage:
- Purchase price= Canadian average in March 2023 from the Canadian Real Estate Association (CREA) = $686,371
- 10% down payment
- 25-year amortization
- Mortgage amount after CMHC = $636,884
- 5 year fixed interest rate – 5.10%
- $3,000/year lump sum payments
- Mortgage will be paid off after 22 years and 1 month. The following investment rules are applied for the remainder of the amortization:
o Full amount is invested in a TFSA & RRSP to stay within contribution limits and assuming no contributions during mortgage payoff
o Annual contribution of $47,892 (annual mortgage amount + $3,000)
o 6% rate of return
The following assumptions are used for the investment side of the equation:
- A registered TFSA will be used for this example
- $3,000/year contributions for 25 years
- 6% rate of return/year
For simplicity we assumed that the house value increased at 3% per year in both scenarios. Therefore, the house is valued at $1,437,108 in 25 years. The accelerated payment option also reaps the rewards of paying less interest towards the mortgage. This saves the owner approximately $67,298 in interest over the span of the mortgage.
After all these assumptions... the following results were observed:
Accelerated mortgage payments followed by 3 years of investing = $1,666,023
TFSA investing with standard mortgage payments = $1,611,577
To summarize, a new homeowner in today’s interest rate environment would benefit by making annual lump sum payments on their mortgage slightly (~3%) more than an individual that invests in a registered account the same amount over the span of the mortgage.
There are many moving parts and Construct Your Finances would provide different recommendations depending on each individual’s circumstances. At the end of the day, both scenarios are great options to increase wealth or mitigate risk/liabilities.
If you found this article informative and would like to see what option best suits your situation, please book a complementary appointment today by clicking here or by email patrick@cyfinances.ca.
