A Registered Retirement Savings Plan or more commonly known as an RRSP is a kind of legal trust that is registered under the Canada Revenue Agency. Basically, it lets an individual save money for his retirement.
During RRSP season, Canadians get bombarded with information about getting an RRSP or making a contribution to their RRSP account. While there is nothing wrong with contributing to your RRSP, there might be better ways to use that contribution that will benefit you and your family. One of the best ways to use your contribution is to use it to pay off your mortgage.
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Here’s why you should pay off your mortgage instead of using the money for RRSP:
Making lump sum payments lessen your principal
Your monthly mortgage payments is composed of two parts: the amount that you pay for the principal amount and the amount to cover the interest. In using your RRSP to pay off your mortgage, you can shave off a couple of thousands in interest in the long run. The lesser your principal amount becomes, the lesser interest or number of years to pay you can have.
You could get a lowered monthly amortization amount
When you use your RRSP contribution to pay off your mortgage, you could possibly lower your monthly amortization. This is because the principal amount has already been decreased by your lump sum payment. This allows you to save more and use the extra money on other things such as a vacation or a new car. A lowered monthly amortization also allows you to have a little bit more leeway on your budget. You can go on more frequent family outings or dates with your spouse with the extra cash you will have.
Paying off a higher debt gives you peace of mind
When you use your RRSP contribution to pay off a lump sum out of your mortgage, you become one big step closer to achieving complete payment of your mortgage. This can bring you peace of mind in knowing that your loan amount has just been dramatically decreased. Your peace of mind stems from that feeling that you have chopped off a couple of thousand dollars off your current loan and that you no longer have to scramble every month just to meet that high monthly mortgage.
If you are planning on growing your family
You can benefit from using the RRSP contribution to fund your mortgage – The extra amount that you save each month from the lump sum payment that you paid for using your RRSP contribution could spell thousands in savings in monthly interest. The money that you save each month could go towards funds to having new babies or your current children’s college fund.
Using your RRSP contribution for your mortgage is always a good idea. Consider all these factors before using your money for personal contribution to the RRSP. Think about what your contribution can do for your entire household and not just you. You will have another time in the future to contribute to the RRSP.
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