Pay Down Debt or Contribute to RRSPs?

Although we use mortgage, you may use this calculator for any type of loan.

All amounts in yellow input cells can be changed as desired.

Input data into the yellow input fields, tab to the next field. Use the tab key or your mouse to move between input cells.

Amounts are recalculated when you tab out of the cell, click elsewhere, or click "Calculate".

Choose province or territory from drop-down list
Your estimated taxable income per year
Your current mortgage:
Current mortgage balance
Mortgage interest rate
What is the frequency of your mortgage payments?
Is your mortgage compounded monthly or semi-annually? (check your mtg documents)
• Canadian mortgages are normally compounded semi-annually  
Effective annual rate (equivalent rate with annual compounding)
Years left to pay on the mortgage
Number of mortgage payments remaining
Amount of final payment on the mortgage

Extra payments on mortgage or on RRSP:
If you contribute $1,000 to an RRSP and are in a 32% tax bracket, your tax savings is $320, for a net cost to you of $680. If you wish to pay down your debt and have the same after-tax disposable income, you would pay $680. For this reason, we use the before-tax amount for RRSP contributions, and the after-tax amount for mortgage payments.
  Marginal tax rate
  Extra contribution to your RRSP at the time of each mortgage payment
 
  Extra amount to pay on the mortgage (after-tax amount)
  New mortgage payment amount
  Years left to pay on the mortgage with higher payments, rounded to even months
  Number of mortgage payments remaining with higher mortgage payment amount
  Amount of final payment
  Once the mortgage is paid off, contributions are then made to RRSPs for

Calculation of RRSP contribution amounts at revised marginal tax rate once mortgage is paid off early
You will contribute to an RRSP once the mortgage is paid off. This increases your RRSP contributions and may put you into a lower tax bracket with some of the tax savings. The calculator uses the revised tax savings and the after-tax value of the mortgage payment to calculate the RRSP contribution for Case 2 below.
Example, using original marginal tax rate of 32%, and revised marginal tax rate of 25%:
  Before-tax amount required to contribute an after-tax amount of $1,000 at 32% marginal tax rate = $1,000 / (1-.32) = 1,000 / .68 = $1,470.59
  Before-tax amount required to contribute an after-tax amount of $1,000 at 25% marginal tax rate = $1,000 / (1-.25) = 1,000 / .75 = $1,333.33
Your RRSP contribution amount using revised marginal tax rate:
To determine your before-tax contributions after the mortgage is paid off, your marginal tax rate is recalculated based on the increased total annual RRSP contributions. This often results in a lower marginal tax rate. This new marginal tax rate is used to calculate your RRSP contribution amounts in Case 2 of "B" below.
  Your revised marginal tax rate, used to calculate RRSP contributions for Case 2 in "B"
Calculation of monthly RRSP contribution except for the 1st and the last contributions:
  Net cost of each RRSP contribution after tax (same as mortgage payment)
  Add back tax savings with higher RRSP contributions
 
  Amount of 1st contribution, at same time as last mortgage payment
  Amount of last contribution, based on original final mtg pmt + extra pmt
  Average annual contributions to RRSP once mortgage is paid off  

If the average annual contribution exceeds the annual contribution limit (2012 is $22,970, future years are indexed), and you do not have sufficient contribution room carried forward, then this analysis will NOT provide accurate results. This analysis doesn't take into account the fact that an average annual contribution could actually be divided between 2 tax years, which could have quite different results if the amounts are large.

  Input 2 more rates to compare values
RRSP Rate of Return - 1st column is mortgage rate ->
Case 1
  Total contributions  
Less tax savings @ marginal tax rate of
  Net out-of pocket cost  
Add total paid on mortgage  
Total out-of-pocket cost RRSPs + Mortgage  
Value in RRSPs at the end of the original mortgage amortization period
Case 2
Pay the extra amount on the mortgage, and when the mortgage is paid off, contribute the mortgage pmts to your RRSP.
 
 
Less tax savings @ marginal tax rate of  
Net out-of-pocket cost  
Add total paid on mortgage  
Total out-of-pocket cost RRSPs + Mortgage  
Value in RRSPs at the end of the original mortgage amortization period
Case 1 is better (worse) than Case 2 by

The values in RRSPs at the end of original amortization period will be the same for Case 1 and Case 2 if:
• the effective annual rate of the mortgage is the same as the effective annual return on the RRSP, and • the marginal tax rate used for calculating the RRSP payments is the same in both Case 1 and Case 2.

However, the marginal tax rate will sometimes be lower in Case 2 due to the higher RRSP contributions once the mortgage is paid off early. For this reason, the values for Case 1 may be higher than the values for Case 2 even when the effective interest rates are equal.

Tip: Unless your RRSP returns are consistently higher than the rate on your mortgage, it is probably better to pay down your mortgage.

Tax rates used are 2012 rates known as of June 11, 2012.
The above calculations are estimates for planning purposes, and assume constant interest rates throughout the analysis. It is assumed that there are no changes in the tax rates, and no change in the taxpayer's income throughout the analysis.
We cannot guarantee accuracy.


These calculators are for educational purposes only. You should not rely on the results as an indication of your financial needs and we recommend that you seek out your own legal, accounting, tax or professional advice. Any information is neither intended to be, or should be construed to be, investment or legal advice or an endorsement of any particular method of investing.