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RRSP Season – Strategies to Reduce Your Mortgage and Boost Your Investments

Did you know that you can use your RRSP to pay your mortgage off sooner and fuel your retirement savings at the same time?

We’ll show you how to maximize your retirement savings by holding a mutual fund in your RRSP and how to use the annual tax refund to shave years off your mortgage loan. Plus, we’ll provide a case study so you can see how an RRSP strategy has helped other clients like yourself reach financial freedom much sooner.

Steps To Pay Down Your Mortgage With An RRSP

February 2022 –  Set Up The Investment Inside The RRSP

  • Speak to your financial advisor about setting up a mutual fund under the RRSP that will allow you to receive at least a 5% return per year.
  • Determine whether you will use your own cash or obtain an RRSP loan.
  • Make the maximum contribution to top up your RRSP amount.

Sweet tip: Using an RRSP loan can help you boost the contribution and obtain a larger refund amount. Simply talk to your accountant about a repayment strategy that will work with your budget while also helping you to get ahead.

April 2022 – File Your Taxes To Obtain The Return

  • Claim the RRSP contribution amount on your tax return to apply for the refund.
  • Receive the tax refund and deposit it into your bank account.

May 2022 – Determine Prepayment Privileges And Use The Refund

  • Check your mortgage commitment letter or lender portal for the prepayment privileges. 
  • If you are permitted to pay up to 15% or 20% of your original amount borrowed without paying a prepayment charge, consider applying the refund directly to your mortgage. This will go directly to the principal and you’ll save the interest that would have otherwise been charged on that amount. 

Sweet tip: Need help? A Pineapple Mortgage Broker can assist you in determining your prepayment privileges and help you move to a new lender if your current options limit your ability to make partial payments.

A Strategy To Grow Your Retirement Savings Fast

February 2023 – Contribute Again To Build Wealth Fast

In 10 years’ time, that initial RRSP investment would have made a five-percent return each year. If you had contributed $10,000 in 2022, the return on this amount would be approximately $6,288 by 2032. A nice bump but not enough to fuel your retirement. 

To maximize your returns follow these steps:

  • Meet with your accountant to figure out how much you can contribute each year and crunch the numbers to determine the total by the time you retire.
    For example: If you can start contributing $10,000 per year into this same RRSP making a 5% return, in 10 years your projected savings would be $132,000 (without factoring in inflation and taxes).
  • Once you get the tax refund each year from the RRSP contribution, put this back into your RRSP for compounding returns or put it directly to your mortgage to pay it down even further.
  • If you’re in a tax bracket of 43% for example, you would receive $4300 per year that you could further reinvest into your RRSP.  This would bump your annual contribution to $14,300 per year with a 5% return, totalling $181,853 in only 10 years. 

Sweet tip: Consider dividing your refund in half using part of it to pay down your mortgage and the rest going to your RRSP. In the above example, if you were to reinvest half the tax return instead of the full amount and put the other half to your mortgage principal, you would pay down your mortgage faster and still be left with $156,960 in your RRSP. 

Use these handy tools to do some of your own calculations –

https://www.fidelity.ca/fidca/en/growthcalculator

https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx

Case Study - See It In Action

Dave is self-employed and does not have a pension. He is looking to fund his retirement by using an investment play. He is also worried that his remaining mortgage balance of $150,000 will impact his retirement plans. 

He recently read an email from Pineapple explaining how he can use an RRSP to boost his savings and pay down his mortgage, so he decided to call a Pineapple Mortgage Broker to find out how. 

Using Prepayment Privileges To Your Advantage

After speaking with his Broker, Dave set up a meeting with his accountant to review his RRSP account and available contribution room. 

He was surprised to learn that if he made some minor adjustments to his spending habits he could put away $1000 per month and contribute $12,000 per year into his RRSP, providing him with a tax return of approximately $6,000 based on his tax bracket. 

His accountant also realized that his RRSP wasn’t making him any money because it did not contain an investment vehicle like a mutual fund. So Dave’s accountant helps set one up that will return an average of 6% per year. Because he already had $10,000 sitting in his regular savings account, his accountant was able to move this money into his new RRSP – giving Dave a head start.

He soon returned to his Pineapple Broker to find out just how much money he can use to pay down his mortgage and discovered that his prepayment privileges would allow him to make a lump sum of 20% of the original amount each year. 

After crunching some numbers, Daves Broker explained how he could apply the full $6,000 tax refund directly to his mortgage payment saving him $4,877.85 in interest and reducing his mortgage by 16 months. There was already light at the end of the tunnel!

Annual Contributions To Reach Financial Freedom Sooner

Come April, Dave decided to meet with his accountant again to discuss more strategies. 

He learned that if he continued to make lump sum payments from his tax refund, in 10 years he would have saved $27,365.01 in interest and paid off his mortgage 151 months sooner than if he had the same mortgage with no prepayment made. 

The accountant also showed Dave that if he continued to invest $12,000 per year into his RRSP making a 6% return per year, in 10 years he would have $164,078 in his RRSP (not including inflation or taxes). 

Dave is elated, he is far more ahead than he would have been if he had used another type of investment instrument and he’s also well on his way to retirement debt-free.

Ready To Get Started?

A Pineapple Mortgage Broker can help you put an RRSP strategy in place that will pay down your mortgage sooner and have you financially free before retirement.

Let’s get started. Contact us today!

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