Given the looming RRSP contribution deadline, we have had people asking us whether they should be paying down their mortgage or contributing to their RRSP.....There are several things to consider when making this decision. First, you might want to make that RRSP contribution and then use the tax refund you get as a result to pay down your mortgage-that may give you the best of both worlds. Second, some question why you would want to put much money down on a mortgage given the current lending climate. Let us explain:
Recently both GE and now CMHC have developed 100% financing programs. For some people, this may be a good option, and one which would leave them more money to contribute to their RRSP. For example :
At 95 % financing- the CMHC premium is 2.75%
At 100% financing- the premium is only slightly higher at 3.10%
Using the example of a $250,000 purchase, let's see what that means.
At 95% financing
$250,000 purchase price
5% down payment would be $12,500xml:namespace prefix =" o" ns =" "urn:schemas-microsoft-com:office:office"" />
Premium would be 2.75% or $6531
At 100% financing
$250,000
No downpayment
Premium would be 3.10% or $7750
So………for an insurance premium difference of only $1219, you can save yourself a $12,500 down payment and use that for your RRSP-you get to perhaps maximize your retirement savings and you can still make your home purchase. This seems like a very low cost to save having to put down $12,500.
If the $12,500 is placed in an RRSP, if your refund rate is 40% you should receive $5000 back in tax refund. Then, as mentioned above, you could apply that to your mortgage. So now you have reduced your mortgage amount by $5000 and also put $12,500 into your RRSP.
If you would like information as to how this could work for your particular numbers, please call us and we will assist you....but hurry, the RRSP deadline is looming!
