Pay off debt, or contribute to your RRSP?
In an article published today, +Jamie Golombek
of the CIBC is quoted as saying that, with interest rates at record lows, and the stock market doing well, you should contribute to your RRSP before paying off debt. His point is that if you have a mortgage at 3%, and are earning more than that on your RRSP, it makes sense to get the tax break and the higher yield on your RRSP, as compared to paying down a low interest rate mortgage.
I don't disagree with that math, but I have two comments:
First, as Mr. Golombek states, you should pay off high interest credit card debt, since it's unlikely that you are earning 20% in your RRSP. I agree.
Second, Mr. Golombek does acknowledge that equity investment carries risk. If you could guarantee that you would make 7% on your investments for the next five years, locking in a mortgage at 3% makes sense. Unfortunately, there are no stock market guarantees.
Markets are at record high levels, and interest rates are at historic lows. Will that continue forever? I suspect not. A not-unusual 10% stock market correction wipes out the investment advantage, so under that scenario paying off debt is the safest, and best, alternative.
My point: before you speculate with borrowed money, consider the risks. Paying down a low interest mortgage may not seem sexy, but if the markets fall we will all wish we could achieve a 3% after tax return, guaranteed, which is what you get when you pay down your mortgage. #debt #mortgage #interestrate