TORONTO (CU)_Just a few weeks ago, the Bank of Canada increased its benchmark rate by half a point, its biggest single move in more than two decades. Many experts say the recent rate hike was just the beginning, with potential for larger increases in the near future. While this is good news for long suffering savers, it is not so much for borrowers. Against this backdrop, many homeowners with some additional cash are wondering whether to pay down mortgage debt or save for retirement.
According to Ron Haik, a wealth advisor at Nicola Wealth, for homeowners in a position to choose between these two, the most suitable approach is to maximize your RRSP contributions with the intention of using the tax deduction towards their mortgage. Those who use their full RRSP contribution room enjoy the tax deduction for the contribution, as well as tax-deferred growth on their investments since they are not subject to taxes until you start withdrawing.
This enables you to pay down your non-deductible mortgage debt using the tax refund. If you still have extra cash after maximising your RRSP and paying down your mortgage debt, Haik recommends this extra cash being split between paying down your mortgage further and maximising your contributions towards your Tax-Free Savings Account (TFSA).
Firstly, the homeowner should see if your home loan contract allows a lump-sum payments or double-up payments. In the case of the latter, the payments go toward your principal repayment thereby helping pay down the mortgage faster. “Most will allow you to pay up to 15 per cent or 20 per cent of the mortgage value in any year without a penalty,” Haik said. The wealth advisor also recommends another strategy called the Smith Manoeuvre. This scheme allows homeowners to convert non-deductible mortgage debt into deductible debt, thereby helping them pay down the mortgage while saving for the future.
However, Haik warns that the Smith Maneuver is not for everybody. In order gain the maximum benefit, you should be comfortable with leverage, have some flexibility in your cash flow and have a plan you can rely on when markets are volatile. Here, you will need to separate the payments that you’re making to your mortgage from that which you are making to the investment loan, which means you will also need to be good at record keeping.