Invest in RRSP’s or pay down your mortgage? Which one is better for you?

Editor User • February 14, 2019

The decision may not be as hard as you may think. A balanced approach to both investing and debt reduction may provide you with the best
results.

The investing world uses dollar-cost averaging. In the mortgage world we use mortgage payment optimization to achieve the same effect. Reach out to me, and we can automate additional principal payments to your mortgage and knock years off your amortization, Which will save you thousands of dollars in interest.

RRSP season is here. Should you be contributing?

(Special) – The banks are very busy these days with Canadians lining up to make their annual Registered Retirement Savings Plan (RRSP) contributions. While contributing to your RRSP for retirement generally is a good idea it may not necessarily the best option for everyone in all circumstances.

Many Canadians at this time of year may be facing some difficult financial decisions, such a choosing between coming up with a lump sum of money to contribute to their RRSP or paying down the mortgage and/or contributing to a Tax Free Savings Account (TFSA).

One of the difficulties many Canadians have is coming up with a lump sum of money at one time to put in their RRSP. That’s why many advisers suggest people set up a system of making regular automatic contributions to their RRSP, or other retirement savings vehicles like a TFSA.

Automatic saving allows you to benefit from dollar cost averaging. This is an investment strategy of buying regular amounts of mutual funds or other investments every month or week, limiting exposure to market volatility and allowing investors to purchase more when markets are down and less when markets are up.

Financial experts would probably agree that paying down mortgage debt is a good idea, but realistically people should take a balanced approach and save for their retirement as well.

Scott Evans, an adviser with BlueShore Financial in Vancouver, says interest rates are an important factor in the decision whether to pay down the mortgage or contribute to your RRSP.

The Bank of Canada is slowing down rate increases and if you expect a higher rate of growth from investments than the rate of interest you are paying on your mortgage, then you may want to put more in your RRSP and less toward your mortgage.

“It’s not only about your objectives but your risk tolerance level and the rates you are paying,” Evans says. “It’s all about what you are comfortable with and what’s going to let you sleep at night.”

The RRSP and the TFSA both are effective financial savings tools and strategies but they serve different purposes and have different tax treatments, which can determine which one is right for you.

In general, your marginal tax rate — tax on income including government-tested income such as Old Age Security — will determine whether it’s better to invest in an RRSP or a TFSA.

If you expect that your tax rate will be lower when you retire than it is today, then an RRSP is probably best but if you expect to be in a higher tax bracket when you retire than you are now, the TFSA is probably the best option.

The reason is that contributions and earnings accrued in your RRSP are not taxed until they are withdrawn, which usually is not until retirement, at which time you probably will be in a lower tax bracket than you were in your working years.

Age also is a consideration.

Younger people these days generally are using a TFSA to save money because their incomes are often too low to take advantage of the tax deductions of contributing to an RRSP. As their careers develop and their incomes increase, they then can begin contributing to their RRSPs.

Focusing on saving and paying down debt at the same time may seem contradictory but a financial professional can help you find the balance that is right for you.

“Make sure you have and use the correct savings vehicles and your investments and financial strategies match your goals and tolerance to risk,” Evans advises. “It’s all about what you’re comfortable with.”

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Talbot Boggs , The Canadian Press

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A Guide to the Cascade Mortgage Strategy

By Matt Robinson • March 7, 2025

In a declining interest rate environment , smart homeowners aren’t waiting for their mortgage renewal to take action—they’re locking in savings now. The Cascade Mortgage Strategy is a tactical approach that lets you progressively lower your borrowing costs while protecting against future rate hikes. Instead of sitting on a fixed rate for an entire term, you prepay portions of your mortgage and reset them at lower rates as they become available. This setup provides a practical framework for implementing the Cascade Mortgage Strategy, allowing you to make strategic prepayments while maintaining a sufficient buffer for emergencies and other financial needs. Here's how it works. For the sake of this illustration, let's assume you own a property valued at $1,000,000. You require a mortgage of $500,000. We set up a home equity line of credit (HELOC) on top of this for $150,000. Property Value: $1,000,000 Mortgage Amount: $500,000 HELOC Limit: $150,000 Annual Prepayment Privileges: 20% of the original mortgage balance annually ($100,000) Initial Setup: Work with us to secure a $500,000 mortgage on your $1,000,000 property, ensuring you have a $150,000 HELOC in place. This gives you a $650,000 overall credit limit. We must ensure the lender offers flexible prepayment privileges, allows for multiple mortgage components, and provides the option to re-amortize your mortgage after each prepayment. Step-by-Step Process: At the end of the first year, use the HELOC to make a 20% ($100,000) prepayment on your mortgage, reducing your balance from $500,000 to $400,000. Immediately reset the $100,000 HELOC balance into a new mortgage component, ideally at a lower interest rate than your original mortgage. Rinse and repeat annually. After each prepayment, you have the option to either reduce your monthly payments or maintain them at the original level. If you choose to reduce the payments, this will improve your cash flow each month. Alternatively, by keeping your payments consistent, you'll accelerate the reduction of your principal, allowing you to pay off your mortgage more quickly. Interest Rate Decline with Each Prepayment This strategy obviously works best in a declining interest rate environment. However, even in a relatively stable interest rate environment, the strategy still offers benefits by improving cash flow and accelerating principal repayment. Each year, after making the prepayment, the homeowner resets the $100,000 HELOC balance into a new mortgage component with a lower interest rate. The decline in interest rates is attributed to both market conditions and the shorter terms selected for the new components. End of Year 1 - The new 4-year term rate is 4.25%, a 0.75% decrease from the original 5% rate. End of Year 2 - The new 3-year term rate is 3.50%, another 0.75% decrease from the Year 1 rate. End of Year 3 - The new 2-year term rate is 3.25%, a 0.25% decrease from the Year 2 rate. End of Year 4 - The new 1-year term rate is 3.00%, a 0.25% decrease from the Year 3 rate. These declines reflect both a general reduction in market rates and the typical savings associated with selecting shorter-term mortgages at each interval. The Results To truly appreciate the benefits of the Cascade Strategy, it's important first to understand what happens when this strategy is NOT employed. In a typical mortgage scenario, a homeowner with a $500,000 mortgage at a 5% interest rate, amortized over 30 years, would make consistent monthly payments over the term of the mortgage. After five years, the numbers look like this: Total Payments Made: $160,107.00 Total Interest Paid: $118,915.80 Principal Paid: $41,191.20 Outstanding Balance (end of term): $458,808.80 In this scenario, a significant portion of the homeowner's payments goes toward interest, with relatively modest progress in reducing the principal balance. Now, let's consider the same homeowner, but this time, they implement the Cascade Strategy. By the end of the five-year term, the results are notably different: Total Payments Made: $160,107.00 (unchanged) Total Interest Paid: $105,618.23 Outstanding Balance: $445,511.23 Principal Reduction: $13,297.57 Net Effective Rate: 4.45% (0.55% Reduction) The total interest paid with the Cascade Strategy is $105,618.23, which is $13,297.57 less than what would have been paid without the strategy. This reduction in interest costs is a direct result of leveraging lower interest rates on the newly created mortgage components, which are set up after each annual prepayment. By the end of the five-year term, the outstanding mortgage balance is $445,511.23, compared to $458,808.80 without the strategy. This $13,297.57 reduction in the outstanding balance indicates that the Cascade Strategy not only saves money on interest but also accelerates the repayment of the principal. This means that homeowners using this strategy are closer to paying off their mortgage sooner, reducing the overall term and financial burden. This case study demonstrates that the Cascade Strategy can be an effective and powerful tool for homeowners looking to optimize their mortgage and improve their financial outcomes. By strategically making prepayments and resetting those amounts into new mortgage components at lower rates, homeowners can achieve substantial interest savings, accelerate their mortgage repayment, and reduce their outstanding balance—all without increasing their total monthly payments.