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Orginally posted by chandresh

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Orginally posted by dimple2001

Mr. Chopra,

Excellent material ! Thank you for posting it.

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Good and intelligent questions (and nice presentation of the intelligent questions) produces excellent responses!!!

Chandresh

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Dimple2001

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First Opinion :

Thus, paying down the mortgage has an after-tax benefit of over 10%. Remember, the higher the interest rate on the mortgage, the more attractive it is to pay down the mortgage.

Now let's look at the RRSP. Even if you are in the lowest marginal tax rate, you will save around 25% in tax (combined federal and provincial; note: rates vary from province to province). In a higher tax bracket, the RRSP might save you as much as 46% in tax savings.

The bottom line is that, when you compare the two, a dollar put toward the mortgage saves you 10% in interest while the RRSP saves you at least 25% in tax. Given the choice, I would take a 25% saving over a 10% saving.

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Third Opinion:

Toronto real estate lawyer Bob Aaron took at look at almost 200 Canadian websites to get opinions on the matter, and he concluded that many of the sites had misleading or incorrect information. Most are sponsored by companies that earn commissions on RRSP contributions, while no one earns a fee when a homeowner pays down his mortgage.

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Chandresh

Advice is free – lessons I charge for!!

I am myself a M.com / ICWAI person, but certainly could not have developed this kind of thought process and analysis.

And I am sure I would not find it anywhere.

Excellent thread ...and information . please continue, I might put in some questitons in my next post in this thread.

But this is making one statement true

"whenever six Economists gather, there are seven opinions"

In this case there are two but .... but we feel the heat.

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Orginally posted by chandresh

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First Opinion :

Thus, paying down the mortgage has an after-tax benefit of over 10%. Remember, the higher the interest rate on the mortgage, the more attractive it is to pay down the mortgage.

Now let's look at the RRSP. Even if you are in the lowest marginal tax rate, you will save around 25% in tax (combined federal and provincial; note: rates vary from province to province). In a higher tax bracket, the RRSP might save you as much as 46% in tax savings.

The bottom line is that, when you compare the two, a dollar put toward the mortgage saves you 10% in interest while the RRSP saves you at least 25% in tax. Given the choice, I would take a 25% saving over a 10% saving.

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Correct me if I am wrong - but the above calculation seems flawed. While the tax advantage is 40%, it is only for one year and for the rest of the years it is interest on that 40%, while the 7% advantage is for year after year, till the mortgage is fully repaid. So a balance period or mortgage of 15 years will result in 105% (without compounding effect), an RRSP will produce and advantage of 40% plus 2.8% per year for 15 years, say 42% (without compounding) giving a total of 82% only.


Chandresh

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I wish I could.....................


On one hand you are counting the 7 % return year after year on the mortgage pay down amount making it 105% return with out compounding while on the other hand you are conveniently forgetting the same amount of money put in RRSP for 15 years would also generate an average 5-7% ( or even much more for this period) return which would come to 75% to 105%. This is in addition to 82% return your calculated on the 40 percent of the pre paid amount. I believe the sum total of these returns/savings would definitely be more than the savings in interests on pre-paying the mortgage.

My 2 cents...