Managed Money Reporter Newsletter — Issue 148, June 1999

Editors: Carl Spiess & Allan McGlade

Featured Articles

Your Mortgage vs. Your RRSP

In personal financial planning, the rule of thumb is that your first priority should be to pay down non-deductible debt. Yet with any rule of thumb, there are always exceptions.

When it comes to a choice between paying down your mortgage or making an RRSP contribution, this rule of thumb doesn't necessarily hold true. Basically, there are four possible combinations of payments you could make:

  1. Make your RRSP contribution, then invest the tax refund.
  2. Make your RRSP contribution, then use the tax refund to pay down your mortgage.
  3. Pay down your mortgage, then invest the savings.
  4. Pay down your mortgage, then start making your RRSP contributions.

Determining which option is best for you requires a detailed analysis of your particular financial circumstances. The results can be surprising. Let's take a hypothetical example:

Joe Smith has the ability to make a $13,500 RRSP contribution on an annual basis. He also has a $200,000 mortgage he would like to pay off. He's wondering which of the above four combinations would be his best choice.

The following assumptions will be made:

  • 8% return on both his RRSP and Non-RRSP savings
  • Value of the house is $250,000 with an assumed growth rate of 2% per year
  • Interest rate on the mortgage is 7.5% compounded semi-annually
  • Mortgage payments are made monthly with a 25-year amortization
  • $13,500 is paid at the beginning of each year into either the RRSP or mortgage
  • Joe's tax rate is 50% during the savings period and 40% during the payout period

Running an analysis based upon the four alternatives noted above, Joe finds the following results at the end of 25 years, when his mortgage is paid off:

For Joe, the best alternative is #2, to make his RRSP contribution of $13,500 and use the tax refund to pay down his mortgage. This will leave him with an annual after tax retirement income of $88,585.

Most people would assume alternative #4 would be best, but this would leave Joe with annual after tax retirement income of $86,382.

Net WorthAnnual
Alternative 1$1,194,160$85,684
Alternative 2$1,285,170$88,585
Alternative 3$1,062,580$63,768
Alternative 4$1,241,676$86,382

Net Worth = after tax value of built up assets at the end of the accumulation period (25 years)
Annual Payment = after tax retirement income payments for a period of 25 years

Consider also the situation where an investor loses his job. If he had put the same $13,500 toward his mortgage (alternative #4), he would now find himself in a liquidity crunch. Whereas if he made a $13,500 RRSP contribution while still employed, he would receive a $6,750 refund to put toward his mortgage. If necessary, he could later withdraw funds from the RRSP account for emergency use in the year he was unemployed, and assuming he is earning less that year, he would pay less taxes on the withdrawal. Again, alternative #2, contributing to the RRSP first and using the refund to pay down the mortgage is the best choice!

Fred Heads West

The Mutual Fund Reporter Team sadly saw Fred Winterburn off to join his family in a recent transfer to British Columbia. Fred initially joined our team as one of the key contacts at the former satellite office in Hydro Place. Most recently, Fred was a Representative at our Service Centre in Scotia Plaza.

Many of you who counted on Fred for your investment needs can rest assured that they will continue to be met by the other highly skilled individuals from our group. For a complete listing of our names and a profile of each individual, visit our Mutual Fund Reporter Editors page.

Best wishes to Fred and his family on their new endeavors. Who knows, once the dust has settled, perhaps we can hope to see Fred as a western factor at ScotiaMcLeod some time in the future.

Fund News

Trimark has added significant depth and diversity to its investment team by adding 3 key portfolio managers. Kiki Delaney, formerly of the Spectrum United Canadian Equity Fund, has been added to the Trimark team and will commence management of a Canadian equity and Small-Cap fund . Heather Hunt, formerly of the Ontario Teachers Pension Plan Board, will take over management of the Trimark Select Canadian Growth Fund. Also added to the Trimark Investment team is Bill Kanko, previously of Mackenzie. Mr. Kanko was responsible for the Ivy Foreign Equity Fund and also worked on the Universal Select Managers Fund. At Trimark, Mr. Kanko will work closely with the Trimark Fund and Trimark Select Growth Fund.

As of March 31st, 1999, Elliott & Page Ltd. has closed off 3 funds from future purchases: Elliott & Page Bond, Global Balanced, and Global Bond.

O'Donnell Investment Management Corporation will merge with the Strategic Value Corporation to form SVC O'Donnell Corp., wholly owned by SVC. This new Corporation will have a total of $3.3 billion in assets. This transaction is subject to regulatory and O'Donnell shareholder approval.


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

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