RRSP vs Mortgage Paydown Canada: Which Saves More Money in 2026?

Quick answer

For most Canadians earning above $60,000, contributing to an RRSP beats paying down the mortgage — but only if you immediately apply the tax refund to the mortgage. That combination gives you the guaranteed mortgage-reduction benefit AND the long-term compounding of tax-sheltered investments. The math tilts toward mortgage paydown when your marginal tax rate is lower than your mortgage rate, when you are within ten years of retirement, or when you carry a high-rate variable mortgage above 6%. Neither option is universally correct — the answer depends on your marginal rate, your mortgage rate, and how many years you have left on your amortization.

The core math: marginal rate vs. mortgage rate

An RRSP contribution does two things: it saves tax immediately at your marginal rate, and it lets your investment grow tax-sheltered until withdrawal. A $10,000 RRSP contribution at a 40% marginal rate generates approximately $4,000 in tax savings this year. If you invest that $4,000 tax refund at 6% for 20 years, it grows to roughly $12,800 — tax free in a TFSA or tax-deferred in the RRSP.

A $10,000 mortgage prepayment on a 5.2% mortgage delivers a guaranteed, risk-free return of 5.2% — the interest you no longer pay. No investment risk, no tax complexity. The comparison is therefore: is your after-tax RRSP return likely to exceed your mortgage rate, accounting for tax on RRSP withdrawals in retirement?

The general rule of thumb: if your current marginal tax rate is meaningfully higher than your mortgage interest rate, RRSP contributions typically win — especially if the refund is applied to the mortgage. If your marginal rate is lower than or equal to your mortgage rate (uncommon, but possible for lower incomes), mortgage paydown often produces a better guaranteed outcome.

Marginal rates include both federal and provincial income tax. Check your combined rate at taxtips.ca for your province and exact income level.

Ontario example: $85,000 salary, RRSP contribution scenarios

At $85,000 in Ontario, the combined marginal tax rate on the next dollar of income is approximately 43.41%. The table below shows the immediate tax refund from RRSP contributions at different amounts, and the net benefit when the refund is applied directly to the mortgage.

Marginal rate is approximate and varies by exact income, credits, and deductions. Actual refund depends on total income for the year. Consult a tax professional for personalized advice.

Ten-year outcome: RRSP vs. mortgage prepayment

Assume $10,000 per year in available cash. Compare putting it all into an RRSP (invested at a 6% average annual return) versus making $10,000 in annual mortgage prepayments on a $450,000 mortgage at 5.2%, 25-year amortization. This comparison focuses on the financial position at the 10-year mark — not which feels better.

RRSP balance is pre-tax. At a 30% withdrawal rate in retirement, the after-tax value is approximately $97,800. Mortgage interest savings are exact. Returns are illustrative and not guaranteed.

The "put the refund on the mortgage" strategy

The strategy that typically outperforms both pure options is to maximize your RRSP contribution and then immediately apply the tax refund as a lump-sum mortgage prepayment. This approach captures the full RRSP deduction benefit while simultaneously reducing mortgage principal — giving you compounding investment growth inside the RRSP AND interest savings on the mortgage.

Most Canadian mortgages allow 10–20% annual lump-sum prepayments without penalty. Apply your refund as soon as it arrives — typically in April or May after filing. On a $450,000 mortgage at 5.2%, a $4,000 lump-sum prepayment in year one saves approximately $8,200 in total interest over the remaining amortization and takes roughly 5 months off the mortgage term. Done consistently each year, the cumulative impact is substantial.

When mortgage paydown clearly wins

There are situations where paying down the mortgage should take priority regardless of RRSP room:

• Near retirement (within 10 years): Eliminating housing costs before retirement reduces how much income you need in retirement — often worth more than incremental RRSP growth at that stage.
• High-rate mortgage (above 6.5%): A guaranteed 6.5%+ return from prepayment is difficult to beat after accounting for RRSP withdrawal tax, especially for moderate earners.
• Low marginal tax rate: If your marginal rate is 20–25%, the RRSP deduction saves only $200–$250 per $1,000 contributed. The mortgage math often wins here.
• No RRSP contribution room: If you have maxed your RRSP or have no room this year, the comparison is moot — put surplus funds toward the mortgage or TFSA.
• Peace of mind matters: Some homeowners sleep better knowing the mortgage is shrinking fast. That psychological value is real and valid — personal finance is personal.

First Home Savings Account: a third option for first-time buyers

If you have not yet purchased a home, the FHSA (First Home Savings Account) introduced in 2023 deserves attention before either the RRSP or mortgage paydown question arises. The FHSA contributes $8,000 per year (up to $40,000 lifetime) with contributions that are tax-deductible (like RRSP) and withdrawals for a qualifying home purchase that are completely tax-free (unlike RRSP, which must be repaid via the Home Buyers' Plan). This makes the FHSA the most tax-efficient savings vehicle available for a first home purchase and it should typically be maxed before deciding between RRSP and mortgage prepayment.

If you already own your home, the FHSA is not available. In that case, the RRSP-vs-mortgage decision described above is the primary framework. If you own a home but your spouse or partner is a first-time buyer, they may still be able to open an FHSA — worth checking with a financial advisor or at canada.ca/fhsa.