Many financial advisors would say you shouldn’t defer saving for retirement to pay off your mortgage first. However, the truth is that paying off your mortgage first can be a perfectly sensible strategy as long as some important conditions are met.
The main condition you need to meet is that you are saving for the long term in some form. This should be at least 10% of your take home pay directed to long-term savings, preferably more. Commissioned financial advisors can make money if your savings are in the form of RRSP or TFSA contributions, but making extra payments against your mortgage can work for you as well.
Note that I said “extra” mortgage payments. It’s no good to save nothing in an RRSP or TFSA and just make your regular mortgage payments for 25 years. That’s just using your mortgage as an excuse to overspend right now.
Suppose your family take-home pay is $70,000. Then if you’re going to defer making RRSP or TFSA contributions, you should be paying at least $7000 extra each year against your mortgage. This will pay off your mortgage many years early. Then you can aggressively build RRSP and/or TFSA savings.
Another condition you have to meet for this strategy to make sense is to avoid building up other debts. If you’re paying extra on your mortgage but building debt on your lines of credit, credit cards, or with car loans, you’re not really saving. This applies to RRSP and TFSA savings as well; if you’re building debt at the same time, you’re not making any progress.
Most financial projections will show that you’re better off making RRSP and TFSA contributions early on instead of paying off your mortgage aggressively. However, the difference isn’t huge. What really matters is the amount you’re saving. If you save enough, you’ll benefit whether you save this money in an investment account or use it to reduce your mortgage.