Monday, April 2, 2012

Simplifying Your Financial Life

Reader JP sent some questions about his leveraged investments and whether he should hold his mortgage in his RRSP. Here is an edited version of his questions:
“Does it make sense to hold my residential mortgage in my RRSP? Given the size of my RRSP and the modest remaining size of my mortgage, I’m really torn about what steps to take. In addition to my RRSP I have after tax investments that I purchased using a secured line of credit, separate from the mortgage, and I claim the interest as investment costs.

On one hand, I have enough that I could simply blow away the mortgage by cashing out the after tax investments. The after tax investments give a nice stream of dividends, but does it make sense to have them and still have the mortgage sitting there?

Do RRSP contributions make any sense now that my wife and I are now both ‘employees’ rather than ‘contractors’ and we still have the mortgage sitting there?”
To start with, I have nowhere near enough information to give JP any specific advice. However, I can discuss how I think about my own finances.

Assuming that JP’s non-registered investments are valuable enough to allow him to pay off both the line of credit and the mortgage, this would seem very tempting to me. I like simplicity and this would definitely simplify JP’s finances. It’s amazing how complex your various accounts can become (RRSP, spousal RRSP, locked-in RRSP, RESP, TFSA, non-registered accounts, etc.). Unless there is a compelling financial reason to add complexity, I err on the side of simplicity.

On the specific question about holding a residential mortgage in an RRSP, this never interested me, but it could be useful in some situations. For example, if JP has a poor credit rating and has to pay a high interest rate on his mortgage, he may prefer to pay that interest to himself (in his RRSP) rather than pay it to someone else. This doesn’t come up very often, though; how many people have enough assets in their RRSPs to pay off their mortgage but have a poor credit rating?

On the question of whether RRSP contributions make sense, there are circumstances where people have so much money in their RRSPs that it makes no sense to add more, but I’m guessing that isn’t the case for JP. When it comes to RRSP contributions and making extra payments on a mortgage, common advice is to do both. With JP and his wife both working and the mortgage being small, you’d think it would be possible to make RRSP contributions and pay off the mortgage aggressively.

Overall, I’d be tempted to simplify by paying off as much debt as possible (without draining RRSPs) and not worry about complicated things like holding a mortgage in an RRSP, but JP’s circumstances may be very different from mine, and he’ll have to decide for himself what to do.

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