In a poll conducted by CIBC, 72% of respondents said they would rather pay down their debts than add to their retirement funds. This is the fifth straight year that Canadians have listed debt reduction as their number one financial priority; previous CIBC polls revealed that 85% of Canadians are taking steps to reduce their personal debt levels and 71% are planning to be free of debt within five years.
CIBC says that "an emotional need in the Canadian psyche to be free of debt" was often the driving force behind the decision, outweighing more practical considerations such as concerns over owing too much money, or the risk of rising interest rates.
“You may not be doing yourself any favours by rushing to pay off your home while mortgage rates are at rock-bottom levels. If you're able to take some risk in your investment portfolio, you might be tens of thousands dollars richer by investing any extra money in an RRSP or TFSA,” says Jamie Golombek, managing director at CIBC Wealth Advisory Services.
As an example, Golombek points to someone who is at a marginal tax rate of 30% at both the time when an RRSP or TFSA contribution is made and when it is withdrawn. If that person were to invest $2,500 per year in a RRSP or TFSA, provided he could earn a 6% rate of return, he would be $60,900 further ahead than someone who used the money to pay off a 30-year mortgage at 3%.
“If you're able to tolerate some risk in your investment portfolio, consider whether you should focus some of your financial resources on increasing your retirement savings via an RRSP/TFSA, instead of putting everything towards paying off your low-rate mortgage,” concludes Golombek.