Extra money - pay mortage or invest?

Question

Our situation:

• Both 28 years old
• Both working full time with stable jobs
• No debts (no student loans, cars are paid, etc.) except a 80$/month 0% interest 2 years loan for home furnitures.
• Family income: about 130 000$/year + few government benefits (we have a 2 years old son)
• Mortage (signed June 2018): about 236 000$ at 3.14% fixed for 4 years. That's 1 192$/month. We already increased that amount to 1 500$/month to pay it faster.
• I have an emergency fund account of 25 000$. I will probably invest 15 000$ and keep 10 000$ as security. My GF has an emergency fund account of about 4000$.
• We contribute to a RESP for our son (family plan, we manage it through our bank). 1 200$/year and government throws 20% of that amount for a total of 1 440$/year. We started contributing 2 years ago and will continue to do so for the next ± 16-18 years.

Before buying our house, I had an automatic transfer from my bank account to a RRSP account of 150$/week for a total of 7 800$/year. When doing my taxes, I get about 37% of that amount in taxes return - about 2 886$. The interest rate of that RRSP is about 3.93%/year (mutual fund, so it can vary). Right now, there's about 15 000$ in that account.

Now, my question is: should I put that 7 800$ toward my mortage knowing that 3.93% of 15 000$ is a lot lower than 3.14% of 236 000$? I generate less money from my savings than the interests from my mortage. I wouldn't stop contributing to my RRSP account totally as my employer has a DPSP program. With that program, I get about 6 000$ per year (3000$ directly taken from my pay and 3000$ from my employer). I also don't need the 2 886$ from taxes return as I usually used that money to buy luxuries (computer parts, etc.).

RESP

A registered education savings plan (RESP) is a contract between an individual (the subscriber) and a person or organization (the promoter).

Under the contract, the subscriber names one or more beneficiaries (the future student(s)) and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries.

RRSP

An RRSP is a retirement savings plan that you establish, that we register, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax.

Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.

DPSP

A DPSP is a plan that allows a portion of a company's profits to be shared with employees. Since the amounts contributed to the plan come from the company's profits, contribution amounts can differ from one year to the next.

Answer 1

should I put that 7 800$ toward my mortage knowing that 3.93% of 15,000$ is a lot lower than 3.14% of 236,000$?

The amounts aren't really relevant. What matters are the interest/return rates.

If you put $7,800 extra to the mortgage, you will decrease the interest paid in the next period by (3.14% / 12) of the $7,800, or about $20. If you invest in the RRSP, you expect to earn (3.93% / 12) off of the $7,800, or about $25. So the difference isn't huge. Put another way, you're going to pay interest on the remaining $230k either way.

That said, 3.93% seems like a very low return for long-term retirement savings. I don't know the Canadian market, but in the US, long-term (30-year) retirement returns should be 10% or higher.

If I were you I would pay off the 0% loan first. Yes it's zero percent, but most consumer 0% loans have kickers that retroactively charge interest on the original balance should you miss a payment or not pay it off in full by the due date. I would rather just knock it out so it's not a risk. It may also be a painful reminder of borrowing to buy furniture.

Then continue saving 10-15% of your income for retirement, and look at your investment options to see if there are some higher-return options (you can afford to take more risks at 28). Then put any remaining money towards the mortgage (or save up for the next home furnishings purchase). You might also consider setting up college savings for your son.

It sounds like you're in a great position overall. I think all you need is a medium-term (5 or 10-year) plan, and then you can prioritize your investments (mortgage, retirement, college savings) to meet that plan. anything you do beyond that is just tweaking.