Paying down your mortgage or investing in an RESP: which strategy is better?
Here’s the situation: you have an unexpected windfall and make the wise decision to use it to improve your personal finances. It could be tough to choose between the relief of paying off part of your mortgage and the security of saving for your child’s education. So how do you figure out the best option?
On the one hand, saving allows you to generate returns that could prove very advantageous over the long term. For a Registered Education Savings Plan (RESP), this means thousands of dollars in grants. On the other hand, certain personal debts could put you under pressure due to interest rates, which are sometimes high and can strain your finances.
To determine which choice will offer you the greatest benefit, why not let the numbers do the talking?
Mortgage or RESP: which one is the most profitable?
Let’s look at the mortgage example again. In your opinion, is paying down your mortgage more or less advantageous than contributing to your RESP?
Fortunately, the Institute of Financial Planning has created a calculator to make things easier for us. For the purposes of this exercise, let’s compare the value of $5,000 in capital after 17 years, with a return on assets and a borrowing rate both set at 5%, using a current marginal tax rate of 36% and a disbursement of 27%.1
How much will $5,000 be worth in 17 years?
| Mortgage loan | Education savings (RESP) | |
|---|---|---|
| Payment / Contribution | $5,000 | $5,000 |
| Grants | $0 | $1,5002 |
| Total invested | $5,000 | $6,500 |
| Return | 5% | 5% |
| Total at the end of the comparison period | $11,460 | $14,898 |
Note: The Institute of Financial Planning’s tool assumes that the person whose situation is being analyzed has the necessary contribution room for their RESP and that they can prepay their mortgage without penalty.
In this case, the net accumulated balance at the end of the comparison period will be close to $15,000 for the RESP, compared to just under $11,500 for the mortgage repayment. Why is there a discrepancy? In most cases, there is a clear advantage for education savings for the first $5,000 because of tax-sheltered growth, grants and the fact that withdrawals result in little or no tax payable by the beneficiary.
Do the math using your own numbers: the calculator will also consider Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) in the comparison.
Understanding the distinctive advantages of RESPs
Different types of savings have their own characteristics and advantages, but the RESP is the only savings vehicle in Canada whose sole purpose is to finance a child’s post-secondary education. This gives it significant tax advantages.
Government grants
For Quebec families, contributing to an RESP can generate up to $12,8003 in government grants. This is an important financial lever that increases the potential return on your savings over the long term, without any additional effort.
More specifically, the Canada Education Savings Grant (CESG) and the Quebec Education Savings Incentive (QESI) offer a minimum 30%3 bonus on your investment. The Canada Learning Bond (CLB) provides up to $2,000 per beneficiary whose family is financially eligible.3
In Quebec, you must invest $2,500 a year to make the most of these grants, and you can add an additional $2,500 to recover unused grants from past years.
Tax-sheltered growth
Another tax advantage of an RESP is that the grants and your contributions can generate tax-sheltered returns over the years, right up to the time of disbursement for post-secondary education.
Should you pay down a mortgage?
In the world of debts, mortgages stand out from the rest. Firstly, although mortgage interest rates can be relatively low, the high loan amount means that the total interest paid can look scary. However, when the loan payment amount is a good match for your financial situation, a mortgage is often referred to as “good debt.” This is because you are borrowing against an asset that can appreciate in value over the long term (unlike your car or your latest sofa bought on credit, for example).
Finally, it’s worth noting that prepaying a mortgage offers no tax advantages in Canada, unlike in other countries where interest is tax-deductible.
Debt repayment: factors to consider
Obviously, not all debts can be treated in the same way. Credit cards, student loans, personal loans and mortgages have very different interest rates and terms, so their impact on your family budget will be different as well. In general, the higher the interest rate, the faster you’ll be able to repay the loan.
For this reason, financial advisors are unanimous: before investing your surplus, aim to pay off your credit card balances in full and manage your consumer debts (car loans, lines of credit, etc.), which can have high borrowing costs.
In any case, in addition to the financial consequences of debt, you need to consider its psychological impact on your thinking.
Investing in your child’s education
While debt increases your expenses, savings generate returns. Generous government grants are therefore an important factor to consider if you have liquidity or a savings budget planned for your family finances. The advantages of the RESP are emotional as well as financial, since it allows you to invest in your child’s future.
A Kaleido education savings advisor can help you take full advantage of these tax benefits… with the peace of mind of knowing that money won’t stand in the way of your family’s ambitions.
What would you do with $5,000?
Up to $12,8003 at your fingertips
Discuss your situation with the Kaleido team to start saving in an RESP and take advantage of generous government grants.
In Quebec, a beneficiary aged 15 and under is automatically eligible for the Canada Education Savings Grant (CESG) and the Quebec Education Savings Incentive (QESI), which represent a minimum of 30% government grants.
For low- and middle-income families, the Additional CESG and Additional QESI could increase this bonus by up to 60%, 3 and the Canada Learning Bond (CLB) could add up to $2,000.
To maximize an RESP, it is recommended to invest $2,500 per year, for a lifetime total of $36,000 per beneficiary. You can also recover unused grants from previous years, up to an annual maximum of $5,000.
In addition to the grants, which range from 30% to 60%,3returns on IDEO+ individual RESPs will vary according to each individual’s strategy and investor profile. For details, please consult the financial reports on kaleido.ca.
Wondering how much an RESP could earn you over the long term? Use our online RESP calculator to get an estimate based on your child’s age and expected monthly contribution.4
Yes! The contributions belong to you, and you can dispose of them tax-free as you see fit upon disbursement at the time of your beneficiary’s post-secondary education. Your beneficiary will be taxed only on the EAPs withdrawn. However, if you withdraw contributions before your beneficiary begins post-secondary studies, you will have to repay the government grants.
Learn more about the different rules and the smart way to withdraw money from your RESP in our blog post.
Legal notes
1. Combined (federal + provincial) tax rates are based on an average taxable income of $65,000 and $40,331 at retirement in Quebec in 2025.
2. The Institute of Financial Planning calculator allows for a 30% grant on a maximum of $5,000, as applicable in the province of Quebec. However, this grant may vary, since the beneficiary must have sufficient unused contribution room. In addition, the calculations do not take into account the possibility of additional grants for low- and middle-income families, nor the maximum grants per beneficiary.
3. Canada Education Savings Grant (CESG) of 20% to 40% and Quebec Education Savings Incentive (QESI) of 10% to 20%. Based on adjusted family net income. The maximum annual CESG payment is $600, and the maximum annual QESI payment is $300. The lifetime maximum per beneficiary is $7,200 for the CESG and $3,600 for the QESI. Canada Learning Bond (CLB) of up to $2,000 per beneficiary, for a child born after December 31, 2003, whose family is financially eligible. Some conditions apply. See our prospectus at kaleido.ca.
4. The information presented is illustrative only and does not guarantee the future performance of IDEO+ plans.
