Earning Interest vs. Saving Interest Chapel Hill NC

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(NC)-Many Canadians don't know what to do with their savings. Should they keep it in a savings account or use it to pay down their mortgage? It would be great to knock off a chunk of debt, but there's also comfort that comes with money set aside for emergencies. It all boils down to the question: "Is it better to earn interest or save interest?"

Many of us have high interest savings accounts because we want our money to work hard for us. Unless your money is in a tax-free savings account, the Canada Revenue Agency could take some of the interest earnings, leaving you with a fraction of the account's income. Since your mortgage interest is paid in after-tax dollars, you'd need a savings account that offers a phenomenal interest rate to provide the same benefit as using your money to pay down your debt.

According to Manulife Bank, based on a 40 per cent marginal tax rate, your bank account would need to pay an interest rate of 10 per cent to provide the same benefit as using those savings to pay down a mortgage where you're charged six per cent.

Let's look at it another way. If you put $10,000 in a savings account paying 2.55 per cent, your monthly after-tax income would be $12.75. If you used that same $10,000 to pay down your mortgage instead, your monthly after-tax savings would be $39.58 (based on a mortgage that charges 4.75 per cent).

Most traditional mortgages won't allow you to access your home's equity at a moment's notice, which is why many people keep a savings account instead of paying down their home loan. If you want to pay down your debt sooner but still keep access to your funds, an all-in-one account like Manulife One may be right for you. For more information on all-in-one accounts or if you want to contact a Banking Consultant, visit manulifeone.ca or call toll-free 1-877-765-2265.

- News Canada