Extra money each month can go to the mortgage or to investments. A prepayment earns a guaranteed return equal to your mortgage rate; an investment earns a return that is higher on average over long periods but uncertain, and taxed according to the account it sits in. This page compares the two on equal terms, then looks at risk, liquidity and the order many people use for extra cash. It’s part of our mortgage payments hub.
The return on each choice
Interest on a mortgage for the home you live in isn’t tax-deductible in Canada, so each dollar of prepayment saves interest at the full mortgage rate, with no tax on the saving. An investment’s return is reduced by tax unless it is sheltered.
After-tax return on a 7% pre-tax return for someone with a 30% marginal tax rate:
| Account | How the return is taxed | After-tax return |
|---|---|---|
| TFSA | Not taxed | 7.00% |
| Taxable account, interest | Taxed in full at the marginal rate | 4.90% |
| Taxable account, capital gains | 50% of the gain is taxable (shown as if realized every year) | 5.95% |
Capital gains held without selling are taxed only when realized, so the deferral makes the real after-tax return a little higher than the table shows. Canadian dividends are taxed at their own rates; the investment tax hub has the detail.
An RRSP works differently: the contribution is deducted now and the withdrawal taxed later, so if the refund is invested too and your tax rate is the same at withdrawal, it comes out close to a TFSA. Whether an RRSP contribution or a prepayment does more is covered in RRSP vs mortgage paydown.
The break-even rate
Investing comes out ahead only if the after-tax return beats the mortgage rate. In a TFSA that means a return above the mortgage rate itself. In a taxable account earning interest, the pre-tax return has to be higher by the tax:
| Mortgage rate | TFSA return needed | Taxable interest return needed (30% marginal rate) |
|---|---|---|
| 3% | above 3% | above 4.29% |
| 4% | above 4% | above 5.71% |
| 5% | above 5% | above 7.14% |
| 6% | above 6% | above 8.57% |
| 7% | above 7% | above 10.00% |
The prepayment’s return is certain; the investment’s is an average that can be much lower, or negative, over any given stretch of years. The break-even rate tells you what the investment has to earn, not whether it will.
A worked comparison: both paths invest the same money
A fair comparison follows both households to the same date with the same cash flow. The household that prepays becomes mortgage-free early and can then invest its whole former payment, so its money is invested later but in larger amounts.
A household has $300,000 left on its mortgage at a fixed 5% with 20 years of amortization left, and $500 a month to spare. The regular payment is $1,971 a month.
- Paydown path: it pays $2,471 a month, is mortgage-free after 14.1 years and saves $56,163 in interest. From then until year 20 it invests the full $2,471 a month in a TFSA.
- Investing path: it keeps the regular payment, is mortgage-free at year 20, and invests $500 a month in a TFSA from the start.
At year 20 both households are mortgage-free and have put the same total into the mortgage and the TFSA combined, so the TFSA balances can be compared directly:
| Return in the TFSA (compounded monthly) | Investing path’s TFSA at year 20 | Paydown path’s TFSA at year 20 |
|---|---|---|
| 4% | $183,387 | $198,480 |
| 5% | $205,517 | $204,625 |
| 6% | $231,020 | $211,016 |
| 7% | $260,463 | $217,663 |
Interest is compounded half-yearly on the mortgage and monthly in the TFSA, and the payoff month is counted as a partial month.
At a 7% return, the investing path ends about $42,800 ahead after 20 years. A comparison that counts only the interest saved, and leaves out the payment the paydown household invests once it is mortgage-free, overstates that gap. The two paths finish level when the investments earn exactly the mortgage’s own rate (5% compounded half-yearly is a little less than 5% compounded monthly, which is why the 5% row isn’t exactly level); below that, the paydown path ends ahead, and above it, the investing path does. The gap at higher returns comes from taking market risk, not from a free gain.
The paydown path’s result also depends on the household investing the old payment once the mortgage is gone. If that money is spent instead, the investing path ends further ahead than the table shows.
Risk, liquidity and timing
| Factor | Paying down the mortgage | Investing |
|---|---|---|
| Return | Certain: the mortgage rate | Uncertain; can be negative over several years |
| Access to the money | Locked in the home; getting it back means borrowing against it or selling | A TFSA or taxable account can be sold, although the price may be down when you need it |
| Effect at renewal | A smaller balance to renew at whatever the rate is then | No effect on the balance |
| Time horizon | Works over any horizon | Works best over long horizons, with time to recover from downturns |
| Behaviour | Automatic once set up | Depends on staying invested through market drops |
Prepaying tends to come out ahead when the mortgage rate is high, the time horizon is short (for example, close to retirement), income is unstable, or a guaranteed result matters more than a higher expected one. Investing tends to come out ahead when there is unused TFSA room, a long horizon, a low mortgage rate and comfort with market swings. Many households split extra cash between the two. For homeowners near retirement, your mortgage and retirement planning looks at the question from that angle.
TFSA room is limited; prepayment capacity resets each year
TFSA room is added once a year: $7,000 for 2026, and someone who has been eligible every year since 2009 and never contributed has $109,000 of room. Unused room carries forward, so it isn’t lost, but money sent to the mortgage instead doesn’t grow tax-free in the meantime. A withdrawal is added back to your TFSA contribution room on January 1 of the following year, not right away, so putting it back sooner uses other unused room. Prepayments, by contrast, are limited each year by your prepayment privileges, and a prepayment can’t be taken back out without borrowing. Your own TFSA room is shown in how much TFSA room you have.
An order many people use for extra cash
This is a common sequence, not a rule; it assumes the household already has a small cash cushion.
| Step | Where the money goes | Why it often comes first |
|---|---|---|
| 1 | An employer’s RRSP or pension match | The match is an immediate return on each dollar contributed |
| 2 | High-interest debt such as credit cards | Paying it off saves interest at a rate far above a mortgage rate |
| 3 | An emergency fund | Cash keeps an unexpected cost off a credit card; see emergency fund vs mortgage paydown |
| 4 | Unused TFSA room | Tax-free growth, and the money stays accessible |
| 5 | RRSP contributions, if your tax rate is higher now than you expect in retirement | The deduction now is worth more than the tax on withdrawal |
| 6 | Mortgage prepayments or a taxable account, or a split | The comparison above: the mortgage rate against the after-tax return |
How extra payments shorten the mortgage, and how much they save on your own balance, is in the mortgage calculator with extra payments; other ways to pay off your mortgage faster are in paying off a mortgage early.
Borrowing to invest: the Smith Manoeuvre
The Smith Manoeuvre uses a readvanceable mortgage to re-borrow each dollar of principal you repay and invest it in a taxable account, so the interest on the borrowed part can become deductible. It adds leverage and risk, because the loan stays owed if the investments fall; the Smith Manoeuvre guide explains how it works and its tax rules.
Related guides
- The full cost of owning, and a homeowner budget: monthly carrying costs
- A built-in way to prepay: accelerated bi-weekly payments and payment frequency
- The TFSA’s rules in full: TFSA guide
Sources
The figures and rules on this page come from these sources, last checked against them between August 29, 2026 and October 2, 2026. How we check facts.
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Data table
- Canada Revenue Agency: Capital Gains – 2025
- Canada Revenue Agency: MP, DB, RRSP, DPSP, ALDA, TFSA limits, YMPE and the YAMPE
- Canada Revenue Agency: Requesting a TFSA transfer
- Canada Revenue Agency: Withdrawing from a TFSA