The Math: Mortgage Payoff vs Investing
Assumptions: $300,000 Remaining Mortgage, 20 Years Left, $500/Month Extra
| Strategy |
Mortgage Rate |
Investment Return |
Net Result After 20 Years |
| Pay off mortgage early |
5.00% |
— |
Mortgage-free in ~13 years, save ~$84,000 in interest |
| Invest (non-registered) |
5.00% |
7% gross (5.5% after tax) |
~$220,000 portfolio, still owe mortgage until year 20 |
| Invest (TFSA) |
5.00% |
7% (tax-free) |
~$260,000 portfolio, still owe mortgage until year 20 |
Breakeven: When Does Investing Win?
| Mortgage Rate |
Minimum Investment Return Needed (Non-Reg, 30% Tax) |
Minimum Return in TFSA |
| 3.00% |
4.3% |
3.0% |
| 4.00% |
5.7% |
4.0% |
| 5.00% |
7.1% |
5.0% |
| 6.00% |
8.6% |
6.0% |
| 7.00% |
10.0% |
7.0% |
In a TFSA, you only need to match the mortgage rate to break even. In a non-registered account, you need a higher return due to taxes on gains.
Scenario: 5% Mortgage Rate, 7% Investment Return
| Option |
Year 5 |
Year 10 |
Year 15 |
Year 20 |
| Mortgage payoff |
|
|
|
|
| Mortgage balance |
$218,000 |
$118,000 |
$0 (paid off ~year 13) |
$0 |
| Money saved (interest) |
$18,000 |
$52,000 |
$84,000 |
$84,000 + 7 years of free cash |
| Invest in TFSA |
|
|
|
|
| Portfolio value |
$35,000 |
$86,000 |
$158,000 |
$260,000 |
| Mortgage balance |
$247,000 |
$183,000 |
$105,000 |
$0 |
| Net worth advantage |
Investing |
Investing |
Investing |
Investing by ~$176,000 |
When to Pay Off the Mortgage
| Situation |
Why Pay Mortgage |
| Risk-averse personality |
Guaranteed return; sleep better at night |
| Mortgage rate > 6% |
Harder for investments to beat consistently |
| Near retirement |
Want to eliminate fixed costs before retirement income drops |
| Variable rate mortgage |
Rate could spike; paying down reduces exposure |
| No TFSA/RRSP room |
Without tax shelter, investment advantage shrinks |
| Already have substantial investments |
Diversify by eliminating debt |
| Short time horizon (< 5 years) |
Market risk too high short-term |
| Unstable income |
Reducing fixed obligations provides safety |
When to Invest Instead
| Situation |
Why Invest |
| Have TFSA room |
Tax-free gains easily beat mortgage rate |
| Mortgage rate is low (under 4-5%) |
Historically, equities return 7-10% long-term |
| Long time horizon (10+ years) |
More time for compounding and recovery from dips |
| Employer RRSP match |
Free money — always take the match first |
| Young (under 45) |
Decades of growth ahead |
| Comfortable with volatility |
Can handle 30%+ drops without panic selling |
| Building RRSP for tax deduction |
Tax refund can be reinvested |
| Want liquidity |
Investments are accessible; mortgage equity is not |
The Best Strategy: Do Both
| Priority |
Action |
Why |
| 1 |
Employer RRSP match |
50-100% instant return (free money) |
| 2 |
High-interest debt (credit cards) |
20%+ interest — always pay first |
| 3 |
Max TFSA |
Tax-free growth beats most mortgage rates |
| 4 |
Max RRSP (if higher tax bracket) |
Tax deduction + tax-deferred growth |
| 5 |
Split remaining 50/50 |
Half to mortgage lump sum, half to non-reg investment |
Example: $1,000/Month Available
| Allocation |
Amount |
Return/Savings |
| TFSA (index ETFs) |
$583 ($7,000/yr) |
7% tax-free growth |
| Mortgage lump sum |
$417/month extra |
5% guaranteed return |
| Combined 20-year result |
|
Mortgage paid off ~5 years early + $180,000 TFSA |
Tax Considerations
| Strategy |
Tax Impact |
| Mortgage payoff |
No tax benefit (mortgage interest is not deductible on primary residence in Canada) |
| TFSA investing |
Zero tax on all gains |
| RRSP investing |
Tax deduction now; taxed on withdrawal (ideally at lower retirement rate) |
| Non-registered investing |
Capital gains at 50% inclusion; dividends get dividend tax credit |
| Smith Manoeuvre |
Convert mortgage interest to tax-deductible by borrowing to invest |
The Smith Manoeuvre (Advanced)
| Step |
Details |
| 1 |
Get a re-advanceable mortgage (HELOC + mortgage combo) |
| 2 |
As you pay down mortgage principal, HELOC available increases |
| 3 |
Borrow from HELOC to invest in income-producing assets |
| 4 |
HELOC interest becomes tax-deductible (since borrowed to invest) |
| 5 |
Investment income helps pay mortgage faster |
| Risk |
If investments decline, you still owe the HELOC |
| Best for |
Financially sophisticated, long time horizon, comfortable with leverage |
Emotional vs Mathematical Decision
| Factor |
Pay Off Mortgage |
Invest |
| Certainty |
100% guaranteed return |
Variable/uncertain |
| Sleep-at-night factor |
Very high |
Depends on personality |
| Flexibility |
None (equity locked in house) |
High (liquid) |
| Regret potential |
Low |
Moderate (if market drops) |
| Excitement |
Low |
Higher (watching portfolio grow) |
| Behavioural risk |
Low (set it and forget it) |
Higher (temptation to time market) |
Scenario Calculator
$200,000 Mortgage, 5% Rate, 20-Year Amortization
| Extra Payment/Month |
Years Saved |
Interest Saved |
Alternative: Invest in TFSA at 7% |
| $200 |
4.5 years |
$38,000 |
$123,000 (20 years) |
| $400 |
7 years |
$59,000 |
$207,000 (20 years) |
| $600 |
9 years |
$72,000 |
$299,000 (20 years) |
| $1,000 |
11 years |
$82,000 |
$520,000 (20 years) |
Investing in TFSA at 7% generates significantly more wealth than mortgage payoff at 5%, but it is not guaranteed.
Bottom Line
| Your Situation |
Recommendation |
| Mortgage rate under 4%, have TFSA room |
Invest (TFSA) |
| Mortgage rate 4-6%, have TFSA room |
Split: max TFSA first, then mortgage extra |
| Mortgage rate over 6% |
Pay down mortgage aggressively |
| No TFSA/RRSP room |
Pay down mortgage (guaranteed return) |
| Near retirement (5-10 years) |
Pay down mortgage (reduce fixed costs) |
| Young, aggressive saver |
Max TFSA → RRSP → then consider mortgage |
| Employer RRSP match available |
Always take the match first, then decide |
→ Back to: Complete Canadian Mortgage Guide