Pay Down the Mortgage or Invest? Calculator

Frequently asked questions

Is it better to pay off the mortgage or invest?

Prepaying earns a guaranteed, tax-free return equal to your mortgage rate. Investing only wins if your after-tax return is higher. At a 4.5% mortgage, a TFSA investment needs to beat 4.5%; a taxable account at a 30% tax rate needs about 6.4%. Long-run stock returns have beaten that on average, but not reliably over any given 10 years.

Why is the break-even higher in a taxable account?

Mortgage interest on your home is not deductible and prepaying saves it tax-free, while investment income in a taxable account is taxed. To match a 4.5% tax-free return at a 30% rate you need 4.5% ÷ 0.7 = 6.4% before tax. Interest is taxed at your full marginal rate; capital gains at half of it.

How much can I prepay without a penalty?

Most closed mortgages allow lump sums of 10% to 20% of the original principal each calendar year plus a payment increase of 10% to 100%; open mortgages allow any amount. Anything above the privilege triggers a prepayment charge, so check your mortgage agreement. The calculator checks your plan against the privilege you enter.

What about the RRSP refund?

If you invest in an RRSP, the refund is extra money to put toward either goal. A common approach is to contribute to the RRSP and use the refund to prepay the mortgage, getting both benefits.

Does the calculator account for risk?

No. The mortgage prepayment return is certain; the investment return is an assumption. A fair comparison uses a return you would be comfortable with in a bad decade, not the best case.

Should I do this before my renewal?

Prepaying reduces the balance you renew, which lowers the new payment; see the mortgage renewal calculator. If rates are expected to be higher at renewal, the guaranteed saving from prepaying is worth more.

Is paying down my mortgage the same as a guaranteed return?

Yes. Every dollar of principal you prepay saves interest at your mortgage rate for the rest of the amortization, tax-free and with no risk. To beat it by investing you need a higher after-tax return: at a 4% mortgage rate a TFSA needs more than 4%, and a taxable account needs about 4% divided by one minus your tax rate.

What happens to my mortgage payment after I pay it off early?

That is the part most comparisons miss. Once the mortgage is gone the whole payment is free, and if you invest it the prepay path keeps growing. The calculator invests those freed payments for the rest of the horizon so both paths spend the same cash.

Should I use my RRSP refund on the mortgage?

Contributing to the RRSP and putting the refund on the mortgage combines the two strategies and is often the best of both when your marginal rate is high. Choose the RRSP account and switch the refund destination to compare it.