Should I Pay Down My Mortgage or Invest?
Prepaying a mortgage earns a return exactly equal to your mortgage rate — guaranteed, tax-free, and immune to market crashes. Investing the same dollars has a higher expected return with real risk around it. That’s the whole decision: a certain medium return versus a probable higher one. Everything else is detail — but the details are where the money is.
Try your own numbers in the extra mortgage payment calculator — it compares both paths at equal cashflow, so the answer isn’t rigged toward either side.
The core math: guaranteed rate vs expected return
An extra payment against a 5.25% mortgage earns 5.25%, full stop. For an investment to beat it, your after-tax return must exceed 5.25% — easy for tax-sheltered accounts if markets cooperate, harder in a taxable account where interest and dividends are taxed annually.
The comparison has to hold cashflow equal to be honest. If you prepay, the mortgage dies early — and the right comparison then invests your entire freed-up payment until the original payoff date. Skipping that step (as many “invest, obviously” articles do) overstates investing’s edge; skipping the compounding (as many “debt-free!” articles do) overstates prepaying’s.
- Mortgage rate well above expected return → prepay. It’s the best guaranteed asset you can buy.
- Mortgage rate well below (the 1.5-3% pandemic-era mortgages) → invest. Carrying cheap debt while compounding is the correct trade.
- Within a point or two → the math is a near-wash, and the behavioural and tax questions below decide it.
The Canadian wrinkle: no deduction, but RRSP room
Canadian principal-residence mortgage interest is not tax-deductible. Two consequences:
- Prepayment’s return is genuinely tax-free — a 5.25% prepayment “yield” is worth 7-9% pre-tax to someone in a 30-40% bracket holding taxable investments.
- An RRSP contribution, by contrast, triggers a deduction at your marginal rate and grows tax-deferred. At a 35% marginal rate, $10,000 into the RRSP returns $3,500 in refund immediately. The classic hybrid — contribute to the RRSP, prepay with the refund — captures both and is hard to beat.
The TFSA sits in between: no deduction, but fully tax-free growth, making it the cleanest rate-vs-rate comparison. See TFSA vs RRSP for which account to fill first.
When prepaying wins even if the math says invest
- You wouldn’t actually invest the money. A prepayment that happens beats an investment that doesn’t. Automated prepayments are a commitment device.
- Variable-rate stress. If a renewal at higher rates would strain your budget, prepaying now buys real safety margin — Canadian mortgages renew every 1-5 years, so today’s rate is not your lifetime rate.
- Approaching retirement. A paid-off home slashes your required retirement income, which reduces registered withdrawals and — in Canada — helps you stay under the OAS clawback threshold.
- Your alternative is taxable investing at a modest expected return. After annual tax drag, beating a 5%+ mortgage in a non-registered account is far from certain.
When investing wins clearly
- Employer match available. RRSP or 401(k) matching is an instant 50-100% return. Always first, before any prepayment.
- High marginal rate + unused RRSP room. The deduction is too valuable to skip.
- Cheap fixed-rate debt. A locked-in 2-3% mortgage is a gift; don’t pay it back early.
- Long horizon and sheltered room available. Decades of tax-free compounding in a TFSA at equity returns beats a mid-rate mortgage on expectation, and unused room doesn’t expire.
How cinder.fi models it
The in-app prepayment calculator reads your actual loan — current balance, rate, remaining term, recorded extra payments — and shows both paths side by side: interest saved and years shortened if you prepay, versus the investment balance at your original payoff date if you invest, with the freed payment invested after an early payoff so the comparison stays fair. The capital allocation engine goes further, ranking an extra $1,000 across mortgage prepayment, each registered account, and taxable investing with your real tax brackets and its effect on your retirement projection.
See the trade-off in your full plan →