Should I Pay Down My Mortgage or Invest?
Prepaying a mortgage earns a return 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. The decision is a certain medium return versus a probable higher one. The details below decide which is right for you.
Try your own numbers in the mortgage overpayment versus investing calculator. Compare monthly extra payments, a lump sum, and a renewal-rate change with equal cash budgets, then save a link to your assumptions.
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%. That is plausible in tax-sheltered accounts if markets cooperate, and harder in a taxable account where interest and dividends are taxed annually.
A fair comparison holds cashflow equal. If you prepay, the mortgage ends early, and you then invest the whole freed-up payment until the original payoff date. Skipping that step overstates investing’s edge; skipping the compounding overstates prepaying’s.
- Mortgage rate well above expected return → prepay. It is the best guaranteed return available.
- Mortgage rate well below (the 1.5-3% pandemic-era mortgages) → invest. Carrying cheap debt while investing is the right trade.
- Within a point or two → the math is a near-wash, and behaviour and tax 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 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 and prepay with the refund, captures both and is hard to beat.
The TFSA sits in between: no deduction, but tax-free growth, which makes it the cleanest rate-vs-rate comparison. See TFSA vs RRSP for which account to fill first.
When prepaying wins even if the math favors investing
- You wouldn’t actually invest the money. A prepayment that happens beats an investment that doesn’t. Automated prepayments force the habit.
- Variable-rate stress. If a renewal at higher rates would strain your budget, prepaying now gives you a safety margin. Canadian mortgages renew every 1-5 years, so today’s rate is not your lifetime rate.
- Approaching retirement. A paid-off home cuts 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 uncertain.
When investing wins clearly
- Employer match available. RRSP or 401(k) matching is an instant 50-100% return. Take it before any prepayment.
- High marginal rate + unused RRSP room. The deduction is too valuable to skip.
- Cheap fixed-rate debt. Don’t pay back a locked-in 2-3% mortgage 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 ranks an extra $1,000 across mortgage prepayment, each registered account, and taxable investing using your real tax brackets, and shows the effect on your retirement projection.
See the trade-off in your full plan →