Pay Down the Mortgage or Invest? Calculator
See what an extra mortgage payment or lump sum saves you in interest and years. Then compare it with investing the same money in a TFSA, RRSP or taxable account. You get the return you would need to beat your mortgage rate, and what happens if markets disappoint.
| After 20 years | Prepay | Invest |
|---|---|---|
| Mortgage balance | $0 | $59,362 |
| Extra equity from prepaying | $59,362 | — |
| Payments invested after the mortgage is gone | $128,192 | — |
| Investments | — | $226,719 |
| Net worth advantage | $39,165 |
Your $6,000 a year is within the $75,000 prepayment privilege (15% of the original amount), so no penalty.
The return you need to beat prepaying, by account
| TFSA (tax-free) | 4.09% a year |
| RRSP (refund reinvested) | 4.12% a year |
| Non-registered (interest taxed at 30%) | 5.81% a year |
A GIC or bond paying less than the mortgage rate in a taxable account never wins. Stocks might, with risk: at 2% less than you expect (4%), prepaying wins by $1,827.
Show the math
Both paths spend the same cash every period: the regular payment plus $500 a month. Prepay: the extra goes on the principal. After the mortgage is gone, the whole payment is invested at your return (the flywheel). Invest: the extra is invested at 6% and the mortgage runs its course. TFSA: no tax either way. The hurdle rates are the pre-tax returns at which each account's after-tax result equals prepaying. TFSA = mortgage rate. Taxable = mortgage rate ÷ (1 − marginal rate). RRSP adjusts for the refund and the withdrawal rate over the horizon. Mortgage interest compounds semi-annually. Investment returns are annual effective. Not modelled: a HELOC re-borrowing strategy, inflation, or changes in income.
How this calculator works
Two paths, same money:
- Prepay: the extra amount goes on the mortgage principal every month. The calculator re-runs the amortization schedule, with the semi-annual compounding the Interest Act requires, and measures how much lower the balance is after the horizon, the interest saved, and how many years earlier the mortgage ends.
- Invest: the same amount is invested every month at your expected return, less tax if the account is taxable.
The winner is the path with the higher net worth at the horizon, extra home equity versus investment value. The break-even return is the mortgage rate divided by (1 − your tax rate on investment gains).
Worked example: $400,000 at 4.5%, $500 a month extra, 10 years, TFSA at 6%
| Line | Prepay | Invest |
|---|---|---|
| Balance after 10 years | $168,349 | $243,781 |
| Extra equity from prepaying | $75,432 | — |
| Investment value | — | $81,237 |
| Interest saved | $15,432 | — |
| Mortgage ends sooner by | 4.75 years | — |
| Advantage | $5,805 to investing |
At a 6% TFSA return, investing wins by $5,805. At anything below 4.5%, prepaying wins.
Assumptions
- The mortgage rate and investment return stay the same over the horizon.
- Prepayments stay within your lender’s privilege, so there is no penalty.
- Taxable-account growth is reduced by the tax rate every year. That slightly overstates the tax on unrealized capital gains.
Common questions
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, with no risk. 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. 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.
- 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 lowers 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.
- 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. 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. It is often the best of both when your marginal rate is high. Choose the RRSP account and switch the refund destination to compare it.
Tax-saving strategies that use this calculator
Sources
Sources
Every figure on this page comes from one of these primary sources. Data last verified .
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