Mortgage vs Invest: The Math Finally Answered
This is one of the most debated personal finance questions in Canada. The answer depends on three things: your mortgage rate, your after-tax investment return, and what type of account you're investing in. The TFSA dramatically changes the calculus — tax-free investment growth makes investing more competitive against mortgage paydown than most people realize.
The mortgage paydown case
Every extra dollar on your mortgage earns a guaranteed, risk-free return equal to your mortgage rate. At 5.5%, that's 5.5% guaranteed — better than a GIC and completely risk-free. It also reduces your amortization and interest burden. For risk-averse Canadians or those with high mortgage rates, this is a compelling argument.
The TFSA investing case
A TFSA earning 7% annually beats a 5.5% mortgage mathematically — and without tax. TFSA growth is completely tax-free, so your 7% expected return is your true return. In a non-registered account at a 43% marginal rate, a 7% gross return becomes only 4% after capital gains tax — below most current mortgage rates.
The RRSP wildcard
An RRSP contribution generates a tax refund that can be immediately applied to the mortgage. At a 43% marginal rate, a $10,000 RRSP contribution returns $4,300 — which can pay down $14,300 in mortgage principal (the $10,000 invested plus $4,300 applied to the mortgage). This "hybrid" strategy often dominates both pure options.
| Scenario | Mortgage Rate | Strategy Winner | Why |
|---|---|---|---|
| High mortgage rate | 6%+ | Mortgage paydown | Guaranteed 6%+ return is competitive |
| Low mortgage rate + TFSA | <5% | TFSA investing | 7% tax-free beats 5% guaranteed |
| Any rate + RRSP | Any | RRSP hybrid | Refund amplifies total paydown |
| Non-registered account | 5%+ | Mortgage paydown | Tax on gains reduces net return |