Pay Down the Mortgage or Invest?

Every extra dollar against the mortgage earns exactly your mortgage interest rate, guaranteed, tax-free — because interest on a personal residence is paid from after-tax income and its avoidance is untaxed. Every dollar invested instead earns whatever markets deliver, shaped by the account it sits in.

This is the rare financial decision with no wrong answer between two good ones. But the comparison is often done carelessly, ignoring taxes and pretending expected returns are promised returns.

The fair comparison is after-tax to after-tax. A 5% mortgage prepayment equals a 5% guaranteed after-tax return; matching it in a taxable investment account at a 40% marginal rate requires roughly 8% of fully taxed interest income — before any risk adjustment. Inside a TFSA or RRSP, however, investment returns compete on equal tax footing, which is why unused registered room shifts the math toward investing, especially over long horizons where diversified portfolios have historically outpaced borrowing costs.

Three refinements sharpen the answer. First, at renewal your mortgage rate can change — today's comparison is not permanent. Second, an emergency fund and any high-interest debt outrank both options. Third, the behavioural dividend of a shrinking mortgage — flexibility, lower fixed costs, resilience in a downturn — is real value even when a spreadsheet mildly favours investing. Many households sensibly do both: registered contributions first, then annual prepayment privileges.