Mortgage Prepayment vs Investing Extra Cash in Canada
This is the rate comparison. It is not the question of which registered account to fill first. If the dollar is competing specifically with TFSA room, RRSP room, or an employer match, use the priority guide and then come back here for the hurdle rate. If the dollar would be invested with borrowed equity, you are in the Smith Manoeuvre, which is leverage, not a prepayment.
That single fact is why the mortgage rate is already an after-tax number. A guaranteed investment certificate in a non-registered account is not. Interest on the GIC is included in your income. Comparing a 4 percent mortgage with a 4 percent GIC, without tax, is how people volunteer to earn less than they could have saved.
Put both sides in the same units
| Use of the extra dollar | What you earn | What you must admit |
|---|---|---|
| Prepay the residence mortgage, inside the privilege | A certain return equal to the contract rate, for as long as that rate is locked. Tax does not take a slice, because the interest you avoid was never deductible. | The dollar is illiquid. Getting it back means refinancing, selling, or a readvance, each with a cost and a new underwriting. You also give up option value if the rate on this term is unusually low. |
| TFSA | The investment return, tax-free. Compare it directly with the mortgage rate. | The return is not certain unless you bought something certain. A TFSA GIC yielding less than the mortgage rate loses to a prepayment, and you used room to do it. Equities can win over a long horizon and can lose over the term of this mortgage. |
| RRSP | A deduction now, tax-deferred growth, and a taxable withdrawal later. The hurdle is not "the mortgage rate versus the fund." It includes the bracket gap. | If you spend the refund, you did not prepay anything. The account-order version of this is the priority guide. The deduction mechanics are the RRSP playbook. |
| Non-registered account | The after-tax return. Interest is fully taxed. Capital gains are partially included. Eligible dividends have a credit. Only what remains is allowed into the comparison. | You may also need this account for flexibility a mortgage prepayment cannot give you. Tax-efficient placement is the tax-efficient investing guide, not a reason to ignore a high contract rate. |
| A rental property down payment | Whatever the property earns after expenses, vacancy, debt service, and tax, plus a taxable gain or loss later | This is concentration and leverage, not a substitute for the hurdle rate. The math, including where it fails, is the multi-property guide. |
A rule you can write on the commitment letter
- Read the rate on the term you are actually in, not a posted rate and not a rate from a news story. This article will not quote a live mortgage rate, because it would be stale by the afternoon.
- If the alternative is a low-risk, taxable investment, convert it to after tax using your marginal rate. If that after-tax yield does not clearly beat the mortgage rate, prepay.
- If the alternative is a TFSA holding the same low-risk investment, compare the yield directly with the mortgage rate. Tax is not the tie-breaker. The rate is.
- If the alternative is equities, write an expected return you will still believe in a down year, then subtract a discount for the fact it is not guaranteed. If the number you wrote does not beat the mortgage rate by a margin you would explain to a sceptical friend, prepay. If it does, and your horizon is longer than this term, investing can be the grown-up choice. It is still a choice, not a free lunch.
- If you might move, break, or need cash inside the term, do not prepay the last liquid dollar. Liquidity is part of the return.
A contract rate well below what new borrowers pay is an asset. Prepaying it faster than required gives up a cheap loan you may not be able to replace. Investing the extra cash, or holding it for the next renewal, can be the rational move even if you dislike debt. At renewal, rerun the comparison with the new rate. The decision is allowed to change when the contract changes.
Privileges, penalties, and the payout statement
Closed mortgages allow extra payments up to a privilege written in the contract: a percentage of the original principal, a double-up of the regular payment, or both. The privilege is not a national standard. Exceeding it on a closed term triggers a prepayment charge.
Ask for the payout figure before you exceed the privilege or refinance. On a closed fixed term the charge is commonly the greater of an interest-rate-differential amount and three months' interest. The differential is the painful one when your contract rate sits above the rate the lender would offer today for the remaining term. When market rates have risen above your contract rate, three months' interest is often the charge that remains, but you are giving up a cheap term to pay it. Variable-rate contracts are often three months' interest rather than a differential. None of this is a formula you should compute from a blog and then wire. Get the lender's number in writing.
Prepaying $20,000 inside the privilege is a clean hurdle-rate decision. Breaking the mortgage to "invest the difference" or to chase a slightly lower rate is a different math problem, and the penalty is a certain cost against an uncertain saving. If you will not write both numbers down, do not break the term.
An illustration you can recompute with your own rate
Suppose the contract rate is 4.5 percent and you have $20,000 of extra cash. Prepaying avoids about $900 of interest in the first year, and that $900 is after tax. A non-registered GIC at the same 4.5 percent, in a 40 percent illustrative marginal bracket, keeps about 2.7 percent after tax, or $540. The mortgage wins by $360 in that year before you even discuss compounding. The same GIC inside a TFSA earns the full 4.5 percent, tax-free, and ties the prepayment on yield while remaining liquid. It does not beat it. An equity portfolio you honestly expect to return 6 percent before fees can beat the prepayment in expectation and can also lose money in the next twelve months. If your real marginal rate is not 40 percent, recompute the GIC. If your contract rate is not 4.5 percent, throw these dollars out and keep the structure.
Two adjustments people skip. First, if the regular payment stays constant after a prepayment, more of each later payment is principal. The benefit compounds inside the mortgage. A one-year interest saving understates a prepayment you leave in place. Second, if you reborrow the equity to invest, you have not "earned 4.5 percent." You have started a leverage strategy, and the tracing rules decide whether any of the new interest is deductible.
When investing is still the right side of the hurdle
- The mortgage rate is low, the term is long, and your equity horizon is longer than the term.
- Registered room is unused and the priority guide says the deduction, or the TFSA's flexibility, outranks a small prepayment. Room does not accumulate forever in a TFSA in the way people hope, and an FHSA that you still qualify for can outrank both. The sequence for a first home is the FHSA purchase guide.
- You have no cash reserve. A prepaid mortgage does not replace a furnace. Fill a modest cash buffer before you celebrate a principal balance.
- The "investment" is a rental you understand, sized with vacancy and a renewal payment, not a slogan about property always going up.
When prepayment is the right side: the contract rate is high relative to what you will actually accept on a safe investment, you expect to stay through the term, the privilege absorbs the payment, and you are not starving a registered account that only exists while you have room. Employer matches sit above this entire debate. Do not decline a match to feel virtuous about principal.
Key takeaways
- The residence mortgage rate is a risk-free after-tax return equal to the contract rate, for the term you have.
- Taxable interest has to be converted to after tax before it is allowed to compete. A rate tie on the brochure is a loss in a non-registered account.
- A TFSA removes the tax drag and leaves the risk. A TFSA GIC below the mortgage rate is a slow way to lose to a prepayment.
- Equities can clear the hurdle in expectation. They do not clear it every year. Write the margin you require.
- Stay inside the prepayment privilege unless the lender's payout figure still leaves a win.
- Reruns happen at renewal, not every time a headline posts a new rate.
The hurdle rate is simple. The tax on the alternative is not.
Brackets, the dividend tax credit, and the registered-account limits decide whether an investment really clears the mortgage. The 2026 tax guide is that side of the arithmetic.
Get the 2026 Tax Guide — $49 CAD
