Mortgage Prepayment vs TFSA and RRSP: Which Dollar First
The pure hurdle-rate comparison — mortgage versus a GIC, a taxable account, or an equity return — is the prepayment versus investing guide. Use it once you know which account is even in the running. This article is the order. It assumes you already have the residence mortgage and you are staring at a surplus. If the surplus is actually a first-home down payment, stop and use the FHSA sequencing guide instead of prepaying a mortgage you do not have yet.
Credit-card and other high-interest consumer debt outranks all three. The rate is certain, non-deductible, and higher than a plausible investment return. An employer match on a group RRSP or pension outranks a prepayment too. Declining a match to pay principal is donating compensation. Take the match, then return to this list.
The stack
- A small cash reserve. Prepaying the last liquid dollar, then putting a furnace on a card, is a negative return. The reserve is not an investment decision. It is what keeps the next decision from being reversed at 20 percent.
- FHSA, if you still qualify and a move is real. The triple advantage can beat both a TFSA and a prepayment for money that will become a down payment. If this mortgage is the home you already own and you will not qualify, skip this rung. Do not open an FHSA as a costume for money you will not withdraw for a home.
- RRSP, when the bracket gap is the point. A contribution deducted in a high bracket and withdrawn in a lower one, with the refund assigned to the mortgage or the TFSA, can beat a plain prepayment. A contribution deducted in the same bracket you will withdraw in, with the refund spent, loses to both the TFSA and the mortgage. The mechanics are the RRSP playbook. The room is the limits guide.
- TFSA, when flexibility or a similar lifetime bracket is the point. Withdrawals do not raise net income. That matters later for Old Age Security. The clawback context is the OAS guide, and the account itself is the TFSA strategies guide. January room is the contribution guide.
- Mortgage prepayment, when the contract rate wins the hurdle. Inside the privilege, with a rate you read off your own term. Illiquid. Certain. After tax, because residence interest is not deductible.
A rule for the top of the stack
| If this is true | The next dollar goes |
|---|---|
| You carry a credit-card balance | The card. Stop. |
| An employer matches the next dollar of group RRSP or pension | The match. Then come back. |
| Your marginal rate this year is meaningfully higher than the rate you expect on RRSP withdrawals, and you will put the refund on the mortgage or into the TFSA | RRSP, up to the deduction that actually lands in that high bracket. Not a dollar past it into a lower bracket, unless you are filling room you will lose a reason to use. |
| Brackets now and later look similar, or you might want the cash for a privilege-sized prepayment next year, or OAS is a future problem | TFSA. |
| The contract rate beats the after-tax yield of the safe investment you would actually buy, and you will stay through the term | The mortgage, inside the privilege. Confirm the penalty before you exceed it. The hurdle arithmetic is the other guide. |
| The contract rate is far below new rates, and the term still has years | TFSA or RRSP, not extra principal. You hold a cheap loan. Do not rush to give it back. |
You have $12,000. The contract rate in this picture is 4.8 percent. Your marginal rate in this picture is 43 percent, the sort of rate that is top-bracket territory in several provinces. Use yours from the provincial rates guide. All $12,000 on the mortgage avoids about $576 of interest in the first year, after tax, because the interest was not deductible. All $12,000 in the TFSA earns whatever the TFSA earns, tax-free. If that is an illustrative 3 percent, you made less than the mortgage saved and you kept the option to withdraw. If it is an illustrative 6 percent, you made more in expectation, with a year that can be negative. All $12,000 to the RRSP saves about $5,160 of tax if the entire contribution is deductible at 43 percent. Put that refund on the mortgage and you have reduced the balance by $5,160 and sheltered $12,000. The $12,000 will be taxed when it comes out. If it comes out at an illustrative 25 percent, the deduction was worth more than the inclusion and the years of deferral did work. If it comes out at 43 percent, you mostly deferred, and the win is the $5,160 prepayment plus the deferral, not a 43 percent gift. If you spend the refund, you skipped the prepayment and kept the future tax. None of these rates is a quote or a promise about your retirement bracket.
An RRSP contribution whose refund buys a kitchen is consumption financed by a future inclusion. It can still be the right kitchen. It is not a mortgage plan and it is not a retirement plan. Decide the refund's destination when you make the contribution. Automate it. A refund that lands in chequing in May will get spent by July unless the mortgage payment or the TFSA transfer is already scheduled.
What this stack refuses to do
- It does not borrow to contribute. Interest on money borrowed to put into a TFSA or RRSP is not deductible. If you are borrowing against the house to invest, that is a non-registered leverage plan, and the Smith Manoeuvre guide and the HELOC guide are the constraints.
- It does not prepay past the privilege on a hunch. Get the payout statement. A penalty is a certain cost.
- It does not ignore a spouse's room. The lower-income spouse's TFSA is still tax-free. The higher-income spouse's RRSP deduction is usually the valuable one. Attribution on TFSA contributions you fund for a spouse is not the problem people think it is. A gift that they invest in a non-registered account is a different story. The couples guide is the line.
- It does not pretend the mortgage is the emergency fund. A readvance is underwriting, not an ATM you control in a job loss.
A new term has a new hurdle rate. A parental-leave year or a large bonus changes the RRSP rung. A TFSA that you raided for a repair gets refilled on the next January 1 when the room returns, and that refill can outrank a prepayment for a year. Write the order down. The retirement withdrawal guide is what this stack looks like later, when the RRSP becomes a RRIF and the mortgage is either gone or the last debt you want in retirement.
Key takeaways
- Consumer debt, then the match, then this debate. Prepaying a 5 percent mortgage while carrying a card is theatre.
- The RRSP wins when a real bracket gap meets a refund you assign. Spending the refund deletes the part that competed with the mortgage.
- The TFSA wins when you want the dollar back, when brackets match, or when future income-tested benefits matter.
- The mortgage wins when its rate beats a safe after-tax alternative and you can live without the liquidity.
- A cheap existing term is an asset. Do not prepay it out of discomfort with debt.
- Do not borrow to fill registered room and call the interest a carrying charge.
The order is a tax decision wearing a mortgage's clothes.
Brackets, room, and the refund only work if the return is filed as you planned. The 2026 tax guide is that return.
Get the 2026 Tax Guide — $49 CAD
