Key Takeaways
- Extra mortgage payments provide predictable interest savings, but prepayment limits and loan terms can affect the benefit.
- Expected investment returns are not guaranteed and may be reduced by taxes, fees, trading costs and market volatility.
- Liquidity, emergency savings, account type and risk tolerance can support investing, mortgage payments or a split approach.
What Does Paying Down Your Mortgage Actually Earn?
Suppose your mortgage rate is 5%.
If you make an additional $10,000 principal payment, you reduce the debt on which future mortgage interest is calculated.
For a typical Canadian principal residence, mortgage interest generally isn't tax-deductible.
So reducing your mortgage can provide a predictable after-tax financial benefit roughly tied to the mortgage interest you avoid, although the exact savings depend on your mortgage rate, payment timing, remaining term and other loan terms.
No earnings report.
No market crash.
No wondering what your portfolio will be worth next month.
You simply owe less money and pay less interest.
There is one practical catch: check your mortgage's prepayment rules first.
Some mortgages limit how much extra principal you can pay each year without a charge. That means the benefit of making an additional mortgage payment also has to be considered alongside the specific terms of your loan.
Now Put That $10,000 in the Market
Imagine you invest the money instead and expect an average annual return of 7% over the long run.
Potentially great.
But there's one enormous difference:
Nobody promised you 7%.
Your portfolio could rise 15% next year.
It could also fall 20%.
And depending on how and where you invest, your return can be reduced by:
- investment fees
- taxes
- trading costs
- poor investment decisions
That's why comparing a 5% mortgage with a 7% expected investment return isn't really 5% versus 7%.
The better comparison is:
predictable interest avoided vs. after-tax, after-fee investment returns while accounting for risk.
Your Account Type Can Change the Answer
This is where the calculation gets more interesting.
If your investments are inside a TFSA, investment income and capital gains are generally tax-free, and withdrawals are generally tax-free as well.
An RRSP can provide a tax deduction for deductible contributions, while investment growth is generally tax-deferred and withdrawals are generally taxable later.
A non-registered investment account can expose investment income and realized capital gains to tax, depending on what you own and your circumstances.
So earning 7% doesn't necessarily mean keeping 7%.
Two Canadians making identical investments could end up with different after-tax outcomes simply because of where those investments are held and their individual tax situations.
Ask This Question Instead
Forget:
"Will my investments earn more than my mortgage rate?"
Ask:
"How much additional return am I expecting to receive for accepting investment risk?"
Suppose your mortgage costs 5%.
Would you take stock-market risk for an expected 5.5% return after fees and taxes?
Maybe.
Maybe not.
What about an expected 8%?
Now the mathematical trade-off looks different — but that 8% still isn't guaranteed.
The larger the expected advantage from investing, the stronger the mathematical case for accepting the additional risk can become.
But expected returns can disappoint, especially over shorter periods.
Don't Forget Liquidity
Investing can have another important advantage: access to your money.
Money held in a TFSA or non-registered investment account can generally be accessed relatively easily, depending on the investments you own.
But an extra mortgage payment becomes home equity.
You can't simply ask your house to return $10,000 because your furnace suddenly dies.
Accessing that equity may require borrowing, refinancing or selling the property.
There is another TFSA detail worth remembering: withdrawing money does not immediately restore that contribution room. The amount withdrawn is generally added back to your TFSA contribution room in the following calendar year.
That's why keeping an adequate emergency fund matters before aggressively directing spare cash toward either option.
There's a Third Choice
You don't actually have to choose one side.
Have $1,000 left over each month?
You could put $500 toward the mortgage and invest $500.
Part of your money produces predictable interest savings.
The other part remains invested for potential long-term growth.
You won't necessarily maximize whichever option turns out to have performed best in hindsight, but you also don't have to bet everything on one assumption about future markets.
The Real Math
A 5% mortgage and a portfolio expected to return 7% are not simply separated by 2 percentage points.
One represents interest you can avoid with considerable predictability.
The other represents a return you hope to earn while accepting volatility and potentially taxes and fees.
So before deciding where your next $10,000 should go, compare:
Mortgage → the interest you can reasonably expect to avoid
against
Investing → the return you realistically expect to keep after taxes and fees, while accounting for risk
Then consider liquidity, your investment horizon, mortgage terms and how much uncertainty you're willing to accept.
Because the real question isn't simply:
"Which percentage is bigger?"
It's:
"Is the additional expected investment return worth the additional risk?"