Maximizing Your Money: Mortgage Repayment or Investing in an RRSP?

Should I Pay Down My Mortgage or Invest If I Have Extra Money?

What a great problem to have! If you are waking up on the last day of the month to an extra $500 in your chequing account, it might make sense to ask yourself if that money could be working harder for you, earning more than the 0.02% it's earning in your chequing account. Many Canadians face the dilemma of whether to use excess funds to pay down debt or invest. Deciding between paying down your mortgage or investing can feel like a tug-of-war between security and growth. Both options have compelling arguments; the right choice depends on your financial goals, risk tolerance, and priorities. Let’s explore the numbers, benefits, risks, and potential strategies. 

Use our quick navigation guide below to jump to any point of our blog on Maximizing Your Money: Mortgage Repayment or Investing in an RRSP 

• Mortgage vs. Investment: The Numbers
• The Benefits and Risks
• Debt Prioritization
• Case Study
• FAQs: Should I Pay Down My Mortgage or Invest If I Have Extra Money?
• The Final Decision

Mortgage vs. Investment: The Numbers

Example Mortgage Scenario

• Mortgage Amount: $500,000
• Interest Rate: 4.50%
• Amortization: 30 years

• Monthly Payment: $2,521

By adding $500 each month to your mortgage payment, here's how your mortgage changes:

New Monthly Payment: $3,021

• New Mortgage Term: 21 years and 6 months (a reduction of 8.5 years!)
• Total Interest Saved: $130,205.51

This option provides the peace of mind of being debt-free sooner while saving a significant amount on interest.

Investment Scenario #1: 4.50% Return

Let’s assume you are investing that extra $500/month at an annual return of 4.5% (compounded annually). Here’s what your investment could look like at the end of 21.5 years:

• Monthly Investment: $500
• Annual Return: 4.5%
• Total Contributions: $129,000 (21.5 years x 12 months x $500)

• Interest Earned: $91,093.93
• Total Future Value of TFSA: $223,593.93

With this scenario, your money grows tax-free inside a Tax-Free Savings Account (TFSA), and you end up with a healthy sum, even though the returns are equivalent to your mortgage interest rate.

Investment Scenario #2: 8% Return

Let’s increase the annual return to a more typical 8%, which is achievable through low-risk stocks and funds. Here’s how the numbers stack up over 21.5 years:

• Monthly Investment: $500
• Annual Return: 8%

• Total Contributions: $129,000
• Interest Earned: $214,989.77
• Total Future Value of TFSA: $347,489.77

At an 8% return, the difference becomes more significant. Investing in a TFSA with this return significantly outperforms paying down the mortgage, leaving you with nearly $218,000 more.

The Benefits and Risks

Benefits of Paying Down the Mortgage

• Guaranteed Savings: Paying extra toward your mortgage gives you a guaranteed return, equivalent to your mortgage interest rate (4.50% in this example).
• Psychological Peace of Mind: Many find comfort in reducing debt and owning their home outright sooner. Getting rid of that mortgage payment feels really good and can create a sense of financial security.
• Reduced Financial Obligations: Lowering your debt-to-income ratio can increase financial flexibility, reduce stress, and may even help you qualify for other lending opportunities in the future.

Risks of Paying Down the Mortgage

• Opportunity Cost: Mortgage rates are typically lower than potential investment returns, meaning you could be missing out on higher growth by choosing to pay off debt instead of investing.
• Lack of Liquidity: Money put into your home is not easily accessible unless you sell or refinance. In contrast, investments in a TFSA or other accounts are generally easier to liquidate when needed.

Benefits of Investing

• Higher Potential Returns: Even at a 4.50% return, your investment in a TFSA could exceed the mortgage savings by $90,000. At an 8% return, the gap is even wider, showcasing how compounding interest can significantly outperform a guaranteed mortgage interest rate.
• Tax-Free Growth: Investments in a TFSA grow without tax implications, and your money can grow tax-free until retirement when you may be in a lower tax bracket.
• Flexibility and Liquidity: Investments in a TFSA or other accounts are more accessible than home equity, providing you with greater flexibility to take advantage of financial opportunities or cover unexpected expenses.

Risks of Investing

• Market Volatility: Investment returns are not guaranteed and can fluctuate with market conditions. The stock market, for example, can experience both gains and losses.
• Discipline Required: Consistently contributing to an investment account and resisting the temptation to withdraw early requires financial discipline. It’s important to stay on track and focus on the long-term goal.

Debt Prioritization

Interest Rates and Their Impact

The current interest rate environment plays a significant role in this decision. If mortgage rates are low (e.g., 3-4%), investing may yield better returns than paying down the mortgage early. However, if rates are high (e.g., 6% or above), paying down the mortgage could be more attractive, as the interest you save may exceed potential returns from investments. Moreover, refinancing your mortgage to lock in a lower rate could also reduce interest payments and influence the decision.

Tax Implications of Both Strategies

When investing, consider the tax treatment of your returns. A TFSA offers tax-free growth, which is an attractive option for most people. However, if you’re investing through an RRSP, there are different tax rules: you’ll receive a tax deduction upfront, but withdrawals are taxed as income. Non-registered accounts may be subject to capital gains tax. It’s important to weigh the tax advantages of investing versus the guaranteed return of paying down your mortgage.

Liquidity and Access to Cash

Money invested in a TFSA or other investment accounts is often more accessible than home equity, which may require selling or refinancing to access. Before deciding, ensure you have an emergency fund (typically 3-6 months of expenses) set aside. Once that’s covered, using extra funds for either mortgage payments or investments can depend on your immediate financial goals.

Life Stage and Personal Goals

Your decision might also depend on your stage in life. For someone younger, investing for long-term growth might make more sense. If you’re closer to retirement, reducing debt could be a priority to ease financial burdens in your later years. Emotional factors also come into play—some people find relief in paying down debt faster, while others are driven by the goal of building wealth for the future.

Diversification of Investments

If your primary residence is already tied to the real estate market, you might want to consider diversifying your portfolio by investing in stocks, bonds, or other assets. Diversifying your investments can help spread risk and provide greater long-term returns.

Case Study: Sarah’s Decision – Mortgage vs. Investment

Background:

Sarah, a 35-year-old professional living in Toronto, has been working diligently to pay off her $400,000 mortgage. She earns a steady income of $80,000 per year and has some extra funds left in her chequing account each month. With her mortgage rate at 4.5%, she is faced with the dilemma of whether to use her extra funds to pay down her mortgage or invest them.

The Numbers:

• Mortgage: $400,000 with a 4.5% interest rate, 30-year amortization
• Extra Funds Available: $600 per month

Sarah’s first instinct is to pay down the mortgage, as she values the peace of mind that comes with reducing debt. But after reviewing her financial situation and reading about investing, she starts to question whether this is the best option.

Scenario 1: Paying Down the Mortgage

If Sarah decides to put the $600 per month toward her mortgage, here’s what the numbers would look like:

• New Monthly Payment: $3,080 (current mortgage payment + extra $600)
• New Mortgage Term: 22 years (instead of 30 years)
• Total Interest Saved: $134,000 (over the life of the mortgage)

Sarah realizes that by paying off the mortgage more quickly, she can save a substantial amount of money on interest. She feels more secure knowing that her mortgage would be paid off sooner, freeing up cash for other goals in the future.

Scenario 2: Investing in a TFSA

Sarah is also intrigued by the idea of investing her $600 per month instead of putting it toward her mortgage. She decides to invest in a Tax-Free Savings Account (TFSA) with an expected return of 6% annually. Here’s how her investment could grow:

• Monthly Investment: $600
• Annual Return: 6% (compounded annually)
• Total Contributions: $153,600 (over 21.5 years)
• Interest Earned: $235,102.71
• Total Future Value of TFSA: $388,702.71

Sarah calculates that over the same 21.5-year period, her investment would grow to $388,702.71. The tax-free growth within her TFSA is very attractive, and the return significantly outpaces the savings she would realize from paying off her mortgage early.

What Sarah Decided:

After considering both options, Sarah decides to split her extra $600 per month evenly—$300 toward her mortgage and $300 toward investing in her TFSA. This balanced approach allows her to reduce her mortgage more quickly while still taking advantage of the long-term growth potential of investing. Additionally, she feels that this approach strikes the right balance between security and growth.

Takeaways from Sarah’s Case Study:

Sarah’s situation highlights the importance of balancing financial goals with risk tolerance. Here are some key takeaways from her case:

1. Mortgage Payoff provides the peace of mind of becoming debt-free sooner and saving on interest payments. It’s a safer choice for those who prioritize stability and financial security.

2. Investing offers the potential for higher long-term returns, especially when compounded in a tax-advantaged account like a TFSA. However, it comes with risks, including market volatility.

3. A Balanced Approach may work best for those who want to benefit from both debt reduction and growth. By allocating funds to both strategies, Sarah is able to address both her desire for security and her long-term wealth-building goals.

FAQs: Should I Pay Down My Mortgage or Invest If I Have Extra Money?

1. Is it better to pay down my mortgage or invest if I have extra money?
The best choice depends on your financial goals, risk tolerance, and the current interest rate environment. If you have high-interest debt, paying that off first is usually the better option. If your mortgage rate is low (3-4%), you might want to consider investing, especially if you're comfortable with market risk. Otherwise, paying off your mortgage early can provide peace of mind and long-term savings on interest.

2. How much faster will I pay off my mortgage if I add $500 per month?
In the example provided, adding $500 per month to your mortgage payment will reduce the term by 8.5 years, saving you over $130,000 in interest. This makes a significant impact on both the time it takes to become debt-free and the amount saved on interest payments.

3. Should I focus on paying off my mortgage if inflation is high?
Inflation could make your mortgage payments easier to manage over time, especially if you have a fixed-rate mortgage. However, investing in assets that outpace inflation (like stocks or real estate) might yield better long-term results. It’s essential to weigh the effect of inflation on your purchasing power against the returns you might see from investments.

4. What if I have other high-interest debt? Should I pay that off first?
Yes! If you have high-interest debts, such as credit cards or personal loans, it’s generally best to prioritize paying those off first. The interest rates on these debts often exceed what you might earn from investments, so paying them down provides a higher return on your money.

5. Can I do both—pay down my mortgage and invest?
Absolutely! You don’t have to choose one over the other. Consider splitting your extra money between paying down the mortgage and investing. For example, if you have $500 extra per month, you might put $250 toward your mortgage and $250 into a TFSA or other investment account. This strategy helps balance debt reduction with wealth-building.

6. How do I determine if paying off my mortgage or investing is right for my financial goals?
Your decision depends on your personal financial goals. If being debt-free sooner aligns with your goals and provides you with peace of mind, paying down your mortgage may be the right choice. If building wealth for the future is more important, investing might be the better option. Consider your time horizon, risk tolerance, and whether you have other pressing financial priorities.

7. What happens if I invest instead of paying down my mortgage?
If you choose to invest, your money has the potential to grow at a higher rate than your mortgage interest, especially with long-term growth in stocks or other investments. However, investing comes with market risk, meaning returns are not guaranteed and can fluctuate. It’s important to understand both the potential for higher returns and the risks involved.

8. Is there a tax advantage to investing in a TFSA or RRSP?
Yes! A TFSA allows for tax-free growth, meaning you won’t pay taxes on the gains when you withdraw funds. In contrast, an RRSP provides a tax deduction on contributions, but withdrawals are taxed as income. Both accounts have advantages depending on your situation, so it’s important to consider the tax implications of your investment choices.

The Final Decision

Ultimately, the choice between paying down your mortgage or investing depends on your financial journey, risk tolerance, and goals. Whether you value the peace of mind of reduced debt or the potential growth of investments, there’s no one-size-fits-all solution.

If you are unsure which path aligns best with your goals, the Spire Mortgage Team can help you crunch the numbers and plan your next steps. Visit www.spiremortgage.ca for personalized advice tailored to your financial situation.

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Whether you're torn between dumping extra cash into your mortgage or letting it ride in the markets, the decision isn't just about numbers—it's about strategy, goals, and timing. With interest rates, market volatility, and tax implications all in play, it helps to have a pro in your corner.

Dusko Sremac – Calgary REALTOR®

Dusko is the lead agent behind Real Estate Partners with REAL BROKER and one of Calgary’s most trusted voices in real estate finance. With over 1,500 families served and 375+ five-star reviews, he blends market insight with financial literacy to help clients make high-impact decisions—especially when it comes to building wealth through real estate. If you're wondering whether to throw that extra cash into your mortgage or into the market, Dusko’s data-backed approach can help you align your real estate decisions with your long-term financial goals.

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