Pay off mortgage or invest calculator: which leaves you with more?
Paying down your mortgage earns a guaranteed return equal to its interest rate; investing the same money comes out ahead only if your return after tax beats that rate. With a $400,000 mortgage at 4.5% over 25 years and $500 a month to spare, putting the extra on the mortgage clears it 7 years and 2 months early and saves $84,730 of interest. Investing the $500 instead at 7% leaves you about $101,000 better off after 25 years, but at a 4% return the mortgage comes out ahead.
Pay off mortgage or invest
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How to use the pay off mortgage or invest calculator
Enter your mortgage and the extra money you have each month or as a lump sum. The results update as you type, and your inputs are kept in the page address so you can bookmark a scenario.
What you owe today. The starting value is $400,000.
Switch this on only if the mortgage was used to earn income, for example to buy a rental property. You then enter your marginal tax rate, and the tax saved on the interest is invested as new money, so it is not taxed as a gain. It is off to start.
Your mortgage rate and the years left to pay, from 5 to 30. The starting values are 4.5% and 25 years.
Monthly, a lump sum applied at the start, or both. The starting value is $500 a month.
The average annual return you expect on the money you invest. The starting value is 7%; try lower values too.
Use 0% for a TFSA. For a taxable account, use the rate you expect on the growth. The starting value is 0%.
How to read your result
Both strategies spend exactly the same cash each month, so the comparison is fair: neither has a mortgage at the end, and the winner is the one holding more investments.
Recommended strategy
The headline names the strategy that leaves more wealth at the end of the amortization and the size of the advantage. It is a comparison under fixed assumptions, so read it alongside the return you entered: the investing side depends on a return that is not guaranteed.
A: extra to the mortgage
Strategy A puts the extra on the mortgage. Once the mortgage is gone, the full payment plus the extra is invested for the years that remain, so A builds its portfolio late. Its card shows the interest saved and the investment value it reaches.
B: invest the extra
Strategy B keeps the regular payment and invests the extra from the start. Its card shows the portfolio after the tax on gains you entered, and the interest paid on the regular schedule.
Payoff timeline and year by year
The timeline shows your regular payment, how soon the extra clears the mortgage and the interest it saves: with the starting values, 214 months instead of 300 and $84,730. The table follows both strategies year by year, so you can see when one overtakes the other.
Who comes out ahead at different returns
The same $400,000 mortgage at 4.5% over 25 years with $500 a month extra and no tax on gains, changing only the expected return. The result turns between 4% and 5%.
Wealth after 25 years. 7% is the starting value. The mortgage payment uses monthly compounding.
Mortgage or investments inside a plan
A proper financial plan models your income, expenses, taxes, investments, insurance, and estate over your full lifetime. It answers concrete questions: When can I retire? How much do I need to save? Should I pay down the mortgage or invest? Am I on track?
Kaetyn St. Hilaire, CFA, in Five costly financial mistakes high earners make
The answer is rarely all one way. Cash flow, the tax shelter you still have in your RRSP and TFSA, how soon you plan to retire and how you would feel about a market fall while you still owe on the house all change it. The calculator holds the return steady every year; real returns do not.
If the money would go into a registered account, compare the two first with the RRSP vs TFSA calculator. The Smith Manoeuvre calculator models a different approach, borrowing against the home to invest, along with its risks.
Putting the mortgage decision beside tax, savings and retirement is the work of financial planning in Calgary with Kaetyn.
Pay off mortgage or invest questions
Answers drawn from the calculator's own rules and assumptions.
Paying down the mortgage earns a guaranteed return equal to your mortgage rate, because every dollar of principal saves that interest. Investing comes out ahead only if your return after tax beats that rate over the whole period, and the return is not guaranteed. With the starting values, a 4.5% mortgage and $500 a month extra, investing wins at a 5% return or more and the mortgage wins at 4% or less.
Roughly your mortgage rate after any tax on the investment growth. Enter the tax on gains you expect, 0% in a TFSA or your effective rate in a taxable account, and change the expected return until the headline switches. That switch point is your breakeven return for this scenario.
Yes. Growth in a TFSA is not taxed, so enter 0% tax on gains. In a taxable account, enter the rate you expect on the growth: at 20%, the starting scenario's advantage for investing falls from $101,152 to $63,976. The calculator does not model an RRSP contribution and refund; the RRSP vs TFSA calculator covers that choice.
Interest is generally deductible only when the borrowed money is used to earn income from a business or property, such as a rental property or a non-registered investment account. Interest on the mortgage for your own home generally is not. If your interest is deductible, switch on tax-deductible interest and enter your marginal tax rate.
Related articles
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- How much do you actually need to retire in Canada? Spending once the mortgage is paid
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