Prepay Mortgage vs Invest Calculator Canada

What the mortgage vs invest calculator does

With a few hundred dollars a month to spare, is it better to put it on the mortgage or in the market? The calculator runs both strategies side by side over the horizon you choose and reports the difference in your net position at the end.

Both paths spend the same amount each month, both use Canadian semi-annual compounding on the mortgage, and the investment return is taxed according to the account you pick. The result is a dollar difference plus the return the investment would need to earn to come out ahead.

The guaranteed return of prepaying

An extra dollar paid against a mortgage earns the mortgage rate, guaranteed, for as long as the mortgage would otherwise have run. It is also tax-free: interest you never pay is not income. So a 4.5% mortgage is competing with whatever pre-tax return leaves you 4.5% after tax.

Canadian mortgages compound semi-annually by law, so the effective annual cost is slightly above the quoted rate. The calculator converts the quoted rate with the standard formula: halve it for the two compounding periods, then take the sixth root for the six months in each period. That is a legal quoting convention, so it is arithmetic in the code rather than a parameter.

Where the tax drag comes from

Inside a TFSA there is none. Growth and withdrawals are untaxed, so you win by beating the effective mortgage rate.

Outside a registered account, interest and most bond income are taxed every year at your marginal rate, so that part of the portfolio compounds at the return times one minus the rate. Capital gains fare better: only the included portion is taxable, and nothing is taxed until you sell, so the money compounds gross for years first. The calculator splits your expected return between the two treatments using the share you enter, so an equity fund portfolio and a GIC portfolio get very different answers from the same headline return.

In an RRSP, each contribution generates a refund, and putting the refund back in means each after-tax dollar buys more room. Everything compounds untouched until withdrawal, when the whole balance is income. Whether that comes out ahead depends mostly on your marginal rate now compared with your expected rate in retirement.

A worked example

You owe $400,000 at 4.5% with 25 years left, so the scheduled payment is about $2,214, and you have $500 a month spare. You expect 6% before tax, all as capital gains, in a non-registered account at a 40% marginal rate, and look 10 years ahead.

Prepaying saves about $15,432 of interest and leaves a balance of about $214,774. Investing leaves a balance of about $290,206 but a portfolio of about $76,989, so investing ends about $1,557 ahead. The breakeven return is about 5.53%. In a TFSA the breakeven drops to about 4.55%, close to the effective mortgage rate, and investing ends about $5,805 ahead. If the 6% were all interest income instead, the breakeven rises to about 7.58% and prepaying wins by about $3,558.

Keeping the two strategies comparable

The most common flaw in this comparison is letting the two paths spend different amounts. If you prepay aggressively, the mortgage clears early, and from then on that strategy has a large free cash flow the invest strategy lacks, because it is still making payments. Ignoring that makes prepayment look bad.

The calculator moves the entire freed-up budget, scheduled payment and spare cash together, into the same portfolio the moment a mortgage clears, in whichever strategy clears first. In the month of the last payment, only the amount needed to close the balance is paid and the rest of that month’s budget is invested. Monthly outlay is identical in both paths throughout the horizon.

What the breakeven number tells you

In a TFSA the breakeven comes out close to the effective annual mortgage rate, a useful check that the model behaves. In a non-registered account it sits above the mortgage rate, and well above it when the return is mostly interest taxed at a high marginal rate. In an RRSP with a lower expected retirement rate it can sit below the mortgage rate, because the tax difference between contribution and withdrawal does some of the work.

The decision then comes down to whether you expect the portfolio to beat that number over the horizon, after fees, with the volatility attached.

What the model leaves out

Volatility matters most. The expected return is applied as a smooth annual figure, so the portfolio never has a bad decade or forces you to sell at the wrong time, while a prepayment carries no such uncertainty.

Prepayment privileges are next. Most Canadian mortgages cap what you can pay down each year without penalty, typically a percentage of the original principal plus a payment increase option. Spare cash above the privilege cannot go on the mortgage.

Liquidity is the last. A portfolio can be reached in a few days. Home equity needs a refinance, a line of credit or a sale, and lenders are least willing to grant those when you most need them.

Using the result

Read the advantage figure as a direction under your assumptions. Change the expected return by a point either way; if the answer flips easily, the two options are close and certainty and peace of mind can decide it.

This calculator provides an estimate for information only and is not financial or investment advice.

About This Mortgage vs Invest Calculator

Use this mortgage vs invest calculator to get an instant, accurate estimate. The figures follow official CRA guidance and every rate and threshold is kept up to date for 2026. Adjust the inputs above to match your situation, or browse all our calculators to plan your next step.